I. SEGMENTATION A. Principles Of Market Segmentation B. The ...

Certified Marketing Analyst

Module 3: Marketing

I. SEGMENTATION

A. Principles Of Market Segmentation

Two major features of modern markets are the extent to which they are capable of being

segmented (because of growing differences between customers and their demands to be treated as

individuals) and the existence of the vastly superior technologies of communication, distribution

and production, which allow the pursuit of segmentation strategies. In some cases this leads to

‘micro-segmentation’ or ‘one-to-one marketing’, in which each customer is treated as a different

segment.

Where there are differences in customer needs or wants, or in their attitudes and predis-

positions towards the offerings on the market, between groups or individuals in the market, then

there are opportunities to segment the market, i.e. to subdivide the larger market into smaller

groups (segments) that provide market targets.

The history of thinking about market segmentation can be traced at least as far back as

Smith (1956), who distinguished between strategies of product differentiation (applying

promotional techniques to influence demand in favour of the product) and market segmentation

(adjusting market offerings in various ways to more closely meet the requirements of different

customers). Baker (1992) acknowledges this as the first coherent statement of a distinctive

marketing view of market structure, representing a compromise between the economist’s view of

markets as single entities and the behavioural scientist’s focus on individual buyer differences.

Seen in this light, segmentation is a logical extension of the marketing concept and market

orientation .

B. The Underlying Premises Of Market Segmentation

Threebasicpropositionsunderpinmarketsegmentationasacomponentof marketingstrategy:

1. For segmentation to be useful customers must differ from one another in some important respect,

which can be used to divide the total market. If they were not different in some significant way,

if they were totally homogeneous, then there would be no need or basis on which to segment the

market. However, in reality all customers differ in some respect. The key to whether a particular

difference is useful for segmentation purposes lies in the extent to which the differences are

related to different behaviour patterns (e.g. different levels of demand for the product or

service, or different use/benefit requirements) or susceptibility to different marketing mix

combinations (e.g. different product/service offerings, media, messages, prices or distribution

channels), i.e. whether the differences are important to how we develop a marketing strategy.

2. The operational use of segmentation usually requires that segment targets can be identified by

measurable characteristics to enable their potential value as a market target to be estimated and for

the segment to be identified. Crucial to utilising a segmentation scheme to make better marketing

decisions is the ability of the marketing strategist to evaluate segment attractiveness and the

current or potential strengths the company has in serving aparticular segment.

3. The effective application of segmentation strategy also requires that selected segments be isolated

from the remainder of the market, enabling them to be targeted with a distinct market offering.

Where segments are not distinct they do not form a clear target for the company’s marketing

efforts.

For any segmentation scheme to be useful it must possess the above three characteristics.

C. Major Issues In Market Segmentation

By way of overview, our general understanding of the issues to be addressed in studying

and applying market segmentation falls into the following four areas suggested by Piercy and

Morgan (1993):

a) The methodology of market segmentation

The methodological tools available for use in developing segmentation schemes are

concerned with two issues. First, there is the question of the choice of the variables or

customer characteristics with which to segment the market – the ‘bases’ of market

segmentation. Second, there is the related question of the procedures or techniques to

applytoidentifyandevaluate thesegments of themarket.

b) Testing the robustness of segments

If segments can be identified using the bases and techniques chosen, then there is the

question of how they should be evaluated as prospective targets. In a classic paper

Frank et al. (1972) suggested that to provide a reasonable market target a segment should

be measurable, accessible, substantial and unique in its response to marketing stimuli.

These criteria remain the basis for most approaches (e.g. see Kotler and Keller, 2012).

In fact, evaluating market segments may be more complex than this suggests.

c) Strategic segmentation decision

If the market is susceptible to segmental analysis and modelling, and attractive

segments can be identified, then the decision faced is whether to use this as the basis

for developing marketing strategies and programmes, and whether to target the entire

market or concen- trate on part of it.

d) Implementation of segmentation strategies

Finally, there is the question of the capabilities of the organisation for putting a

segmentation approach into effect and, indeed, the extent to which corporate

characteristics should guide the segmentation approach in the first place.

D. Segmenting consumer markets

The variables used in segmenting consumer markets can be broadly grouped into three

main classes:

1. Background customer characteristics for segmenting markets

Often referred to as classificatory information, background characteristics do not

change from one purchase situation to another. They are customer-specific but not

specifically related to their behaviour in the particular market of interest. Background

characteristics can be classified along two main dimensions (see Figure 3.1).

The first dimension is the origin of the measures. The measures may have been

taken from other disciplines and are hence not marketing specific but believed to be related to

marketing activity. Non-marketing-specific factors include demographic and socio-

economic.

Figure 3.1 Background customer characteristics

characteristics developed in the fields of sociology and demography.

Alternatively, measures may have been developed specifically by marketing researchers

and academics to solve marketing problems. Typically they have been developed out of

dissatisfaction with tra- ditional (sociological) classifications. Dissatisfaction with social

class, as a predictor of marketing behaviour, for example, has led to the development of

lifestyle segmentation and geodemographic segmentation such as the ACORN (A

Classification Of Residential Neighbourhoods) and related classification schemes.

The second dimension to these characteristics is the way in which they are

measured. Factors such as age or sex can be measured objectively, whereas personality

and lifestyle (collectively termed ‘psychographics’) are inferred from often subjective

responses to a range of diverse questions. The commonest variables used are as follows.

a) Demographic characteristics

Measures such as age and gender of both purchasers and consumers have been

one of the most popular methods for segmenting markets:

• Gender

• Age

• Geographic location

b) Socio-economic characteristics

Factors such as income, occupation, terminal education age and social class

have been popular with researchers for similar reasons to demographics: they are

easy to measure and can be directly related back to media research for media

selection purposes. More importantly, the underlying belief in segmenting markets

by social class is that the different classes are expected to have different levels of

affluence and adopt different lifestyles. These lifestyles are, in turn, relevant to

marketing-related activity, such as propensity to buy certain goods and services.

Socio-economic measures are best seen in the use of social class groups.

Social class has been used as a surrogate for identifying the style of life that

individuals are likely to lead. The underlying proposition is that consumers higher

up the social scale tend to spend a higher proportion of their disposable income on

future satisfactions (such as insurance and investments) while those lower down the

scale spend proportionately more on immediate satisfactions. As such, socio-

economic class can be particularly useful in identifying segments in markets such as

home purchase, investments, beer and newspapers. The financial services industry

makes extensive use of socio-economic groups for marketing, such as developing

pensions and life assurance products aimed at particular social groups. One

company is launching an occupational annuity to pay a higher pension to those in

stressful or unhealthy jobs. Premiums and terms for private health insurance are

partly determined by social class groupings (Gardner, 1997).

Concern has been expressed among both marketing practitioners and

academics that social class is becoming increasingly less useful as a segmentation

variable. Lack of satisfac- tion with social class in particular and other non-

marketing-specific characteristics such as segmentation variables has led to the

development of marketing-specific measures such as stage of customer life cycle,

geodemographics such as the classification system and the development of lifestyle

research.

c) Consumer life cycle

Stage of the family life cycle, essentially a composite demographic variable

incorporating factors such as age, marital status and family size, has been

particularly useful in identifying the types of people most likely to be attracted to a

product field (especially consumer durables) and when they will be attracted. The

producers of baby products, for example, build (e-) mailing lists of households with

newborn babies on the basis of free gifts given to mothers in maternity hospitals.

These lists are dated and used to direct advertising messagesfor further baby, toddler

and child products to the family at the appropriate time as the child grows.

Stage of family life cycle was first developed as a market segmentation tool

by Wells and Gubar (1966) and has since been updated and modified by Murphy

and Staples (1979) to take account of changing family patterns.

In some instances segmentation by life cycle can help directly with product

design, as is the case with package holidays. In addition to using age as a

segmentation variable, holiday firms target very specifically on different stages of

the life cycle.

d) Personality characteristics

Personality characteristics are more difficult to measure than demographics or

socio-eco- nomics. They are generally inferred from large sets of questions often

involving detailed computational (multivariate) analysis techniques.

Perhaps the main value of personality measures lies in creating the background

atmos- phere for advertisements and, in some instances, package design and

branding.Research to date, however, primarily conducted in the United States, has

identified few clear relationships between personality and behaviour. In most instances

personality measures are most likely to be of use for describing segments once they

have been defined on some other basis. As with the characteristics discussed above,

behaviour, and reasons for behaviour, in personality-homogeneous segments may be

diverse.

e) Lifestyle characteristics

In an attempt to make personality measures developed in the field of

psychology more relevant to marketing decisions, lifestyle research was pioneered

by advertising agencies in the United States and the United Kingdom in the early

1970s. This research attempts to isolate market segments on the basis of the style of

life adopted by their members. At one stage these approaches were seen as

alternatives to the social class categories discussed above.

Lifestyle segmentation is concerned with three main elements: activities

(such as leisure activities, sports, hobbies, entertainment, home activities, work

activities, professional work, shopping behaviour, housework and repairs, travel and

miscellaneous activities, daily travel, holidays, education, charitable work);

interaction with others (such as self- perception, personality and self-ideal, role

perceptions, as mother, wife, husband, father, son, daughter, etc. and social

interaction, communication with others, opinion leadership); and opinions (on topics

such as politics, social and moral issues, economic and business– industry issues and

technological and environmental issues).

The most significant advantages of lifestyle research are again for guiding

the creative content of advertising. Because of the major tasks involved in gathering

the data, however, it is unlikely that lifestyle research will supplant demographics as

a major segmentation variable

2. Customer attitudinal characteristics for segmenting markets.

Attitudinal characteristics attempt to draw a causal link between

customer characteristics and marketing behaviour. Attitudes to the product

class under investigation and attitudes towards brands on the market have

both been used as fruitful bases for market segmentation.

a) Benefit segmentation

Classic approaches (e.g. Haley, 1968, 1984) examine the benefits

customers are seeking in consuming the product. Segmenting on the basis of

benefits sought has been applied to a wide variety of markets such as banking,

fast-moving consumer products and consumer durables. The building society

investment market, for example, can be initially segmented on the basis of the

benefits being sought by the customers. Typical benefits sought include high rates

of interest (for the serious investor), convenient access (for the occasional

investor) and security (for the ‘rainy day’ investor).

