Principles of Marketing

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What Is Marketing?

- Marketing is a process by which companies

create value for customers and build strong
customer relationships to capture value from
customers in return.

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 Marketing Process

1-Understanding the Marketplace

and Customer Needs
Customer Needs, Wants, and Demands
• States of deprivation

Needs • Physical—food, clothing, warmth, safety

• Social—belonging and affection
• Individual—knowledge and self-expression

Wants • Form that needs take as they are shaped by

culture and individual personality

Demands • Wants backed by buying power

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• Market offerings are some
combination of products, services,
information, or experiences offered
to a market to satisfy a need or
want
• Marketing myopia is focusing
only on existing wants and losing
sight of underlying consumer needs

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Customers
• Value and
satisfaction

Marketers
• Set the right level of
expectations
• Not too high or low

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 Exchange is the act of obtaining a desired
object from someone by offering
something in return

- Marketing actions try to create, maintain,

grow exchange relationships.

- Markets are the set of actual and potential buyers

of a product

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 Designing a Customer-Driven Marketing
Strategy
Marketing management is the art and science of choosing
target markets and building profitable relationships with
them
– What customers will we serve?
– How can we best serve these customers?
Market segmentation refers to dividing the markets into
segments of customers

Target marketing refers to which segments to go after

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Designing a Customer-Driven Marketing

Strategy
Choosing a Value Proposition

A brand’s Value Proposition is the set of benefits or values a company

promises to deliver to customers to satisfy their needs.

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Designing a Customer-Driven Marketing
Strategy
Marketing Management Orientations

Production Product Selling Marketing Societal

concept concept concept concept concept

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Marketing Management Orientations

a)Production concept:
Consumers will favor products that are available and
highly affordable
b)Product concept:
Consumers favor products that offer
the most quality, performance, and features
Focus is on continuous product improvements

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 Marketing Management Orientations
c)Selling concept:

Consumers will not buy enough of the firm’s products

unless it undertakes a large scale selling and promotion
effort

d)Marketing concept:

Knowing the needs and wants of the target markets and

delivering the desired satisfactions better than
competitors do

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Marketing Management Orientations

e)Societal marketing:
Make good marketing
decisions by considering:
consumers’ wants and
long-term interests,
company’s requirements,
society’s long-run interests

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 Designing a Customer-Driven Marketing
Strategy

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Preparing an Integrated
Marketing Plan and Program
The marketing mix: set of tools (four Ps) the firm uses to implement its
marketing strategy. It includes product, price, promotion, and place.

Integrated marketing program: comprehensive plan that communicates

and delivers the intended value to chosen customers.

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 Building Customer Relationships
Customer Relationship Management (CRM)

The overall process of

building and maintaining
profitable customer
relationships by delivering
superior customer value and
satisfaction

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Relationship Building Blocks:

Customer Value and Satisfaction
Customer- Customer
perceived value satisfaction
• The difference • The extent to
between total which a product’s
customer value and perceived
total customer cost performance
matches a buyer’s
expectations

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 Capturing Value from Customers
Creating Customer Loyalty and Retention
• Customer lifetime value is the value of the entire stream of purchases
that the customer would
make over a
lifetime of
patronage

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Growing Share of Customer

• Share of customer is the portion of the customer’s
purchasing that a company gets in its product
categories
• Customer equity is the total combined customer
lifetime values of all of the company’s customers

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 Building Customer Equity
• Right relationships with the right customers
involves treating customers as assets that need to
be managed and maximized
• Different types of customers require different
relationship management strategies

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Strategic planning

• The process of developing and

maintaining a strategic fit between
the organization’s
goals and capabilities and its
changing marketing opportunities

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 Steps in Strategic Planning

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Mission statement

• A statement of the organization’s

purpose—what it wants to
accomplish in the larger
environment

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 The Mission Statement
• Questions the mission statement should answer
– What is our business?
– Who is our customer?
– What do consumers value?
– What should our business be?
• Mission statements should be market- oriented, not product-oriented

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Setting Company Objectives and Goals

• The mission should be
translated into supporting
objectives for each level of
management
• Marketing strategies and
programs must be developed to
support these objectives
Heinz ties its diverse product
portfolio together under the
mission: “As the trusted leader in
nutrition and wellness, Heinz—the
original Pure Food Company—is
dedicated to the sustainable health
of people, the planet, and our
company”
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 Business portfolio

• The collection of businesses and

products that make up the
company

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Designing the Business Portfolio

• The company must
– Analyze its current business portfolio or strategic business units
(SBUs) and decide which SBUs should receive more, less, or no
investment
– Develop strategies for growth and downsizing that will shape the
future business portfolio

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 Portfolio analysis
• The process by which
management evaluates the
products and businesses that
make up the company

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Portfolio Analysis
• Purpose of portfolio analysis
– To direct resources toward more profitable businesses while phasing
out or dropping weaker ones
• Basis of evaluation
– Attractiveness of SBU’s market or industry
– Strength of SBU’s position within that market or industry