Benefit segmentation takes the basis of segmentation right back to the

underlying reasons why customers are attracted to various product offerings. As

such, it is perhaps the closest means yet to identifying segments on bases directly

relevant to marketing decisions. Developments in techniques such as conjoint

analysis make them particularly suitable for identifying benefit segments (Hooley,

1982).

b) Perceptions and preferences

A second approach to the study of attitudes is through the study of

perceptions and preferences. Much of theworkinthemulti-dimensional scalingarea

(Green et al., 1989) is primarily concerned with identifying segments of

respondents who view the products on offer in a similar way (perceptual space

segmentation) and require from the market similar features or benefits (preference

segmentation).

3. Customer behavioural characteristics for segmentingmarkets

The most direct method of segmenting markets is on the basis of the

behaviour of the consumers in those markets. Behavioural segmentation covers

purchases, consumption, communication and response to elements of the

marketing mix.

a) Purchase behavior

Study of purchasing behaviour has centred on such issues as the time of

purchase (early or late in the product’s overall life cycle) and patterns of purchase

(the identification of brand- loyal customers).

● Innovators: because of their importance when new products are

launched, innovators (those who purchase a product when it is still new)

have received much attention from marketers. Clearly during the launch

of new products isolation of innovators as the initial target segment

could significantly improve the product’s or service’s chances of

acceptance on the market. Innovative behaviour, however, is not

necessarily generalis- able to many different product fields. Attempts to

seek out generalised innovators have been less successful than looking

separately for innovators in a specific field. Generalisa- tions seem most

relevant when the fields of study are of similar interest.

● Brand loyalty: variously defined, brand loyalty has also been used as a

basis for segmentation. While innovators are concerned with initial

purchase, loyalty patterns are concerned with repeat purchase. As such,

they are more applicable to repeat purchase goods than to consumer

durables, though they have been used in durables markets (see the example

below). As with innovative behaviour, research has been unable to identify

consumers who exhibit loyal behaviour over a wide variety of products.

Loyalty, aswith innovativeness, is specific to a particular product field.

Volkswagen, the German automobile manufacturer, has used loyalty

as a major method for segmenting its customer markets. It divided its

customers into the following categories: first-time buyers; replacement

buyers – (a) model-loyal replacers,

(b) company-loyal replacers, and (c) switch replacers. These segments

were used to analyse performance and market trends and for forecasting

purposes.

In the context of e-marketing, companies such as Site Intelligence have

devised methods of segmenting website visitors and purchasers using

combinations of behavioural (visits) and demographic characteristics.

b) Consumption behavior

Purchasers of products and services are not necessarily the consumers,

or users, of those products or services. Examination of usage patterns and volumes

consumed (as in the heavy user approach) can pinpoint where to focus marketing

activity. There are dangers, however, in focusing merely on the heavy users. They

are, for example, already using the product in quantity and therefore may not

offer much scope for market expansion. Similarly they will either be current

company customers or customers of competitors.

Cook and Mindak(1984) have shownthat the heavyuserconcept ismore useful

insome markets than in others.

In the latter case brand loyalty patterns may be set and competition could be

fierce. Companies may be better advised to research further the light or non-users of

the product to find out why they do not consume more of the product. In the growth

stage of the product life cycle the heavy user segment may well be attractive, but

when the market reaches maturity itmay makemore sensetotryto extend themarket by

mopping up extra potential demand in markets that are not adequately served by

existing products.

Product and brand usage has a major advantage over many other situation-

specific segmentation variables in that it can be elicited, in the case of many

consumer products, from secondary sources.

c) Communication behavior

A further behavioural variable used in consumer segmentation studies has

been the degree of communication with others about the product of interest.

Opinion leaders can be particularly influential in the early stages of the product

life cycle.

In many fields, however, identifying opinion leaders is not so easy. As with

innovators, opinion leaders tend to lead opinion only in their own interest areas. A

further problem with satisfying opinion leaders is that they tend to have fairly

strong opinions themselves and can often be a very heterogeneous group .

In addition to information-giving behaviour (as displayed by opinion

leaders) markets could be segmented on the basis of information-seeking behaviour.

The information seekers may be a particularly attractive segment for companies basing

their strategy on promotional material with a heavy information content.

d) Response to elements of the marketing mix

The use of elasticities of response to changes in marketing-mix variables as

a basis for segmentation is particularly attractive as it can lead to more actionable

findings, indicat- ing where marketing funds can best be allocated. Identifying, for

example, the deal-prone consumer or the advertising-responsive segment has

immediate appeal. There are, however, methodological problems in research in

identifying factors such as responsiveness to changes in price.

e) Relationship-seeking characteristics

E. Segmenting business markets

As with consumer markets, a wide variety of factors has been suggested for

segmenting business markets, but in fact business segmentation variables can be considered

under the same headings as those for consumer markets:

1. Background company characteristics

Demographic characteristics of companies can be a useful starting point for

business segmentation; indeed, they characterise the approaches most commonly

used by business marketing companies. Factors that can be considered here include

demographics such as industry type, customer size and location, but also operating

variables such as customer technology and capabilities, different purchasing policies

and situational factors including product application.

2. Attitudinal characteristics

It is possible also to segment business markets on the basis of the benefits being

sought by the purchasers. As we saw, benefit segmentation in the consumer market is the

process of segmenting the market in terms of the underlying reasons why customers buy,

focusing particularly on differences in why customers buy. Its strength is that it is segmentation

based on customer needs. In the business market, the same logic applies to the purchasing

criteria of different customers and product applications.

3. Behavioural characteristics

Behavioural issues relevant to segmenting business markets may include buyers’

personal characteristics and product/brand status and volume.

a) Buyers’ personal characteristics

Although constrained by company policies and needs, business products are

bought by people in just the same way that consumer products are. Business goods

markets can be segmented by issues such as the following:

• buyer–seller similarity: compatibility in technology, corporate culture or even

company size may be a useful way of distinguishing between customers;

• buyer motivation: purchasing officers may differ in the degree to which they shop

around and look at numerous alternative suppliers, and dual-source important

products and services, as opposed to relying on informal contacts for information

and remaining loyal to existing personal contacts;

• buyer risk perceptions: the personal style of the individual, intolerance of

ambiguity, self-confidence and status within the company may also provide

significant leverage.

b) Product/brand status and volume

The users of a particular product, brand or supplier may have important things in

common that can make them a target. For example, customers may differ in the rate

and extent of the adoption of new safety equipment in plants. Companies loyal to a

specific competitor maybe targeted – for instance to attack that competitor’s weaknesses

in service or product. Current customers may be a different segment from prospective

customers or lost customers.

High-volume product users may be different from medium and low users

in how they purchase. Even more than in consumer markets the 80/20 rule (80 per cent

of sales typically being accounted for by only 20 per cent of customers) can

dominate a business market. Identifying the major purchasers for products and

services through volume purchased can be particularly useful. Also of interest may

be the final use to which the product or service is put. Where, for example, the final

consumer can be identified, working backwards can suggest a sensible

segmentation strategy.

F. Identifying and describing market segments

In reality the most fundamental way of segmenting markets is the market-oriented

approach of grouping together customers who are looking for the same benefits in using the

product or service. All other bases for segmenting markets are really an approxima- tion of this.

The wine marketer assumes that all ABC1s have similar benefit needs from the wines they

purchase. Hence use/benefit segmentation can be referred to as first-order segmentation. Any

attempt to segment a market should commence by looking for different use/benefit segments.

Within identified use/benefit segments, however, there could be large numbers of cus-

tomers with very different backgrounds, media habits, levels of consumption, and so on.

Particularly where there are many offerings attempting to serve the same use/benefit segment

concentration on sub-segments within the segment can make sense. Sub-segments, for example,

who share common media habits, can form more specific targets for the company’s offerings.

Further segmentation within use/benefit segments can be termed second-order segmentation.

Second-order segmentation is used to improve the ability of the company to tailor the

marketing mix within a first-order segment.

G. The benefits of segmenting markets There are a number of important benefits that can be derived from segmenting a

market, which can be summarised in the following terms:

• Segmentation is a particularly useful approach to marketing for the smaller company. It

allows target markets to be matched to company competencies, and makes it more likely

that the smaller company can create a defensible niche in the market.

• It helps to identify gaps in the market, i.e. unserved or underserved segments. These

can serve as targets for new product development or extension of the existing product

or service range.

• In mature or declining markets it may be possible to identify specific segments that are still in

growth. Concentrating on growth segments when the overall market is declining is a major

strategy in the later stages of the product life cycle.

• Segmentation enables the marketer to match the product or service more closely to the needs

of the target market. In this way a stronger competitive position can be built (see Jackson,

2007, for the importance for companies of determining their strategic market position). This

is particularly important in the Internet age where companies compete in a large and

heterogeneous community (see Barnes et al., 2007).

• The dangers of not segmenting the market when competitors do so should also be

emphasised. The competitive advantages noted above can be lost to competitors if the

company fails to take advantage of them. A company practising a mass marketing strategy in

a clearly segmented market against competitors operating a focused strategy can find itself

falling between many stools.

H. Implementing market segmentation

It should also be noted that there is evidence that companies often struggle with the

implementation of segmentation-based strategies, and fail to achieve the potential benefits

outlined above (see, e.g., Piercy and Morgan, 1993; Dibb and Simkin, 1994) – this is the

difference between segmentation as a normative model and as a business reality (Danneels,

1996).

1. The scope and purpose of market segmentation

There is growing recognition that conventional approaches may pay insufficient

attention to identifying the scope of market segmentation (Plank, 1985). Indeed, a seminal

paper by Wind (1978) proposed that in selecting segmentation approaches it is necessary to

distinguish between segmentation that has the goal of gaining a general understanding of the

market and use for positioning studies, and segmentation concerned with marketing

programme decisions in new product launches, pricing, advertising and distribution. These are

all valid and useful applications in segmentation analysis, but they are fundamentally

different.

2. Strategic, managerial and operational levels of segmentation

One approach to making the scope of market segmentation clearer is to distinguish

between different levels of segmentation, in the way shown in Figure 3.2 (Piercy and Morgan,

1993).

Figure 3.2 Levels of segmentation

This approach is similar to the first-order and second-order segmentation distinction

made above, but goes further in relating the levels of segmentation to organisational issues as

well as customer issues. The nature of the different levels of segmentation can be described as

follows:

• Strategic segmentation is related to management concerns for strategic intent

and corporate mission, based on product/service uses and customer benefits.

• Managerial segmentation is concerned primarily with planning and allocating

resources such as budgets and personnel to market targets.

• Operational segmentation focuses on the issue of aiming marketing

communications and selling efforts into the distribution channels that reach and

influence market targets (and their sub-divisions).