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 The BCG Growth-Share Matrix

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BCG Growth-Share Matrix

• Strategies for categories of the BCG Matrix
– Stars need heavy investments to finance their rapid growth
– Cash cows need less investment to hold their market share
– Question marks require a lot of cash to hold their share, let alone
increase it
– Dogs do not promise to be large sources of cash

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 The Product/Market Expansion Grid

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Market penetration
• Increasing sales of current products to
current market segments without changing
the product

Market development

• Identifying and developing new market

segments for current company products

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 Product development
• Offering modified or new products to current
market segments

Diversification
• Starting up or acquiring businesses outside the
company’s current products and markets

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Downsizing
• Reduces the business portfolio by eliminating products of business units
that are not profitable or that no longer fit the company’s overall strategy
• Reasons for downsizing
– Rapid growth of the company
– Lack of experience in a market
– Change in market environment
– Decline of a particular product

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 Planning Marketing
• Marketing plays a key role in strategic planning by
– Providing a guiding philosophy for the company strategy
– Providing inputs to strategic planners
– Designing strategies to help individual business units reach their
objectives

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Creating Customer Value

• Marketers must practice partner relationship management
– Working with partners internally within the company can create an
effective value chain
– Working with external partners in the marketing system helps to form
a superior value delivery network

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 Value chain

• The series of internal departments

that carry out value-creating activities
to design, produce, market, deliver,
and support a firm’s products

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Value delivery network

• The network made up of the company,

its suppliers, its distributors, and,
ultimately, its customers who partner
with each other to improve the
performance of the entire system

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 Marketing strategy

• The marketing logic by which the

company hopes to create customer
value and achieve profitable customer
relationships

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Managing Marketing Strategies and the

Marketing Mix

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 Market segmentation
• Dividing a market into distinct groups of
buyers who have different needs,
characteristics, or behaviors, and who might
. require separate products or marketing
programs

Market segment
• A group of consumers who respond in a
similar way to a given set of marketing
efforts

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Market targeting
• The process of evaluating each market
segment’s attractiveness and selecting one or
more segments to enter

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 Positioning

• Arranging for a product to occupy a clear, distinctive,

and desirable place relative to competing products in
the minds of target consumers

Differentiation

• Actually differentiating the market offering to create

superior customer value

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.
Marketing mix

• The set of tactical marketing tools—product, price,

place, and promotion—that the firm blends to produce
the response it wants in the target market

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 The Four Ps of the Marketing Mix

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The 4 Ps and the 4 Cs of

the Marketing Mix
• 4 Ps - Seller’s view • 4 Cs - Buyer’s view
– Product • Customer Solution
– Price • Customer Cost
– Place • Convenience
– Promotion • Communication

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 Managing Marketing: Analysis, Planning,
Implementation, and Control

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SWOT Analysis

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 Contents of a Marketing Plan
• Executive summary
• Current marketing situation
• Analysis of threats and opportunities
• Objectives and issues
• Marketing strategy
• Action programs
• Budgets
• Controls

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Fuel for Thought

• External factors – including trends stemming from the economic,
technological, social, legal-political, and competitive environments –
may represent threats or opportunities to many businesses

How have recent technological changes impacted the marketing of

various goods and services?

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 Marketing implementation
• Turning marketing strategies and plans into
marketing actions to accomplish strategic
marketing objectives

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Organizing Marketing Departments

• Functional organization
– Each marketing activity is headed by a functional specialist
• Geographic organization
– Sales and marketing people are assigned to specific countries, regions,
and/or districts

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 Marketing Department Organization
• Product management organization
– One person is given responsibility for complete strategy and
marketing program for a single product
• Market or customer organization
– Manager responsible for particular market or type of customer (e.g.,
government buyers)
• Combination organization
– Uses some combination of the previous four approaches

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Marketing control
• Measuring and evaluating the results of
marketing strategies and plans and taking
corrective action to ensure that the objectives
are achieved

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 Marketing Control

Operating control

• Evaluates performance against the annual

plan and takes corrective action

Strategic control

• Evaluates whether strategies match

opportunities

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Return on Marketing Investment

• The net return from a marketing investment (Marketing ROI) divided by the costs of
the marketing investment
• Marketing ROI is assessed using
– Standard marketing performance measures
• Brand awareness, sales, market share
– Customer-centered measures
• Customer acquisition, customer retention, customer lifetime value, customer equity

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 Return on Marketing Investment

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Consumer Buying Behavior

• Consumer Buying Behavior refers to the buying behavior of

final consumers -individuals & households who buy goods and
services for personal consumption.
• All these consumers make up the consumer market.
• The central question for marketers is:
• “How do consumers respond to various marketing efforts the
company might use?”

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 Model of Buyer Behavior (Fig. 5.1)

Marketing and Buyer’s Black Box Buyer Responses

Other Stimuli

Marketing Buyer Characteristics Product Choice

Product Buyer Decision Process Brand Choice
Price Dealer Choice
Place
Promotion
Other Purchase Timing
Economic Purchase Amount
Technological
Political
Cultural

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Factors Influencing Consumer Behavior

(Fig. 5.2)
Cultural

Social
Personal
Culture Age and Psycho-
Reference life-cycle Logical
groups
Occupation Buyer
Sub- Motivation
culture Economic
Family situation Perception
Lifestyle Learning
Social Roles Beliefs and
class Personality attitudes
and and
status self-concept

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Analyzing the Marketing Environment
The Marketing Environment
The marketing environment includes the actors and forces
outside marketing that affect marketing management’s
ability to build and maintain successful relationships with
customers (Microenvironment & Macroenvironment)

Microenvironment
Microenvironment consists of the actors close to the
company that affect its ability to serve its customers, the
company, suppliers, marketing intermediaries, customer
markets, competitors, and publics

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Actors in the Microenvironment

The Company
• Top management
• Finance
• R&D
• Purchasing
• Operations
• Accounting

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 Suppliers
• Provide the resources to produce goods and services
• Treat as partners to provide customer value

Marketing Intermediaries
Help the company to
promote, sell and
distribute its products
to final buyers

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Types of Marketing Intermediaries

Physical
Resellers distribution
firms

Marketing
Financial
services
intermediaries
agencies

Competitors
• Firms must gain strategic advantage by
positioning their offerings against
competitors’ offerings

• Differentiation (Why is it important?)

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 Publics
• Any group that has an actual or
potential interest in or impact on
an organization’s ability to
achieve its objectives
– Financial publics
– Media publics
– Government publics
– Citizen-action publics
– Local publics
– General public
– Internal publics

Customers

• Consumer markets
• Business markets
• Government markets
• International markets

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 Macroenvironment
Macroenvironment consists of broader forces that affect the actors in the
microenvironment.

The Company’s Macroenvironment

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 Demographic Environment
Demography: the study of human populations-- size, density,
location, age, gender, race, occupation, and other statistics
• Demographic environment: involves people, and people
make up markets
• Demographic trends: shifts in age, family structure,
geographic population, educational characteristics, and
population diversity

Demographic Environment
• Baby boomers include people born between 1946 and 1964
• Generation X includes people born between 1965 and 1976
– High parental divorce rates, Cautious economic
outlook, Less materialistic, Family comes first
• Millennials (gen Y or echo boomers) include those born
between 1977 and 2000
– Comfortable with technology, Tweens (ages 8–12),
Teens (13–19), Young adults (20’s)

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 Demographic Environment
Generational marketing is
important in segmenting
people by lifestyle of life
state instead of age

Demographic Environment
More people are:
• Divorcing or separating
• Choosing not to marry or choosing to marry
later
• Marrying without intending to have children
Trends:
• Increasing number of working women
• Increasing number of stay-at-home dads

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 Demographic Environment
• Move from rural to
metropolitan areas
• Change in where people work
– Telecommuting, Home
office
• Changes in the Workforce
– More educated
– More white collar

Demographic Environment
Increased Diversity
Markets are becoming more
diverse
- International
- Ethnicity
- Gay and lesbian
- Handicapped

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 Economic Environment
Economic environment consists of factors
that affect consumer purchasing power and
spending patterns

Value marketing
Offering financially cautious buyers greater value— the
right combination of quality and service at a fair price,
e.g., Ikea

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 Natural Environment
Natural environment: natural resources that
are needed as inputs by marketers or that
are affected by marketing activities
• Trends
– Increased shortages of raw materials
(e.g., 2007–08 world food price crisis)
– Increased pollution
(e.g., Pollution in China)
– Increased government intervention
– Increased environmentally sustainable
strategies

Technological Environment
• Most dramatic force in changing the marketplace
• New products, opportunities
• Concern for the safety of new products.

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 Political environment
laws, government agencies, and pressure groups
that influence or limit various organizations
and individuals in a given society

Social & Cultural Environment

• Increased emphasis on
ethics
– Socially responsible
behavior
– Cause-related
marketing

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 Cultural Environment
Cultural environment consists of institutions and other
forces that affect a society’s basic values, perceptions,
and behaviors

Different McDonald's items form different countries

Persistence of Cultural Values

Core beliefs and values are persistent and are passed on
from parents to children and are reinforced by schools,
churches, businesses, and government
Secondary beliefs and values are more open to change and
include people’s views of themselves, others, organization,
society, nature, and the universe

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 Shifts in Secondary Cultural Values

– People vary in their emphasis on serving

themselves versus serving others.

– More “cocooning” (e.g., staying home, home

cooked meals)

– Decline of loyalty toward companies

Customer-driven marketing strategy:

Creating value for target customers
Market segmentation
• Market segmentation is dividing a market into distinct
groups that have
have common needs

• Before considering a segment a viable target for a company,

companies should ensure:
– Individuals or businesses within the segment should be
uniform.
– The segment should differ from other segments.