Confusing these very different roles for segmentation may be why segmentation is

sometimes seen as a failure in organisations:failed segmentation efforts tend to fall into one of

two categories: the marketer-dominated kind, with little data to support its recommendations, or

the purely statistical type that identi- fies many consumer differences that aren’t germane to the

company’s objectives. (Young, 1996).

The implication is that clarifying the role and purpose of an approach to segmentation

may be important to avoid unrealistic expectations. However, it is clear that segmentation-

based strategies do sometimes fail at the implementation stage.

3. Sources of implementation problems

The recognition of implementation problems with segmentation-based strategies may

be traced back over the years: Wind (1978) noted that little was known about translating

segment research into marketing strategies; Young et al. (1978) accused marketers of being

preoccupied with segmentation technique rather than actionability; Hooley (1980) blamed

segmentation failures on the use of analytical techniques for their own sake and poor

communication between managers and marketing researchers. Shapiro and Bonoma (1990)

wrote: ‘Much has been written about the strategy of segmentation, little about its

implementation, management and control’, and this would still seem a valid conclusion.

Piercy and Morgan (1993) attempted to catalogue the sources of implementation failure

with segmentation-based strategies, and these issues provide a further screening device for

evaluating the suitability of a segmentation model generated through market research. Issues to

assess include the following: Organisation structure, internal politics, corporate culture, information

and reporting, decision making processes , Corporate capabilities, Operational systems.

Many of these issues are covert and hidden inside the organisation, yet to ignore them

is to place the strategy at risk. One proposal is that in addition to the conventional evaluation

of market targets each potential target should be tested for internal compatibility, as suggested

in Figure 3.3.

Figure 3.3 Market segment attractiveness and organisational resource strength

This analysis may suggest that some market targets are unattractive because they have

a poor ‘fit’ with the company’s structures and processes, or even that the company is not

capable of implementing a segmentation-based strategy at the present time, or it may identify

the areas that need to be changed if the segment target is to be reached effectively.

II. TARGETING

A. Introduction

One of the key decisions a company faces is its choice of market or markets to serve.

However, many firms enter markets with little thought as to their suitability in the longer term.

They are entered primarily because they appear superficially attractive for the firm’s products or

services. As we shall see in this chapter, a strong case can be made for choosing markets and

industries where the prospects are attractive, but also where the firm can establish a strong,

defensible, position. Figure 3.4 suggests that if we compare, in general terms, the attractiveness of

markets and the strength of the competitive position we can take, then there are several traps to be

avoided: Peripheral business, Illusion business, Dead-end business, Ideally the firm is seeking to position

its offerings in Core business.

Figure 3.4 Market attractiveness and competitive position

Source: Adapted from Piercy (1997).

While the strategic traps are easily described, the importance of the issue is underlined by the fact

that market choices are just that – choice may mean ignoring some markets and some customers and

some ways of business, to focus on the areas where superior performance and results can be achieved.

Making such choices may be diftcult. Michael Porter has suggested the heart of the problem: to put it

simply, managers don’t like to choose. there are tremendous organisational pres- sures towards imitation

and matching what the competitor does. Over time this slowly but surely undermines the uniqueness of

the competitive position.(Porter, quoted in Jackson, 1997).

Porter’s argument is that a key challenge is to make clear trade-offs and strategic choices.The

alternative is that a company risks destroying its own strategy:they start off with a clear position, and over

time they’re drawn into a competitive con- vergence where they and their rivals are all basically doing the

same thing. those kinds of competitions become stalemates.(Porter, quoted in Jackson, 1997).

B. The process of market definition

The definition of the markets a company serves, or those it is evaluating as possible targets, is

partlyaquestion of measurement andconventionalcompetitivecomparisons. It is alsoin part a creative

process concerned with customer needs. Stanley Marcus of Neimann Marcus is frequently cited on

this point: ‘Consumers are statistics. Customers are people.’ A number of points are worth bearing

in mind in approaching market definition: Markets change, Markets and industries, Different

definitions for different purposes.

a) Different ways of defining markets

Day (1992) suggests that markets can be defined in two ways: on the basis of

customers, or on the basis of competitors.

• Customer-defined markets. This approach takes us beyond products that are

‘substitutes in kind’, i.e. the same technology, to ‘substitutes in use’, i.e. all

the products and services which may meet the same customer needs and

problems.

• Competitor-defined markets. This approach focuses on all the competitors

that could possibly serve the needs of a group of customers, and reflects

technological similarity, relative production costs and distribution methods.

In general, competitor-based definition will be important for allocating marketing

resources and managing the marketing programme – responding to price cuts, salesforce

coverage, and so on. On the other hand, customer-defined approaches are likely to be more

insightful in understanding the dynamics of the market, the attractiveness of alternative

markets, and in developing strong competitive positions.

One practical approach to evaluating the characteristics of markets is the product–

customer matrix.

b) Product–customer matrix

Figure 3.5 suggests that the underlying structure of a market can be understood as a

simple grouping of customers and products/services. The challenge is to examine a market

using this matrix to identify no more than five or six groups of products and services and five or

six groups of customers, that constitute the market. If this is impossible then this is probably not

a single market but several, and the exercise should be subdivided.

Figure 3.5 the product– customer matrix

The important perspective that can be built using this approach is one which

recognises:

• products/services – in terms of what they do for customers, not in terms of

how they are produced or by whom;

• customers – in terms of important differences between groups in needs,

preferences, priorities or ways of buying.

For example, vast arrays of retail financial services products provided by banks and their

competitors can be reduced to six categories of products by considering what customer benefits

they provide. Rather than hundreds of products, the market consists of only six groups of

products and services to provide access to cash; provide security of savings; buy-now pay-later;

make cashless payments; get a return on assets such as savings; and acquire a range of specialist

services. The same process of reduction can be applied to products/services. For example, do not

describe the market as ‘computers’, but as what different mixes of computer hardware, software

and services actually deliver to customers in a particular market, such as accounting systems,

internal communications, management information and so on.

This approach provides a start in defining markets in such a way that we move past the

core market of similar products to find the extended market. This analysis can be used for a

variety of purposes, but one advantage of this type of initial approach is that it starts to identify

the way a market divides into distinctly different segments.

C. Defining how the market is segmented

Management definition of market segments may typically be on the basis of

products/services offered or markets served.

1. Products or services offered

Describing segments on the basis of products or services offered can lead to broad-based

segmentation of the market. Many market research companies operating in the service sector

define their market segments in terms of the services they offer, e.g. the market for retail audits, the

market for telephone surveys, the market for qualitative group discussions, the market for

professional (industrial) interviewing. Underlying this product- or service-based approach to

identifying markets is a belief that segments defined in this way will exhibit the differences in

behaviour essential to an effective segmentation scheme.

2. Market or markets served

Central to the success of Van den Bergh (a subsidiary of Unilever The market, which

comprises butter, margarine and low-fat spreads) and other creative marketers has been an

unwill- ingness merely to accept the segmentation of the market adopted by others. In many

fast- moving consumer products markets, and in grocery marketing in particular, there has been

a tendency to over-segment on the basis of background customer characteristics or volume

usage. By looking beyond these factors to the underlying motivations and reasons to buy,

companies can often create an edge over their competitors.

Once the segments have been identified the alternatives need to be evaluated on the basis

of market attractiveness and company strength, or potential strength, in that particular market

segment. This evaluation is carried out across a number of factors.

c) Determining market segment attractiveness

It is clear that many factors may be considered in evaluating market, or specific segment,

attractiveness discussed multi-factor approaches to evaluation in the context of assessing the

portfolio of product offerings, while here they are discussed as strategic tools for deciding which

markets to enter in the first place. There have been many checklists of such factors, but one way of

grouping the issues is as follows: market factors,economic and technological factors, competitive

factors, and environmental factors.

a) Market factors

Among the market characteristics that influence the assessment of market

attractiveness are the following (Figure 3.6).

Figure 3.6 Factors affecting market segment attractiveness

b) Economic and technological factors

Issues reflecting the broader economic characteristics of the market and the

technology used include the following.

• Barriers to entry

Markets where there are substantial barriers to entry (e.g. protected technology or high

switching costs for customers) are attractive markets for incumbents but unattractive

markets for aspirants. While few markets have absolute barriers to entry in the long

term, for many companies the costs of overcoming those barriers may make the venture

prohibitively expensive and uneconomic.

• Barriers to exit

Conversely, markets with high exit barriers, where companies can become locked into

untenable or uneconomic positions, are intrinsically unattractive. Some new target

opportunities, for example, may have substantial investment hurdles (barriers to entry)

that, once under- taken, lock the company into continuing to use the facilities created. In

other markets powerful customers may demand a full range of products/services as the

cost of maintaining their business in more lucrative sectors. When moving into high-risk

new target markets a major consideration should be exit strategy in the event that the

position becomes untenable.

• Bargaining power of suppliers

The supply of raw materials and other factor inputs to enable the creation of suitable

products and services must also be considered. Markets where the suppliers have

monopoly or near-monopoly power are less attractive than those served by many

competing suppliers (see Porter, 1980).

• Level of technology utilisation

Use and level of technology affects attractiveness of targets differently for different

competitors. The more technologically advanced will be attracted to markets which

utilise their expertise more fully and where that can be used as a barrier to other

company entry. For the less technologically advanced, with skills and strengths in other

areas such as people, markets with a lower use of technology may be more appropriate.

• Investment required

Size of investment required, financial and other commitment will also affect attractiveness

of market and could dictate that many market targets are practically unattainable for some

companies. Investment requirements can form a barrier to entry that protects incumbents

while deterring entrants.

• Margins available

Finally, margins will vary from market to market, partly as a result of price sensitivity and

partly as a result of competitive rivalry. In grocery retailing margins are notoriously low

(around 2–4 per cent) whereas in other markets they can be nearer 50 per cent or even

higher.

c) Competitive factors

The third set of factors in assessing the attractiveness of potential market targets

relates to the competition to be faced in those markets.

• Competitive intensity

The number of serious competitors in the market is important. Markets may be

dominated by one (monopoly), two (duopoly), a few (oligopoly) or none (‘perfect

competition’) of the players in that market. Entry into markets dominated by one

or a few key players requires some form of competitive edge over them that can be

used to secure a beachhead. In some circumstances it may be that the existing

players in the market have failed to move with changes in their markets and

hence create opportunities for more innovative rivals.