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 Bases for Segmentation
1. Geographic segmentation

2. Demographic segmentation

3. Psychographic segmentation

4. Behavioral segmentation: (Occasion segmentation)

5. Benefit segmentation

Geographic segmentation
• In the geographic segmentation approach, markets are
divided into different geographic units. These units
may include nations, cities, or even neighborhoods.

 For example, seasonal products, such as coats,

overcoats, boots and winter gear are marketed to
geographic areas where the temperature gets very
low.
 People living around beaches, will need swimwear
and beach attire.

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 Demographic segmentation
• Demographic segmentation divides the market into
groups based on variables such as age, gender, family
size, birth era, household size, life stage, religion, race,
marital status and nationality.

Psychographic segmentation

• Psychographic segmentation: it divides buyers into

different groups based on social class, lifestyle, or
personality characteristics. People in the same
demographic groups can have very different
psychographic make ups.

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 Behavioral segmentation
• Behavioral segmentation: divides consumers into groups
according to the following characteristics:

 User status: in terms of smoking: non-smokers, ex-smokers,

potential smokers, first time smokers, regular smokers.
 Usage Rate: light user, medium user, heavy user. (Mobile phone
operators offer smart plans according to the usage rate of
consumers.)
 Loyalty status: low, high (example Apple diehards have high
loyalty). Will Apple users shift to Samsung ?
 Buyer involvement: High involvement (special effort), low
involvement (minimum effort).

Occasion segmentation

• Occasion segmentation: dividing the market into

groups according to occasions when buyers get the
idea to buy, actually make their purchase or use the
purchased item.

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 Benefit segmentation
 Benefit segmentation: In purchasing products, consumers
are generally trying to satisfy specific needs. Hence, they
are looking for products which provide specific benefits that
satisfies these needs. The grouping of consumers on the
basis of the benefits they are looking for in a product is
known as benefit segmentation.

 Example: The sensitive segment (Sensodyne), the healthy

segment (Pepsodent, white plus, Colgate), for fresh breath
segment (Close-Up), the economic toothpaste segment
(Magic toothpowder), for cavity protection (Crest), for teeth
whitening (Pepsodent whitening, Medi plus whitening etc.)

Segmenting international markets

• Inter-market segmentation/cross market segmentation:

forming segments of consumers who have similar
needs and buying behavior even though they are
located in different countries.

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 Requirements for effective segmentation
 To be useful, market segments must be:

1. Measurable: the size and the profiles of the segment

must be measurable.
2. Accessible: the segment should be effectively reached
and served.
3. Substantial: the segment must be large or profitable
enough to serve.
4. Differentiable: the segments must be different from one
another.
5. Actionable: the segment should be such that effective
programs can be designed for attracting and serving.

Selecting a target market (Market Targeting)

The market targeting process involves two steps:

1. Determining how many segments to enter

2. Determining which segments offer the most

potential.

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Selecting target market segments

Selecting target market segments

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 1. Undifferentiated marketing:

• Undifferentiated
marketing: involves
ignoring segment
differences and offering just
one product or service to the
entire market. This strategy
helps to keep the cost down.
For example, Coca-Cola
with one regular flavor.

2. Differentiated marketing

• Differentiated marketing:
involves marketing in a
number of segments and
developing separate
marketing program for each.
However, this increases the
cost for the company.

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 3. Concentrated marketing

• Concentrated marketing:
involves firms selecting one
segment and attempting to
capture a large share of this
market.

4. Micro-marketing

• Micro-marketing: the practice of

tailoring products and marketing
programs to the needs and wants
of specific individuals.

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 Developing New Products

And Managing the Product

Life-Cycle

New-Product Development Strategy

• New product development:
– The development of original products, product improvements, product
modifications, and new brands through the firm’s own product
development efforts.
• New product innovation is very expensive and very risky.
– $20 - $30 billion is lost on failed food products annually.

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 New-Product Failures
• Why do new products fail?
– Overestimation of market size.
– Product design problems.
– Incorrectly positioned, priced, or advertised.
– Pushed by high level executives despite poor marketing research
findings.
– Excessive development costs.
– Competitive reaction.

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New-Product Development Process

• Idea generation
• Idea screening
• Concept development and testing
• Marketing strategy development
• Business analysis
• Product development
• Test marketing
• Commercialization

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 New-Product Development Process
• Idea generation:
– Internal sources:
• Company employees at all levels.
– External sources:
• Customers
• Competitors
• Distributors
• Suppliers
• Outsourcing (design firms, product
consultancies, online collaborative
communities)
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New-Product Development Process

• Idea screening:
– Process used to spot good ideas and drop poor ones.
– Executives provide a description of the product along with estimates
of market size, product price, development time and costs,
manufacturing costs, and rate of return.
– Evaluated against a set of company criteria for new products.