Under conditions of perfect, or near-perfect, competition price competitiveness is

particularly rife. The many small players in the market offer competitively

similar products so that differentiation is rarely achieved and it is usually on

the basis of price rather than performance or quality. To compete here

requires either a cost advantage (created through superior technology, sourcing

or scale of operations) or the ability to create a valued uniqueness in the

market. In segments where there are few, or weak, competitors there may again

be better opportunities to exploit.

• Quality of competition

Good competitors are also characterised by their desire to serve the market

better and hence will keep the company on its toes competitively rather than

allow it to lag behind changes in the environment. Markets that are dominated

by less predictable, volatile competitors are intrinsically more diftcult to

operate in and control and hence less attractive as potential targets.

• Threat of substitution

In all markets there is a threat that new solutions to the customers’ original

problems will be found that will make the company’s offerings obsolete. The

often quoted example is substitution of the pocket calculator for the slide rule,

though other less dramatic examples abound. With the increasing rate of

technological change experienced in the twenty-first century it is probable that

more products will become substituted at an accelerating rate.

In such situations two strategies make sense. First, for the less technologically

innovative, seek market targets where substitution is less likely (but beware

being lulled into believing substitution will never occur!). Second, identify

those targets where your own company can achieve the next level of

substitution. Under this strategy companies actively seek market targets that are

using an inferior level of technology and are hence vulnerable to attack by a

substitute product. Hewlett-Packard’s success with laser printers followed by

ink jet printers in the PC peripherals market (attacking dot matrix printers) is a

classic example.

• Degree of differentiation

Markets where there is little differentiation between product offerings offer

significant opportunities to companies that can achieve differentiation. Where

differentiation is not possible often a stalemate will exist and competition will

degenerate into price conflicts, which are generally to be avoided.

d) The general business environment

Lastly, there is the issue of more general factors surrounding the market or

segment in question : Exposure to economic fluctuations, Exposure to political and

legal factors, Degree of regulation, and Social acceptability and physical environment

impact.

e) Making the criteria clear and explicit

It is also the case that some of the real criteria for evaluating market/segment

attractiveness may be highly subjective and qualitative. For example, a brewery

evaluating alternative markets for its by-products identified the criteria of market

attractiveness as:

• Market size: it defined a minimum market value to be ofinterest.

• Market growth rate: moderate growth was preferred (it did not want to

invest large amounts in keeping up with a by-products market).

• Low competitive intensity: it wanted to avoid head-on competition with

others.

• Stability: it wanted a stable income flow.

• Low profile: it did not want to invest in any area that would attract media criticism,

or regulatory activity by the government.

f) The impact of change

It should also be remembered that nothing is static – things change, and sometimes

they change rapidly in a number of ways: Company change, Markets change, Competitors

change, Reinventing the market, and Market boundaries change.

D. Determining current and potential strengths

The importance of the resource-based theory of the firm, and the practicalities of

assessing a company’s strengths (and weaknesses) .The issue to consider now is how those

resources, capabilities and competencies can be deployed in a specific market or segment (see

Figure 3.7). One approach to this evaluation divides the issue as follows: the firm’s current

market position; the firm’s economic and technological position; the firm’s capability profile.

Figure 3.7 Factors affecting business strength

E. Making market and segment choices

Conventional approaches suggest the use of portfolio matrices as a useful way of

summa- rising the alternative business investment opportunities open to a multi-product

company, and for making explicit choices between markets and segments. While such

matrices have been used to assess the balance of the portfolio of businesses the company

operates the same techniques can usefully be adapted to help with the selection of market

targets ( Figure 3.8).

Figure 3.8 Target Market Selection

Using this approach the factors deemed relevant in a particular market are identified

(typically from the factors listed above) and are each assigned weights depending on their

perceived importance (using hard data wherever possible). The subjective choice and

weighting of the factors to be used in the analysis ensure that the model is customised to the

needs of the specific company. The process of selecting and weighting the factors can, in

itself, prove a valuable experience in familiarising managers with the realities of the

company’s markets. Where appropriate, factors can be more objectively assessed through the

use of marketing research or economic analysis. Once the factors have been determined and

weighted, each potential market segment is evaluated on a scale from ‘excellent = 5’ to ‘poor

= 1’ and a summary score on the two main dimensions of ‘market segment attractiveness’ and

‘company business strength in serving that segment’ computed using the weightings.

Sensitivity analyses can then be conducted to gauge the impact of different assumptions on the

weight to attach to individual factors and the assessments of targets on each scale.

The resulting model, such as that shown in Figure 3.9 for a hypothetical company,

enables the alternatives to be assessed and discussed objectively. Ideally, companies are

looking for market targets in the bottom right-hand corner of Figure 9.6. These opportunities

rarely exist and the trade-off then becomes between going into segments where the company

is, or can become, strong, but that are less attractive (e.g. target opportunity 1), or alternatively

tackling more attractive markets but where the company is only average in strength (target 2).

Figure 3.9 Evaluating market targets for a hypothetical company

F. Alternative targeting strategies

The classic approach to segmentation or targeting strategies is provided by

Kotler, most recently in Kotler and Keller (2012). Kotler’s model suggests that there

are three broad approaches a company can take to a market, having identified and

evaluated the various segments that make up the total (Figure 3.10). The company can

pursue:

a) undifferentiated marketing, essentially producing a single product designed to

appeal across the board to all segments.

An undifferentiated marketing approach entails treating the market as one whole,

rather than as segmented, and supplying one standard product or service to satisfy

all customers. It is the approach carried out in Porter’s (1980) cost leadership

strategy. This approach was particularly prevalent in the mass marketing era in the

days before the emergence (or recognition!) of strongly identified market

segments. More recently, however, as the existence of market segments has

become more widely accepted, the wisdom of such an approach in all but markets

where preferences are strongly concentrated has been called into doubt.

b) differentiated marketing, offering a different product to each of the different

segments;

Differentiated marketing is adopted by companies seeking to offer a distinct

product or service to each chosen segment of the market. Thus a shampoo

manufacturer will offer different types of shampoo depending on the condition

of the hair of the customer. The major danger of differentiated marketing is that it

can lead to high costs, both in manufacturing and marketing a wide product line.

Depending on the company’s resources, however, differentiated marketing can

help in achieving overall market domination (this is the strategy pursued in the

yellow fats market by Van den Bergh – see above).

c) concentrated marketing, focusing attention on one, or a few, segments.

For the organisation with limited resources, however, attacking all or even most of

the potential segments in a market may not be a viable proposition. In this instance

concentrated or focused marketing may make more sense. Under this strategy the

organisation focuses attention on one, or a few, market segments and leaves the

wider market to its competitors. In this way it builds a strong position in a few

selected markets, rather than attempting to compete across the board (either with

undifferentiated or differentiated products).

The success of this approach depends on clear, in-depth knowledge of the

customers served. The major danger of this strategy, however, is that over time the

segment focused on may become less attractive and limiting on the organisation.

Figure 3.10 alternative marketing strategies

III. Positioning

Positioning is the act of designing a company’s offering and image to occupy a

distinctive place in the minds of the target market. The goal is to locate the brand in the

minds of consumers to maximize the potential benefit to the firm. A good brand positioning

helps guide marketing strategy by clarifying the brand’s essence, identifying the goals it

helps the consumer achieve, and showing how it does so in a unique way. Everyone in the

organization should understand the brand positioning and use it as context for making

decisions. A useful measure of the effectiveness of the organization’s positioning is the

brand substitution test. If, in some marketing activity—an ad campaign, a viral video, a new

product introduction—the brand were replaced by a competitive brand, then that marketing

activity should not work as well in the marketplace. A well-positioned brand should be

distinctive in its meaning and execution. If a sport or music sponsorship, for example, would

work as well if it were for a leading competitor, then either the positioning is not sharply

defined well enough or the sponsorship as executed does not tie closely enough to the brand

positioning.

A good positioning has one foot in the present and one in the future. It needs to be

somewhat aspirational so the brand has room to grow and improve. Positioning on the basis

of the current state of the market is not forward- looking enough, but at the same time, the

positioning cannot be so removed from reality that it is essentially unob- tainable. The real

trick is to strike just the right balance between what the brand is and what it could be.

One result of positioning is the successful creation of a customer-focused value

proposition, a cogent reason why the target market should buy a product or service.

Positioning requires that marketers define and communicate similarities and

differences between their brand and its competitors. Specifically, deciding on a positioning

requires: (1) choosing a frame of reference by identifying the target market and relevant

competition, (2) identifying the optimal points-of-parity and points- of-difference brand

associations given that frame of reference, and (3) creating a brand mantra summarizing the

positioning and essence of the brand.

a) Choosing a Competitive Frame of Reference

The competitive frame of reference defines which other brands a brand competes

with and which should thus be the focus of competitive analysis. Decisions about the

competitive frame of reference are closely linked to target market decisions. Deciding to

target a certain type of consumer can define the nature of competition because certain

firms have decided to target that segment in the past (or plan to do so in the future) or

because consumers in that segment may already look to certain products or brands in

their purchase decisions.

Identifying Competitors: A good starting point in defining a competitive frame of

reference for brand positioning is category membership—the products or sets of

products with which a brand competes and that function as close substitutes. It would

seem a simple task for a company to identify its competitors. PepsiCo knows Coca-

Cola’s Dasani is a major bottled-water competitor for its Aquafina brand; Wells Fargo

knows Bank of America is a major banking competitor; and Petsmart.com knows a major

online retail competitor for pet food and supplies is Petco.com.

The range of a company’s actual and potential competitors, however, can be

much broader than the obvious. To enter new markets, a brand with growth intentions

may need a broader or maybe even a more aspirational competitive frame. And it may

be more likely to be hurt by emerging competitors or new technologies than by current

competitors.

Analyzing Competitors described how to conduct a SWOT analysis that

includes a competitive analysis. A company needs to gather information about each

competitor’s real and perceived strengths and weaknesses. Finally, based on all this

analysis, marketers must formally define the competitive frame of reference to guide

positioning. In stable markets where little short-term change is likely, it may be fairly

easy to define one, two, or perhaps three key competitors. In dynamic categories where

competition may exist or arise in a variety of different forms, multiple frames of

reference may be present, as we discuss below.

b) Identifying potential point-of difference and point of party

Once marketers have fixed the competitive frame of reference for positioning by

defining the customer target market and the nature of the competition, they can define the

appropriate points-of-difference and points- of-parity associations.

• Points-of-difference (PODs)

Points-of-difference (PODs) are attributes or benefits that consumers

strongly associate with a brand, positively evaluate, and believe they could not find to

the same extent with a competitive brand. Associations that make up points-of-

difference can be based on virtually any type of attribute or benefit. LouisVuitton

may seek a point-of-difference as having the most stylish handbags, Energizer as

having the longest-lasting battery, and Fidelity Investments as offering the best

financial advice and planning.

Strong brands often have multiple points-of-difference. Some examples are

Apple (design, ease-of-use, and irreverent attitude), Nike (performance, innovative

technology, and winning), and Southwest Airlines (value, reliability, and fun

personality).Creating strong, favorable, and unique associations is a real challenge,

but an essential one for competitive brand positioning. Although successfully

positioning a new product in a well-established market may seem particularly

difficult, Method Products shows that it is not impossible.

Three criteria determine whether a brand association can truly function as a

point-of-difference: desirability, deliverability, and differentiability. Some key

considerations follow : Desirable to consumer, Deliverable by the company, and

Differentiating from competitors.

• Points-of-parity (POPs)

Points-of-parity (POPs) on the other hand, are attribute or benefit associations

that are not necessarily unique to the brand but may in fact be shared with other brands.

These types of associations come in three basic forms: category, correlational, and

competitive.

Category points-of-parity are attributes or benefits that consumers view as

essential to a legitimate and credible offering within a certain product or service category.

In other words, they represent necessary—but not sufficient— conditions for brand

choice. Consumers might not consider a travel agency truly a travel agency unless it is

able to make air and hotel reservations, provide advice about leisure packages, and offer

various ticket payment and delivery options. Category points-of-parity may change over

time due to technological advances, legal developments, or consumer trends, but to use a

golfing analogy, they are the “greens fees” necessary to play the marketing game.

Correlational points-of-parity are potentially negative associations that arise

from the existence of positive associations for the brand. One challenge for marketers is

that many attributes or benefits that make up their POPs or PODs are inversely related. In

other words, if your brand is good at one thing, such as being inexpensive, consumers

can’t see it as also good at something else, like being “of the highest quality.” Consumer

research into the trade-offs consumers make in their purchasing decisions can be

informative here. Below, we consider strategies to address these trade-offs.

Competitive points-of-parity are associations designed to overcome perceived

weaknesses of the brand in light of competitors’ points-of-difference. One good way to

uncover key competitive points-of-parity is to role-play competitors’ positioning and infer

their intended points-of-difference. Competitor’s PODs will, in turn, suggest the brand’s

POPs.

Regardless of the source of perceived weaknesses, if, in the eyes of consumers, a

brand can “break even” in those areas where it appears to be at a disadvantage and

achieve advantages in other areas, the brand should be in a strong—and perhaps

unbeatable—competitive position. Consider the introduction of Hyundai Motor

Company—the biggest carmaker in South Korea and one of the top ten global auto

companies.

• Multiple Frames Of Reference It is not uncommon for a brand to identify more than

one actual or potential competitive frame of reference, if competition widens or the firm

plans to expand into new categories. For example, Starbucks could define very distinct

sets of competitors, suggesting different possible POPs and PODs as a result:

i. Quick-serve restaurants and convenience shops (McDonald’s and Dunkin’

Donuts)—Intended PODs might be quality, image, experience, and variety;

intended POPs might be convenience and value.

ii. Home and office consumption (Folgers, NESCAFÉ instant, and Green

Mountain Coffee K-Cups)—Intended PODs might be quality, image, experience,

variety, and freshness; intended POPs might be convenience and value.

iii. Local cafés—Intended PODs might be convenience and service

quality; intended POPs might be product quality, variety, price, and community.

Finally, if there are many competitors in different categories or subcategories, it may be

useful to either develop the positioning at the categorical level for all relevant categories

(“quick-serve restaurants” or “supermarket take-home coffee” for Starbucks) or with an

exemplar from each category (McDonald’s or NESCAFÉ for Starbucks).

• Straddle positioning Occasionally, a company will be able to straddle two frames of

reference with one set of points-of-difference and points-of-parity. In these cases, the

points-of-difference for one category become points-of-parity for the other and vice versa.

Subway restaurants are positioned as offering healthy, good- tasting sandwiches. This

positioning allows the brand to create a POP on taste and a POD on health with respect to

quick-serve restaurants such as McDonald’s and Burger King and, at the same time, a

POP on health and a POD on taste with respect to health food restaurants and cafés.

Straddle positions allow brands to expand their market coverage and potential

customer base. Another example is BMW.

c) Choosing specific POPs and PODs

To build a strong brand and avoid the commodity trap, marketers must start with

the belief that you can differentiate anything. Michael Porter urged companies to build

a sustainable competitive advantage. Competitive advantage is a company’s ability to

perform in one or more ways that competitors cannot or will not match.

Marketers typically focus on brand benefits in choosing the points-of-parity and

points-of-difference that make up their brand positioning. Brand attributes generally play

more of a supporting role by providing “reasons to believe” or “proof points” as to why a

brand can credibly claim itoffers certain benefits. Marketersof Dove soap, for example, will

talk about how its attribute of one-quarter cleansing cream uniquely creates the benefit of

softer skin. Singapore Airlines can boast about its superior customer service because of its

better- trained flight attendants and strong service culture. Consumers are usually more

interested in benefits and what exactly they will get from a product. Multiple attributes

may support acertain benefit, and they may change over time.

Figure 3.11a Hypothetical Beverage Perceptual Map: Current Perceptions

Figure 3.11b Hypothetical Beverage Perceptual Map: Possible Repositioning for Brand A

• Means of differentiation

Any product or service benefit that is sufficiently desirable, deliverable,

and differentiating can serve as a point-of-difference for a brand. The obvious,

and often the most compelling, means of differentiation for consumers are

benefits related to performance. Sometimes changes in the marketing

environment can open up new opportunities to create a means of differentiation.

Often a brand’s positioning transcends its performance considerations.

Companies can fashion compelling im- ages that appeal to consumers’ social and

psychological needs. To identify possible means of differentiation, marketers

have to match consumers’ desire for a benefit with their company’s ability to

deliver it.

• Perceptual maps

For choosing specific benefits as POPs and PODs to position a brand,

perceptual maps may be useful. Perceptual maps are visual representations of

consumer perceptions and preferences. They provide quantitative pictures of

market situations and the way consumers view different products, services, and

brands along various dimensions. By overlaying consumer preferences with

brand perceptions, marketers can reveal “holes” or “openings” that suggest unmet

consumer needs and marketing opportunities.

• Emotional branding

Many marketing experts believe a brand positioning should have both

rational and emotional components. In other words, it should contain points-of-

difference and points-of-parity that appeal to both the head and the heart.Strong

brands often seek to build on their performance advantages to strike an emotional

chord with customers.

• Brand Mantras

To further focus brand positioning and guide the way their marketers

help consumers think about the brand, firms can define a brand mantra. A brand

mantra is a three- to five-word articulation of the heart and soul of the brand and

is closely related to other branding concepts like “brand essence” and “core

brand promise.” Its purpose is to ensure that all employees within the

organization and all external marketing partners understand what the brand is

most fundamentally to represent with consumers so they can adjust their actions

accordingly.

Role of brand mantras Brand mantras are powerful devices. By

highlighting points-of-difference, they provide guidance about what products to

introduce under the brand, what ad campaigns to run, and where and how to sell

the brand. Their influence can even extend beyond these tactical concerns. Brand

mantras can guide the most seemingly unrelated or mundane decisions, such as

the look of a reception area and the way phones are answered. In effect, they

create a mental filter to screen out brand-inappropriate marketing activities or

actions of any type that may have a negative bearing on customers’ impressions.

Brand mantras must economically communicate what the brand is and

what it is not. What makes a good brand mantra? McDonald’s “Food, Folks, and

Fun” captures its brand essence and core brand promise. Two other high- profile

and successful examples—Nike and Disney—show the power and util- ity of a

well-designed brand mantra.

Designing a brand mantra Unlike brand slogans meant to engage,

brand mantras are designed with internal purposes in mind. Here are the three key criteria

for a brand mantra: Communicate, Simplify. And Inspire.

d) Establishing a Brand Positioning

Once they have fashioned the brand positioning strategy, marketers should communicate it to

everyone in the organization so it guides their words and actions. One helpful schematic with which to

do so is a brand- positioning bull’s-eye. “Marketing Memo: Constructing a Brand Positioning Bull’s-

eye” outlines one way marketers can formally express brand positioning without skipping any steps.

Often a good positioning will have several PODs and POPs. Of those, often two or three really

define the competitive battlefield and should be analyzed and developed carefully. A good positioning

should also follow the “90–10” rule and be highly applicable to 90 percent (or at least 80 percent) of the

products in the brand. Attempting to position to all 100 percent of a brand’s product often yields an

unsatisfactory “lowest common denominator” result. The remaining 10 percent or 20 percent of

products should be reviewed to ensure they have the proper branding strategy and to see how they could

be changed to better reflect the brand positioning.

• Communicating Category membership

Category membership may be obvious. Target customers are aware that Maybelline is

a leading brand of cosmetics. When a product is new, marketers must inform consumers of the

brand’s category membership.Sometimes consumers may know the category membership but

not be convinced the brand is a valid member of the category. Brands are sometimes affiliated

with categories in which they do not hold membership.

Figure 3.12 Hypothetical Example of a Starbucks Brand Positioning Bull’s Eye

The typical approach to positioning is to inform consumers of a brand’s

membership before stating its point- of-difference. Presumably, consumers need

to know what a product is and what function it serves before deciding whether it

is superior to the brands against which it competes. For new products, initial

advertising often con- centrates on creating brand awareness, and subsequent

advertising attempts to create the brand image. Ally Bank tapped into a distrust of

financial institutions to stake out a unique positioning.

There are three main ways to convey a brand’s category membership:

Announcing category benefits, Comparing to exemplars, and Relying on the product

descriptor.

• Communicating POPS and PODS

We saw above that one common challenge in positioning is that many of the

benefits that make up points-of-parity and points-of-difference are negatively correlated.

ConAgra must convince consumers that Healthy Choice frozen foods both taste good and are

good for you. Consider these examples of negatively correlated attributes and benefits:

Low price vs. High quality Powerful vs. Safe

Taste vs. Low calories Strong vs. Refined

Nutritious vs. Good tasting Ubiquitous vs. Exclusive

Efficacious vs. Mild Varied vs. Simple

Other approaches include launching two different marketing campaigns, each

devoted to a different brand attribute or benefit; linking the brand to a person, place, or thing

that possesses the right kind of equity to establish an attribute or benefit as a POP or POD;

and convincing consumers that the negative relationship between attributes and benefits, if

they consider it differently, is in fact positive.