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 New-Product Development Process
• Concept development and testing:
– Product idea:
• Idea for a possible product that the company can see itself offering
to the market.
– Product concept:
• Detailed version of the new-product idea stated in meaningful
consumer terms.
– Concept testing:
• Testing new-product concepts with groups of target consumers to
find out if the concepts have strong consumer appeal.
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New-Product Development Process

• Marketing strategy development:
– Part One:
• Describes the target market, planned value
proposition, sales, market share, and profit
goals.
– Part Two:
• Outlines the product’s planned price,
distribution, and marketing budget.
– Part Three:
• Describes the planned long-run sales and profit
goals, marketing mix strategy.

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 New-Product Development Process
• Business analysis:
– Involves a review of the sales, costs, and profit projections to assess
fit with company objectives.
– If results are positive, project moves to the product development
phase.

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New-Product Development Process

• Product development:
– Develops concept into a physical product.
– Calls for a large jump in investment.
– Prototypes are made.
– Prototypes must have correct physical features and convey
psychological characteristics.
– Prototypes are subjected to physical tests.

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 New-Product Development Process
• Testing marketing:
– Product and marketing program are introduced in a more realistic
market setting.
– Not needed for all products.
– Can be expensive and time consuming, but better than making a major
marketing mistake.

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New-Product Development Process

• Commercialization:
– Must decide on timing (i.e., when to introduce the product).
– Must decide on where to introduce the product (e.g., single location,
state, region, nationally, internationally).
– Must develop a market rollout plan.

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 Managing New-Product Development
• Customer centered new-product development:
– Focuses on finding new ways to solve customer problems and create
more customer-satisfying experiences.
• Team-based new-product development:
– Various company departments work closely together, overlapping the
steps in the product development process to save time and increase
effectiveness.
• Systematic new-product development:
– Innovation management systems collect, review, evaluate, and
manage new-product ideas.

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The Product Life Cycle

• Product life cycle: The course of a product’s sales and profits in its
lifetime. It involves five distinct stages:
– Product development
– Introduction
– Growth
– Maturity
– Decline

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 Applying the Product Life Cycle
• Product class has the longest life cycle.
• Product form tends to have the standard PLC shape.
• Brand can change quickly because of changing competitive attacks and
responses.
• Style is a basic and distinctive mode of expression.
• Fashion is a popular style in a given field.
• Fads result in a temporary period of unusually high sales driven by
consumer enthusiasm. Fads decline quickly.

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Practical Problems of PLC

• When used carefully, the PLC may help develop good marketing
strategies.
• However, in practice, it is difficult to:
– Forecast sales level, length of each stage, and shape of PLC.
– Develop marketing strategy because strategy is both a cause and result
of the PLC.
• Marketers should avoid blindly pushing products to next stage and
instead seek ways to rescue products and growth sales.

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 Introduction Stage of PLC
• Sales: Low
• Costs: High cost per customer
• Profits: Negative or low
• Customers: Innovators
• Competitors: Few

• Marketing objective: Create product awareness and trial.

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Introduction Stage of PLC

• Marketing strategies:
– Product: Offer a basic product.
– Price: Use cost-plus pricing.
– Distribution: Build selective distribution.
– Advertising: Build product awareness among early adopters and
dealers.
– Promotion: Use heavy promotion to entice product trial.

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 Growth Stage of PLC
• Sales: Rapidly rising
• Costs: Average cost per customer
• Profits: Rising profits
• Customers: Early adopters
• Competitors: Growing number

• Marketing objective: Maximize market share.

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Growth Stage of PLC

• Strategies:
– Product: Offer product extensions, service, warranty.
– Price: Price to penetrate the market.
– Distribution: Build intensive distribution.
– Advertising: Build awareness and interest in the mass market.
– Promotion: Reduce to take advantage of heavy consumer demand.

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 Maturity Stage of PLC
• Sales: Peak sales
• Costs: Low cost per customer
• Profits: High profits
• Customers: Middle majority
• Competitors: Stable number beginning to decline

• Marketing objective: Maximize profits while

defending market share.

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Maturity Stage of PLC

• Strategies:
– Product: Diversify brand and models.
– Price: Match our best competitors.
– Distribution: Build more intensive distribution.
– Advertising: Stress brand differences and benefits.
– Promotion: Increase to encourage brand switching.

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 Maturity Stage of the PLC

• Strategies used to manage the PLC during maturity

include:
– Modifying the market
– Modifying the product
– Modifying the marketing mix

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Maturity Stage of the PLC

• Modifying the market:
– Increase the consumption of the current product.
• How?
– Look for new users and market segments.
– Reposition the brand to appeal to larger or faster-growing segment.
– Look for ways to increase usage among present customers.

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 Maturity Stage of the PLC
• Modifying the product:
– Changing characteristics such as quality, features, or style to attract
new users and to inspire more usage.
• How?
– Improve durability, reliability, speed, taste.
– Improve styling and attractiveness.
– Add new features.

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Maturity Stage of the PLC

• Modifying the marketing mix:
– Improving sales by changing one or more marketing mix elements.
• How?
– Cut prices.
– Launch a better ad campaign.
– Move into new market channels.

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 Decline Stage of PLC
• Sales: Declining sales
• Costs: Low cost per customer
• Profits: Declining profits
• Customers: Laggards
• Competition: Declining number

• Marketing objective: Reduce expenditures and milk the brand.

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Decline Stage of PLC

• Strategies:
– Product: Phase out weak items.
– Price: Cut price.
– Distribution: Go selective—phase out unprofitable outlets.
– Advertising: Reduce to level needed to retain hardcore loyals.
– Promotion: Reduce to minimal level.

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 Additional Considerations
• Product decisions and social responsibility:
– Consider public policy issues, regulations regarding acquiring or
dropping products, patent protection, product quality and safety, and
warranties.

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Additional Considerations
• International product and service marketing:
– Must determine which products and services to introduce in which
countries, and how much to standardize or adapt the offering.
– Packaging presents new challenges for international marketers.
– Many service businesses are global.

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 Pricing:
Understanding and Capturing Customer
Value

Pricing ConceptsUnderstanding and

Capturing Customer Value
Topic Outline
• What Is a Price?
• Customer
Perceptions of Value
• Company and
Product Costs
• Other Internal and
External
Considerations
Affecting Price
Decisions

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 What Is a Price?
The challenge is to find the price that will let the
company make a fair profit by getting paid for
the customer value it creates.

Price is the amount of money charged for a product

or service. It is the sum of all the values that
consumers give up in order to gain the benefits
of having or using a product or service.

What Is a Price?

Price is the only

element in the
marketing mix that
produces revenue;
all other elements
represent costs
It is one of the most
flexible marketing
mix elements

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 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Understanding how much

value consumers place
on the benefits they
receive from the product
and setting a price that
captures that value

• One frequent problem is that companies are too

quick to reduce prices.
• Other common mistake include pricing that is too
cost oriented rather than customer value oriented
• Pricing that doesn’t take the rest of the marketing
mix into account is a big mistake too.

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 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Value-based pricing uses the buyers’ perceptions of value, not the sellers
cost, as the key to pricing. Price is considered before the marketing
program is set.
• Value-based pricing is customer driven
• Cost-based pricing is product driven

Factors to Consider When

Setting Prices
Customer Perceptions of Value

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 Factors to Consider When
Setting Prices
Customer Perceptions of Value

Good-value pricing offers the right combination of quality and good

service to fair price

Existing brands are being redesigned to offer more quality for a given price
or the same quality for less price

Factors to Consider When

Setting Prices
Customer Perceptions of Value
Everyday low pricing (EDLP) involves charging a
constant everyday low price with few or no
temporary price discounts

High-low pricing involves charging higher prices on

an everyday basis but running frequent
promotions to lower prices temporarily on
selected items

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 Factors to Consider
When Setting Prices
Customer Perceptions of Value

• Value-added pricing attaches value-added features and services to

differentiate offers, support higher prices, and build pricing power
• Pricing power is the ability to escape price competition and to justify
higher prices and margins without losing market share

Factors to Consider
When Setting Prices
Company and Product Costs

Cost-based pricing involves setting prices based on the costs for

producing, distributing, and selling the product plus a fair rate of return
for its effort and risk

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 Factors to Consider When
Setting Prices
Company and Product Costs

Cost-based pricing adds a standard markup to the cost of the product

Factors to Consider When Setting Prices

Cost-Plus Pricing
• Cost-plus pricing adds a standard markup to the cost
of the product
• Benefits
– Sellers are certain about costs
– Prices are similar in industry and price
competition is minimized
– Consumers feel it is fair
• Disadvantages
– Ignores demand and competitor prices

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 Factors to Consider
When Setting Prices
Break-Even Analysis and Target Profit Pricing

Break-even pricing is the price at which total costs are equal to total
revenue and there is no profit

Target profit pricing is the price at which the firm will break even or
make the profit it’s seeking

Factors to Consider When Setting Prices

Other Internal and External Considerations
Affecting Price Decisions
• Customer perceptions
of value set the upper
limit for prices, and
costs set the lower limit
• Companies must
consider internal and
external factors when
setting prices

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 Factors to Consider
When Setting Prices
Other Internal and External Considerations Affecting
Price Decisions

Target costing starts with an ideal selling price

based on consumer value considerations and then
targets costs that will ensure that the price is met

Factors to Consider When Setting Prices

Other Internal and External Considerations Affecting
Price Decisions

Organizational considerations include:

• Who should set the price
• Who can influence the prices

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Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
The Market and Demand
• Before setting prices, the
marketer must understand
the relationship between
price and demand for its
products

Factors to Consider When Setting Prices

Other Internal and External Consideration Affecting Price Decisions
Competition

Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly

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Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Price elasticity of demand illustrates the response of demand
to a change in price

Inelastic demand occurs when demand hardly changes

when there is a small change in price

Elastic demand occurs when demand changes greatly for a

small change in price

Price elasticity of demand = % change in quantity demand

% change in price

Factors to Consider When Setting Prices

Other Internal and External Considerations
Competitor's Strategies

• Comparison of offering in terms

of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

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 Factors to Consider
When Setting Prices
Other Internal and External Consideration Affecting Price Decisions

Economic conditions

Reseller’s response to price

Government

Social concerns

New Pricing Strategies

• Market-skimming pricing strategy sets high initial
prices to “skim” revenue layers from the market.
• •Product quality and image must support the price.
• •Buyers must want the product at the price.