• Monitoring Competition

Positioning requires an organizational commitment. It is not something that is

constantly overhauled or changed. At the same time, it is important to regularly research the

desirability, deliverability, and differentiability of the brand’s POPs and PODs in the

marketplace to understand how the brand positioning might need to evolve or, in relatively

rare cases, be completely replaced. In assessing potential threats from competitors, three

high-level variables are useful: Share of market, Share of mind, and Share of heart.

e) Alternative Approaches to Positioning

The competitive brand positioning model we’ve reviewed in this chapter is a structured way

to approach positioning based on in-depth consumer, company, and competitive analysis. Some

marketers have proposed other, less-structured approaches in recent years that offer provocative ideas

on how to position a brand. We highlight a few of those here.

• Brand narratives and storytelling

They identify five elements of narrative branding:(1) the brand story in terms of

words and metaphors, (2) the consumer journey or the way consumers engage with the brand

over time and touch points where they come into contact with it, (3) the visual language or

expression for the brand, (4) the manner in which the narrative is expressed experientially or

the brand engages the senses, and (5) the role the brand plays in the lives of consumers.

Based on literary convention and brand experience, they also offer the following framework

for a brand story:

i. Setting. The time, place, and context

ii. Cast. The brand as a character, including its role in the life of the audience, its

relationships and responsi- bilities, and its history or creation myth

iii. Narrative arc. The way the narrative logic unfolds over time, including actions,

desired experiences, defining events, and the moment of epiphany

iv. Language. The authenticating voice, metaphors, symbols, themes, and leitmotifs

• Cultural Branding

Douglas Holt believes that for companies to build iconic, leadership brands, they must

assemble cultural knowledge, strategize according to cultural branding principles, and hire and

train cultural experts.

f) Positioning and Branding for A Small Business

Building brands is a challenge for a small business with limited resources and budgets.

Nevertheless, numerous success stories exist of entrepreneurs who have built their brands up

essentially from scratch to become power- house brands. Here are some specific branding guidelines

for small businesses :

• Findacompelling product orserviceperformance advantage. • Focus on building one or two strong brands based on one or two key associations • Encourage product orservicetrial inany way possible • Developcohesive digital strategytomakethe brand “biggerandbetter.” • Create buzz and a loyal brand community. • Employ a well-integrated set of brand elements. • Leverage as many secondary associations as possible.

• Creatively conduct low-cost marketing research.

IV. Product strategy

A Product Life-Cycle Marketing Strategies A company’s positioning and differentiation strategy must change as its product, market,

and competitors change over the product life cycle (PLC). To say a product has a life cycle is to

assert four things: 1)Products have a limited life. 2)Product sales pass through distinct stages,

each posing different challenges, opportunities, and problems to the seller. 3)Profits rise and fall

at different stages of the product life cycle. 4)Products require different marketing, financial,

manufacturing, purchasing, and human resource strategies in each life-cycle stage.

Most product life cycles are portrayed as bell-shaped curves, typically divided into four

stages: introduction, growth, maturity, and decline. (see Figure 3.13).

• Introduction—A period of slow sales growth as the product is introduced in the

market. Profits are nonexistent because of the heavy expenses of product

introduction.

• Growth—A period of rapid market acceptance and substantial profit

improvement.

• Maturity—A slowdown in sales growth because the product has achieved

acceptance by most potential buyers. Profits stabilize or decline because of

increased competition.

• Decline—Sales show a downward drift and profits erode.

We can use the PLC concept to analyze a product category (liquor), a product form

(white liquor), a product(vodka), or a brand (Absolut). Not all products exhibit a bell-shaped

PLC.56 Three common alternate patterns are shown in Figure 3.13.

Figure 3.13 Sales and Profit Life Cycles

B Marketing Strategies: Introduction Stage and the Pioneer Advantage

Companies that plan to introduce a new product must decide when to do so. To be first can be

rewarding,but risky and expensive. To come in later makes sense if the firm can bring superior technology,

quality, or brand strength to create a market advantage. We next consider some of the pros and cons of being a

pioneer in a new market.

• Pioneering Advantages

Studies show that a market pioneer can gain a great advantage. What are the sources of the

pioneer’s advantage? “Marketing Insight: Understanding Double Jeopardy”

Describes one way market leaders can benefit from loyalty due to their size. Early users will

recall the pioneer’s brand name if the product satisfies them. The pioneer’s brand also establishes the

attributes the product class should possess.It normally aims at the middle of the market and so

captures more users. Customer inertia also plays a role, and there are producer advantages: economies

of scale, technological leadership, patents, ownership of scarce assets, and the ability to erect other

barriers to entry. Pioneers can spend marketing dollars more effectively and enjoy higher rates of

repeat purchases. An alert pioneer can lead indefinitely.

• Pioneering Drawbacks

Pioneering Drawbacks but the pioneering advantage is not inevitable. Peter Golder and Gerald

Tellis raise further doubts about the pioneer advantage. They distinguish between an inventor, first to

develop patents in a new-product category, a product pioneer, first to develop a working model, and a

market pioneer, first to sell in the new-product category. Including nonsurviving pioneers in their

sample, they conclude that although pioneers may still have an advantage, more market pioneers fail

than has been reported, and more early market leaders (though not pioneers) succeed. Later entrants

overtaking market pioneers through the years included Matsushita over Sony in VCRs, GE over EMI in

CAT scan equipment, and Google over Yahoo! in search.

• Gaining A Pioneering Advantage Tellis and Golder also identified five factors underpinning long-term market leadership: vision

of a mass market, persistence, relentless innovation, financial commitment, and asset leverage.Other

research has highlighted the role of genuine product innovation. When a pioneer starts a market with a

really new product, like the Segway Human Transporter, surviving can be very challenging.

Figure 3.14 Long-Range Product Market Expansion Strategy (Pi = producti; Mj = market j)

The pioneer should visualize the

product markets it could enter, knowing it cannot enter all of them at once. Suppose market-

segmentation analysis reveals the segments shown in Figure 12.8. The pioneer should analyze the

profit potential of each singly and of all together and decide on a market expansion path. Thus, the

pioneer in Figure 12.8 plans first to enter product market P1M1, then move into a second market

(P1M2), then surprise the competition by developing a second product for the second market (P2M2),

then take the second product back into the first market (P2M1), then launch a third product for the

first market (P3M1). If this game plan works, the pioneer firm will own a good part of the first two

segments, serving each with two or three products.

C Product Characteristics and Classifications

Many people think a product is tangible, but technically a product is anything that can be

offered to a market to satisfy a want or need, including physical goods, services, experiences,

events, persons, places, properties, organizations, information, and ideas.

• Product Levels: The Customer-Value Hierarchy

In planning its market offering, the marketer needs to address five product

levels (see Figure 3.15).2 Each level adds more customer value, and together the five

constitute a customer-value hierarchy.

Figure 3.15 Components of the market offering

The fundamental level is the core benefit: the service or benefit the customer is

really buying. A hotel guest is buying rest and sleep. The purchaser of a drill is buying

holes. Marketers must see themselves as benefit providers.

At the second level, the marketer must turn the core benefit into a basic

product. Thus a hotel room includes a bed, bathroom, towels, desk, dresser, and closet.

At the third level, the marketer prepares an expected product, a set of attributes

and conditions buyers normally expect when they purchase this product. Hotel guests

minimally expect a clean bed, fresh towels, working lamps, and a relative degree of

quiet.

At the fourth level, the marketer prepares an augmented product that exceeds

customer expectations.

In developed countries, brand positioning and competition take place at this

level. In developing and emerging markets such as India and Brazil, however,

competition takes place mostly at the expected product level.

At the fifth level stands the potential product, which encompasses all the

possible augmentations and transformations the product or offering might undergo in

the future. Here companies search for new ways to satisfy customers and distinguish

their offering.

Figure 3.16 Five product levels

• Product Classifications

Durability and Tangibility Products fall into three groups according to durability

and tangibility:

a) Nondurable goods are tangible goods normally consumed in one or a few uses,

such as beer and shampoo.Because these goods are purchased frequently, the

appropriate strategy is to make them available in many locations,charge only a

small markup, and advertise heavily to induce trial and build preference.

b) Durable goods are tangible goods that normally survive many uses: refrigerators,

machine tools, and clothing.They normally require more personal selling and

service, command a higher margin, and require more seller guarantees.

c) Services are intangible, inseparable, variable, and perishable products that

normally require more quality control,supplier credibility, and adaptability.

Examples include haircuts, legal advice, and appliance repairs.

• Consumer-Goods Classification

When we classify the vast array of consumer goods on the basis of shopping

habits, we distinguish among convenience, shopping, specialty, and unsought goods.

The consumer usually purchases convenience goods frequently, immediately, and with

minimal effort : Shopping goods, Specialty goods, Unsought goods.

• Industrial-Goods Classification

We classify industrial goods in terms of their relative cost and the way they enter the

production process: materials and parts, capital items, and supplies and business services. Materials

and parts are goods that enter the manufacturer’s product completely. They fall into two classes:

raw materials and manufactured materials and parts. Raw materials in turn fall into two major

groups: farm products (wheat, cotton,livestock, fruits, and vegetables) and natural products (fish,

lumber, crude petroleum, iron ore).

• Design

As competition intensifies, design offers a potent way to differentiate and

position a company’s products and services. Design is the totality of features that affect

the way a product looks, feels, and functions to a consumer.It offers functional and

aesthetic benefits and appeals to both our rational and emotional sides : Design

Leaders, Power of Design, Approaches to Design.

• Luxury Products

Design is often an important aspect of luxury products, though these products

also face some unique issues. They are perhaps one of the purest examples of the role

of branding because the brand and its image are often key competitive advantages that

create enormous value and wealth. Marketers for luxury brands such as Prada, Gucci,

Cartier, and Louis Vuitton manage lucrative franchises that have endured for decades in

what some believe is now a $270 billion industry :Characterizing Luxury Brands,

Growing Luxury Brands, and Marketing Luxury Brands.

D Product and Brand Relationships

• The Product Hierarchy

The product hierarchy stretches from basic needs to particular items that satisfy those

needs. We can identify six levels of the product hierarchy, using life insurance as an

example:

a) Need family—The core need that underlies the existence of a product family.

Example: security.

b) Product family—All the product classes that can satisfy a core need with

reasonable effectiveness. Example:savings and income.

c) Product class—A group of products within the product family recognized as

having a certain functional coherence, also known as a product category.

Example: financial instruments.

d) Product line—A group of products within a product class that are closely

related because they perform a similar function, are sold to the same customer

groups, are marketed through the same outlets or channels,or fall within given

price ranges. A product line may consist of different brands, a single family

brand, or anindividual brand that has been line extended. Example: life

insurance.

e) Product type—A group of items within a product line that share one of several

possible forms of the product.Example: term life insurance.

f) Item (also called stock-keeping unit or product variant)—A distinct unit within

a brand or product line distinguishable by size, price, appearance, or some

other attribute. Example: Prudential renewable term life insurance.

• Product Systems and Mixes

• Product Line Analysis

In offering a product line, companies normally develop a basic platform and modules

that can be added to meet different customer requirements and lower production costs.

Car manufacturers build cars around a basic platform. Homebuilders show a model

home to which buyers can add additional features. Product line managers need to know

the sales and profits of each item in their line to determine which items to build,

maintain, harvest,or divest.They also need to understand each product line’s market

profile and image.

Sales and Profits Figure 3.17 shows a sales and profit report for a five-item product

line. The first item accounts for 50 percent of total sales and 30 percent of total profits.

The first two items account for 80 percent of total sales and 60 percent of total profits.

If these two items were suddenly hurt by a competitor, the line’s sales and profitability

could collapse. These items must be carefully monitored and protected. At the other

end, the last item delivers only 5 percent of the product line’s sales and profits. The

product line manager may consider dropping this item unless it has strong growth

potential. Every company’s product portfolio contains products with different margins.

Supermarkets make almost no margin on bread and milk, reasonable margins on

canned and frozen foods, and better margins on flowers, ethnic food lines, and freshly

baked goods. Companies should recognize that different items will allow for different

margins and respond differently to changes in level of advertising.

Market Profile and Image The product line manager must review how the line is

positioned against competitors’ lines. Consider paper company X with a paperboard

product line.Two paperboard attributes are weight and finish quality. Paper is usually

offered at standard levels of 90, 120, 150, and 180 weights. Finish quality is offered at

low, medium, and high levels.

Figure 3.17 Product – item contribution to a product line’s total sales and profit

V. New Product Options

A Challenges in New-Product Development

In retailing, consumer goods, electronics, autos, and other industries, the time to

bring a product to market has been cut in half.20 For instance, luxury leather-goods maker

Louis Vuitton has implemented a new factory format dubbed Pégase so it could ship fresh

collections to its boutiques every six weeks—more than twice as frequently as in the

past—giving customers more new looks to choose from.

The Innovation Imperative In an economy of rapid change, continuous innovation

is a necessity. Companies that fail to develop new products leave themselves vulnerable to

changing customer needs and tastes, shortened product life cycles, increased domestic and

foreign competition, and especially new technologies. Google, Dropbox, and Box update

their software daily. Highly innovative firms are able to repeatedly identify and quickly

seize new market opportunities. They create a positive attitude toward innovation and risk

taking, routinize the innovation process, practice teamwork, and allow their people to

experiment and even fail. One such firm is W. L. Gore.

New-Product Success Most established companies focus on incremental

innovation, entering new markets by tweaking products for new customers, using

variations on a core product to stay one step ahead of the market, and creating interim

solutions for industry-wide problems. With the widespread adoption of smart phones,

mobile apps are becoming a lucrative business, as the creators of Angry Birds video game

have found, securing their leadership with continual innovation.

B Introducing new market offering

A) Types of new product

New products range from new-to-the-world items that create an entirely

new market to minor improvements or revisions of existing products. Most new-

product activity is devoted to improving existing products. Some recent product

launches in the supermarket were brand extensions, such as Tide To Go Stain

Eraser, Gillette Fusion ProGlide Styler, Dawn Power Clean, Crest 3D White

Glamorous White Toothpaste, and Coconut Delight Oreo Fudge Cremes.6 At Sony,

modifications of established products accounted for more than 80 percent of new

product activity.

Companies typically must create a strong R&D and marketing partnership

to pull off a radical innovation. The right corporate culture is another crucial

determinant; the firm must prepare to cannibalize existing products, tolerate risk,

and maintain a future market orientation. A keen understanding of customers is also

paramount. Few reliable techniques exist for estimating demand for radical

innovations.

Focus groups can provide perspective on customer interest and need, but

marketers may need a probe-and-learn approach based on observation and feedback

of early users’ experiences and other means such as online chats or product-focused

blogs.

High-tech firms in telecommunications, computers, consumer electronics,

biotech, and software in particular seek radical innovation. They face a number of

product-launch challenges: high technological uncertainty, high market uncertainty,

fierce competition, high investment costs, short product life cycles, and scarce

funding sources for risky projects.

C New-Product Failure

New products continue to fail at rates estimated as high as 50 percent or even 95 percent in

the United States and 90 percent in Europe.29 The reasons are many: ignored or misinterpreted

market research; overestimates of market size; high development costs; poor design or

ineffectual performance; incorrect positioning, advertising, or additional drawbacks new-product

launches face are:

• Fragmented markets. Companies must aim their new products at smaller market

segments than before,which can mean lower sales and profits for each product.

• Social, economic, and governmental constraints. New products must satisfy

consumer safety and environmental concerns and stringent production constraints.

• Cost of development. A company typically must generate many ideas to find just

one worthy of development and thus often faces high R&D, manufacturing, and

marketing costs.

• Capital shortages. Some companies with good ideas cannot raise the funds to

research and launch them.

• Shorter required development time. Companies must learn to compress

development time with new techniques, strategic partners, early concept tests, and

advanced marketing planning.

• Poor launch timing. New products are sometimes launched too late, after the

category has already taken off, or too early for sufficient interest to have gathered.

• Shorter product life cycles. Rivals are quick to copy success. At one time, Sony

enjoyed a three-year lead on its new products, but Matsushita and others learned to

copy them within six months, leaving Sony with barely time to recoup its

investment.

• Lack of organizational support. The new product may not mesh with the

corporate culture or receive the financial or other support it needs.

But failure comes with the territory, and truly innovative firms accept it as part of what’s

necessary to be successful. Silicon Valley marketing expert Seth Godin maintains, “It is not just

OK to fail; it’s imperative to fail.”Many Internet companies are the result of failed earlier

ventures and experience numerous setbacks as their services evolve. Dogster.com, a social

network site for dog lovers, emerged after the spectacular demise of Pets.com.

Failure is not always the end of an idea. Recognizing that 90 percent of experimental

drugs are unsuccessful, Eli Lilly looks at failure as an inevitable part of discovery and

encourages its scientists to find new uses for compounds that fail at any stage in a human clinical

trial. Evista, a failed contraceptive, became a $1 billion-a-year drug for osteoporosis. Strattera

was unsuccessful as an antidepressant but became a top seller for attention deficit/hyperactivity

disorder.

a) Budgeting for New-Product Development

R&D outcomes are so uncertain that it is difficult to use normal

investment criteria when budgeting for new-product development. Some

companies simply finance as many projects as possible, hoping to achieve a few

winners. Others apply a conventional percentage-of-sales figure or spend what the

competition spends. Still others decide how many successful new products they

need and work backward to estimate the required investment.

b) Organizing New-Product Development

Figure 3.18 The New-Product Development Decision Process

c) Managing Development Process : Idea

Generating Idea. The new-product development process starts with the

search for ideas. Some marketing experts believe we find the greatest opportunities

and highest leverage for new products by uncovering the best possible set of unmet

customer needs or technological innovation. New-product ideas can in fact come

from interacting with various groups and using creativity-generating techniques.

• Interacting with employees

• Interacting with outsiders

• Studying competitors

• Adopting creativity techniques

Using idea screening. In screening ideas, the company must avoid two

types of errors. A DROP-error occurs when the company dismisses a good idea. It

is extremely easy to find fault with other people’s ideas (Figure 3.18). Some

companies shudder when they look back at ideas they dismissed or breathe sighs of

relief when they realize how close they came to dropping what eventually became a

huge success. Consider the hit television show Friends.

Figure 3.18 Product idea rating device

Management can rate the surviving ideas using a weighted-index method

like that in Table 3.18. The first column lists factors required for successful product

launches, and the second column assigns importance weights. The third column

scores the product idea on a scale from 0 to 1.0, with 1.0 the highest score. The final

step multiplies each factor’s importance by the product score to obtain an overall

rating. In this example, the product idea scores 0.69, which places it in the “good

idea” level. The purpose of this basic rating device is to promote systematic

evaluation and discussion, not to make the decision for management. As the idea

moves through development, the company will need to constantly revise its estimate

of the product’s overall probability of success, using the following formula:

d) Managing Development Process : Concept to strategy

Attractive ideas must be refined into testable product concepts. A product

idea is a possible product the company might offer to the market. A product concept

is an elaborated version of the idea expressed in consumer terms.

Concept Development and Testing Concept development is a necessary

but not sufficient step for new-product success. Marketers must also distinguish

winning concepts from losers by testing.

• Concept development

• Concept testing

• Conjoint analysis

e) Managing development process : Concept to strategy

Following a successful concept test, the new-product manager will develop

a preliminary three-part strategy plan for introducing the new product into the

market. The first part describes the target market’s size, structure, and behavior;

the planned brand positioning; and the sales, market share, and profit goals sought in

the first few years. The second part outlines the planned price, distribution strategy,

and marketing budget for the first year. The third part of the marketing strategy

plan describes the long-run sales and profit goals and marketing-mix strategy over

time.

f) Business analysis

After management develops the product concept and marketing strategy, it

can evaluate the proposal’s business attractiveness. Management needs to prepare

sales, cost, and profit projections to determine whether they satisfycompany

objectives. If they do, the concept can move to the development stage. As new

information comes in, the business analysis will undergo revision and expansion.

• Estimating total sales

• Estimating cost and profit

g) Managing the development process : development to commercialization.

Up to now, the product has existed only as a word description, a drawing, or

a prototype. The next step represents a jump in investment that dwarfs the costs

incurred so far. The company will determine whether the product idea can translate

into a technically and commercially feasible product. If not, the accumulated project

cost will be lost, except for any useful information gained in the process.

Product development. The job of translating target customer requirements

into a working prototype is helped by a set of methods known as quality function

deployment (QFD). The methodology takes the list of desired customer attributes

(CAs) generated by market research and turns them into a list of engineering

attributes (EAs) that engineers can use. For example, customers of a proposed truck

may want a certain acceleration rate (CA). Engineers can turn this into the required

horsepower and other engineering equivalents (EAs). A major contribution of QFD

is improved communication between marketers, engineers, and manufacturing

people.