Market-penetration pricing involves setting a low

price for a new product in order to attract a large
number of buyers and a large market share.

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 Marketing Channels
Delivering Customer Value

3-161

First Stop: Netflix’s

Channel Innovation
• Innovative distribution model of video entertainment:
– DVDs by mail
– Watch Instantly service
– Video streaming on almost any device
– Original content development
• Stays ahead of the competition through innovation and revolutionizing
distribution

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 Supply Chains
• Upstream partners supply the raw materials, components, parts,
information, finances, and expertise needed to create a product or
service.
• Downstream partners serve as distribution channels that link the firm and
its customers.

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Value Delivery Network

• Company, suppliers, distributors, and customers who
partner with each other to improve the performance
of the entire system

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 Marketing Channels
(Distribution Channels)
• Interdependent organizations that help make a product or service
available for use or consumption
• Channel decisions
– Affect every other marketing decision
– Can lead to competitive advantage
– May involve long-term commitments to other firms

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How a Distributor Reduces the Number of

Channel Transactions

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 How Channel Members Add Value
• Intermediaries create greater efficiency in making goods available to
target markets.
• Role of marketing intermediaries
– Transform the assortments of products made by producers into the
assortments wanted by consumers
• Bridge the major time, place, and possession gaps that separate goods
and services from users

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Key Functions Performed by Channel

Members
Help to complete transactions
• Information
• Promotion
• Contact
• Matching
• Negotiation

Help to fulfill the completed transactions

• Physical distribution
• Financing
• Risk taking
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 Number of Channel Levels
• Channel level: A layer of intermediaries that performs work in bringing
the product and its ownership closer to the final buyer
– Direct marketing channel: No intermediary levels
– Indirect marketing channels: One or more intermediary levels

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Number of Channel Levels

• Types of flows that connect the institutions in the channel:
– Physical flow of products
– Flow of ownership
– Payment flow
– Information flow
– Promotion flow

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 Consumer and
Business Marketing Channels

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Channel Behavior
• Channel conflict: Disagreements among marketing channel members on
goals, roles, and rewards
– Horizontal conflict occurs among firms at the same level of the
channel.
– Vertical conflict occurs between different levels of the same channel.

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 Vertical Marketing Systems
Conventional distribution channel
• Consists of one or more independent producers,
wholesalers, and retailers
• Each member is a separate business seeking to
maximize its own profits even at the expense of profits
for the system as a whole.

Vertical marketing system (VMS)

• Producers, wholesalers, and retailers act as a unified

system.
• Types: Corporate, contractual, and administered
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Horizontal Marketing System

• Two or more companies at one level join together to
follow a new marketing opportunity.

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 Multichannel Distribution Systems
• A single firm sets up two or more marketing channels to reach customer
segments.
• Advantages:
– Expansion of sales and marketing coverage
– Tailor-made products and services for the specific needs of customer
segments
• Disadvantages:
– Harder to control
– Generates conflict
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Multi Channel
Distribution System

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 Disintermediation
• Occurs when product or service producers cut out
marketing channel intermediaries or when radically
new types of channel intermediaries displace
traditional ones

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Channel Design Decisions

• Marketing channel design involves designing effective marketing
channels by:
– Analyzing customer needs
– Setting channel objectives
– Identifying major channel alternatives
– Evaluating the alternatives

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 Designing International Channels
• Channel strategies should be adapted to the existing structures within
each country.
• Distribution systems can have many layers and a large number of
intermediaries.
• Customs and government regulation can restrict distribution in global
markets.

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Marketing Channel Management

Managing and
Selecting channel
motivating channel
members
members

Evaluating channel
members

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 Public Policy and
Distribution Decisions
• Exclusive distribution
• Exclusive dealing
• Clayton Act of 1914: Exclusive arrangements are legal as long as the
parties:
– Do not substantially lessen competition or tend to create a monopoly
– Enter into the agreement voluntarily

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Marketing Logistics
(Physical Distribution)
• Planning, implementing, and controlling the physical flow of materials,
final goods, and related information from points of origin to
consumption
• Customer-centered logistics: Marketplace to the factory or sources of
supply
– Outbound logistics
– Inbound logistics
– Reverse logistics

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 Supply Chain Management

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Marketing Logistics and

Supply Chain Management
• The goal of marketing logistics is to deliver a targeted level of customer
service at the least cost.
• Logistics functions include:
– Warehousing
– Inventory management
– Transportation
– Logistics information management

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 Warehousing
• Storage warehouses store goods for moderate to long periods.
• Distribution centers are large, highly automated warehouses that
receive goods, take orders, fill them, and deliver goods to customers.

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Inventory Management
• Should be done in a cost effective and profitable manner
– Just-in-time logistics systems
– Radio frequency identification (RFID), smart tag technology, gives
the physical location of a product.

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 Transportation
Factors affected by choice of transportation
• Pricing of products
• Delivery performance
• Condition of goods
• Customer satisfaction
Modes
• Trucks, railroads, water carriers, pipelines, air carriers,
and the Internet
Multimodal transportation
• Combining two or more modes of transportation
• Piggyback, fishyback, trainship, and airtruck

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Logistics Information Management

• Flows of information closely linked to channel performance
• Information can be shared and managed through:
– Electronic data interchange (EDI)
– Vendor-managed inventory (VMI)

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 Integrated Logistics Management
• Emphasizes teamwork both inside the company and among all the
marketing channel organizations
– Forming cross-functional teams inside the firm
– Building logistics partnerships
– Outsourcing to third-party logistics providers
• Third-party logistics (3PL) provider: Performs any or all of the
functions required to get a client’s product to market

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Retailing
Retailing includes all the
activities in selling
products or services
directly to final
consumers for their
personal, non-business
use
Retailers are businesses
whose sales come
primarily from retailing

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 Retailing
Product Line

Specialty stores
• Narrow product line with deep assortment

Department stores
• Wide variety of product lines

Convenience stores
• Limited line of high-turnover goods

Superstores
• Non-food goods

Category killers
• Deep in category with sales staff

Wholesaling
Wholesaling includes all activities involved in selling goods
and services to those buying for resale or business use

Selling and promoting

Buying assortment building
Bulk breaking
Warehousing
Transportation
Financing
Risk bearing
Market information
Management services and advice

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 Wholesaling
Wholesaling

Selling and promoting involves the wholesaler’s sales force helping the
manufacturer reach many smaller customers at lower cost

Buying assortment building involves the selection of items and building

of assortments needed by their customers, saving the customers work

Wholesaling
Wholesaling

Bulk breaking involves the wholesaler buying in larger quantity and

breaking into smaller lots for its customers

Warehousing involves the wholesaler holding inventory, reducing its

customers’ inventory cost and risk

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 Wholesaling
Wholesaling

Transportation involves the wholesaler providing quick delivery

due to its proximity to the buyer

Financing involves the wholesaler providing credit and financing

suppliers by ordering earlier and paying on time

Wholesaling
Wholesaling

Risk bearing involves the wholesaler absorbing risk by taking title and
bearing the cost of theft, damage, spoilage, and obsolescence

Market information involves the wholesaler providing information to

suppliers and customers about competitors, new products, and price
developments

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 Wholesaling
Wholesaling

Management services and

advice involves wholesalers
helping retailers train their
sales clerks, improve store
layouts, and set up
accounting and inventory
control systems

Engaging Customers and

Communicating Customer Value
and Advertising

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 The Promotion Mix

The Promotion
Mix

Integrated Marketing Communications

Advertising Personal
selling

Consistent, clear,
and compelling
company and
brand messages
Sales
Public
Promotion
relations

Direct and
Digital
marketing

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Elements in the Communication Process
Sender Encoding Message Decoding Receiver

Media

Noise

Feedback Response

Steps in Developing Effective

Communication
Determine the
Identify the Design the
Communication
Target Audience Message
Objectives

Select the
Select the Collect
Communication
Message Source Feedback
Channels

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 Buyer Readiness States

Awareness Knowledge Liking

Preference Conviction Purchase

Advertising
Advertising is the practice and techniques employed to
bring attention to a product or service.

Benefits Drawbacks

Seems Legitimate Impersonal

Allows Repetition One-Way Communication

Builds Long-Term Image Easily Ignored

Low Cost per Exposure Can Be Very Costly

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Personal Selling
Personal selling is also known as face-to-face selling in
which one person who is the salesman tries to convince the
customer in buying a product.

Benefits Drawbacks

Builds Buyer Preference Long-Term Commitment

Fosters Relationships Most Expensive Tool

Sales Promotion
Demand-stimulating devices to supplement advertising
and facilitate personal selling.

Benefits Drawbacks

Attract Customer Attention Effects are Short-Lived

Encourage Immediate Short-Term
Purchase
May Not Build Brand
Can Boost Sagging Sales Preference

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Public Relations

Management tool
designed to favorably
influence attitudes
toward an organization,
Its products,
and its policies

Benefits of Publicity
Lower Costs

Increased attention

More information

Timeliness

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Limitations of Publicity

Loss of control

Limited exposure

Publicity is not free

Forms of Direct
and Digital Marketing

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 Benefits of Direct and
Digital Marketing to Buyers
• Buyers • Sellers
• Convenient, easy, • Low-cost, efficient,
and private and speedy
• Easy buyer-seller • Build close,
interaction personalized,
• Quick access to interactive, one-to-
products and one customer
relevant information relationships
• Brand engagement • Offer greater
and community flexibility
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The End.

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