• Physical prototypes

• Costomer tests

Marketing testing. After management is satisfied with functional and

psychological performance, the product is ready to be branded with a name, logo,

and packaging and go into a market test, if desired. Not all companies undertake

market testing. A company officer at Revlon stated: “In our field—primarily higher-

priced cosmetics not geared for mass distribution—it would be unnecessary for us to

market test. When we develop a new product, say an improved liquid makeup, we

know it’s going to sell because we’re familiar with the field. And we’ve got 1,500

demonstrators in department stores to promote it.” One problem is that many

managers find it difficult to kill a project that attracted much effort and attention,

even if they should do so based on market testing. The result is an unfortunate (and

typically unsuccessful) escalation of commitment.

• Consumer – goods market testing

• Business – goods market testing

h) Commercialization.

Commercialization incurs the company’s highest costs to date. Too often

companies are so focused on developing a new product that they neglect to spend

adequate time developing a winning marketing launch program.The firm will need

to contract for manufacture, or it may build or rent a full-scale manufacturing

facility. Most new-product campaigns also require a sequenced mix of market

communication tools to build awareness and ultimately preference, choice, and

loyalty.

• When ( timing )

• Where ( geographic strategy )

• To whom ( target – market prospect )

• How ( introductory market strategy)

g) The consumer – adoption process

Adoption is an individual’s decision to become a regular user of a product

and is followed by the consumer loyalty process. New-product marketers typically

aim at early adopters and use the theory of innovation diffusion and consumer

adoption to identify them.

• Stages in the adoption process

The consumer-adoption process is the mental steps through which

an individual passes from first hearing about an innovation to final

adoption. They are: 1) Awarenness, 2) Interest, 3) evaluation, 4)

Trial, 5) Adoption.

• Factors influencing the adoption process

Marketers recognize the following characteristics of the

adoption process: differences in individual readiness to try new

products, the effect of personal influence, differing rates of

adoption, and differences in organizations’readiness to try new

products. Some researchers are focusing on use-diffusion processes

as a complement to adoption process models to see how consumers

actually use new products.

Readiness to try new products and personal influence.

The five adopter groups differ in their value orientations and their

motives for adopting or resisting the new product : innovators,

earlyadopters,early majority, late majority,laggards.

Characteristics of the innovation. Five characteristics

influence an innovation’s rate of adoption : 1) relative advantage, 2)

compatibility, 3) complexity, 4) divisibility, 5) communicability.

Organizations’ Readiness to Adopt Innovations.

VI. Pricing Strategy

Many economists traditionally assumed that consumers were “price takers” who

accepted prices at face value or as a given. Marketers, however, recognize that consumers

often actively process price information, interpreting it from the context of prior purchasing

experience, formal communications (advertising, sales calls, and brochures), informal

communications (friends, colleagues, or family members), point-of-purchase or online

resources, and other factors.

Purchase decisions are based on how consumers perceive prices and what they

consider the current actual price to be—not on the marketer’s stated price. Customers may

have a lower price threshold, below which prices signal inferior or unacceptable quality, and

an upper price threshold, above which prices are prohibitive and the product appears not

worth the money. Different people interpret prices in different ways. Consider the consumer

psychology involved in buying a simple pair of jeans and a T-shirt.

A Setting the price

A firm must set a price for the first time when it develops a new product, when it

introduces its regular product into a new distribution channel or geographical area, and

when it enters bids on new contract work. The firm must decide where to position its

product on quality and price. Most markets have three to five price points or tiers. Marriott

Hotels is good at developing different brands or variations of brands for different price

points: Marriott Vacation Club—Vacation Villas (highest price), Marriott Marquis (high

price), Marriott (high-medium price), Renaissance (medium-high price), Courtyard

(medium price), TownePlace Suites (medium-low price), and Fairfield Inn (low price).

Firms devise their branding strategies to help convey the price-quality tiers of their

products or services to consumers. Having a range of price points allows a firm to cover

more of the market and to give any one consumer more choices. “Marketing Insight:

Trading Up, Down, and Over” describes how consumers have been shifting their spending

in recent years. The firm must consider many factors in setting its pricing policy. Table

3.19 summarizes the six steps in the process.

3.19 Figure Steps in setting a pricing policy

B Adapting the price

Companies usually do not set a single price but rather develop a pricing structure that

reflects variations in geographical demand and costs, market-segment requirements, purchase

timing, order levels, delivery frequency, guarantees, service contracts, and other factors. As a

result of discounts, allowances, and promotional support, a company rarely realizes the same

profit from each unit of a product that it sells.

C Initiating and responding to price changes

Companies often need to cut or raise prices. A price-cutting strategy can lead to other

possible traps: Low-quality trap. Consumers assume quality is low. Fragile-market-share trap.

A low price buys market share but not market loyalty. The same customers will shift to any

lower-priced firm that comes along. Shallow-pockets trap. Higher-priced competitors match the

lower prices but have longer staying power because of deeper cash reserves. Price-war trap.

Competitors respond by lowering their prices even more, triggering a price war.

a) Initiating price increases.

Another factor leading to price increases is overdemand. When a

company cannot supply all its customers, it can raise its prices, ration supplies,

or both. It can increase price in the following ways, each of which has a different

impact on buyers.

• Delayed quotation pricing. The company does not set a final price

until the product is finished or delivered. This pricing is prevalent in

industries with long production lead times, such as industrial

construction and heavy equipment.

• Escalator clauses. The company requires the customer to pay

today’s price plus all or part of any inflation increase that takes

place before delivery. Escalator clauses base price increases on

some specified price index. They are found in contracts for major

industrial projects, such as aircraft construction and bridge building.

• Unbundling. The company maintains its price but removes or

prices separately one or more elements that were formerly part of

the offer, such as delivery or installation. Car companies sometimes

add higher-end audio entertainment systems or GPS navigation

systems to their vehicles as separately priced extras.

• Reduction of discounts. The company instructs its sales force not

to offer its normal cash and quantity discounts.

b) Anticipating competitive responses

The introduction or change of any price can provoke a response from

customers, competitors, distributors, suppliers, and even government.

Competitors are most likely to react when the number of firms is few, the

product is homogeneous, and buyers are highly informed.

c) Responding to competitors price changes

How should a firm respond to a competitor’s price cut? It depends on the

situation. The company must consider the product’s stage in the life cycle, its

importance in the company’s portfolio, the competitor’s intentions and

resources, the market’s price and quality sensitivity, the behavior of costs with

volume, and the company’s alternative opportunities.

In markets characterized by high product homogeneity, the firm can

search for ways to enhance its augmented product. If it cannot find any, it may

need to meet the price reduction. If the competitor raises its price in a

homogeneous product market, other firms might not match it if the increase will

not benefit the industry as a whole. Then the leader will need to roll back the

increase.

VII. Service Strategy

Categories of Service Mix The service component can be a minor or a major part of the total offering.

We distinguish five categories of offerings:

• A pure tangible good such as soap, toothpaste, or salt with no accompanying services.

• A tangible good with accompanying services, like a car, computer, or cell phone, with a warranty

or specialized customer service contract. Typically, the more technologically advanced the

product, the greater the need for high-quality supporting services.

• A hybrid offering, like a restaurant meal, of equal parts goods and services. People patronize

restaurants for both the food and its preparation.

• A major service with accompanying minor goods and services, like air travel with supporting

goods such as snacks and drinks. This offering requires a capital-intensive good—an airplane—for

its realization, but the primary item is a service.

• A pure service, primarily an intangible service, such as babysitting, psychotherapy, or massage.

A Distinctive Characteristics Of Service

Service companies can try to demonstrate their service quality through physical evidence

and presentation. Suppose a supermarket wants to position itself as the “fast” supermarket. It

could make this positioning strategy tangible through any number of marketing tools:

▪ Place—The layout of the checkout area and the traffic flow should be planned

carefully. Waiting lines should not get overly long.

▪ People—Checkout staff should be busy, but there should be a sufficient number to

manage the workload.

▪ Equipment—UPC scanners, credit card readers, and electronic registers should all be

state of the art.

▪ Communication material—signage and brochures—text and photos—should suggest

efficiency and speed.

▪ Symbols—The supermarket’s name and symbol could suggest fast service, for

instance, “Speedy Shop.”

▪ Price—The supermarket could advertise a $10 rebate if customers have to wait in line

more than five minutes.

B The New Services Realities

Service firms once lagged behind manufacturers in their understanding and use of

marketing because they were small or they faced large demand or little competition. This has

certainly changed. Some of the most skilled marketers now are service firms. One that wins

consistent praise for its brand-building success is Singapore Airlines.

C Achieving Excellence In Services Marketing

The increased importance of the service industry has sharpened the focus on what it takes

to excel in the marketing of services. Here are some guidelines: 1) Marketing Excellence, 2)

Technology and Service Delivery, 3) Best Practices of Top Service Companies.

Figure 3.20 Three types of marketing in service industries

D Managing Service Quality

The service quality of a firm is tested at each service encounter. If employees are bored,

cannot answer simple questions, or are visiting each other while customers are waiting,

customers will think twice about doing business there again.

Managing customer expectations. Customers form service expectations from many

sources, such as past experiences, word of mouth, and advertising. In general, they compare

perceived and expected service. If the perceived service falls below the expected service,

customers are disappointed. Successful companies add benefits to their offering that not only

satisfy customers but surprise and delight them by exceeding expectations.

Figure 3.21 Service quality model

Based on this service-quality model, researchers identified five determinants of service quality, in

descending order of importance:

• Reliability—The ability to perform the promised service dependably and accurately.

• Responsiveness—The willingness to help customers and provide prompt service.

• Assurance—The knowledge and courtesy of employees and their ability to convey trust and

confidence.

• Empathy—The provision of caring, individualized attention to customers.

• Tangibles—The appearance of physical facilities, equipment, staff, and communication

materials.

Based on these five factors, the researchers developed the 21-item SERVQUAL scale (see Table

3.22). They also note there is a zone of tolerance, or a range in which a service dimension would be deemed

satisfactory, anchored by the minimum level consumers are willing to accept and the level they believe can

and should be delivered.

Figure 3.22 SERCQUAL attributes

E Managing product – support services

No less important than service industries are product-based industries that must provide a

service bundle. Manufacturers of equipment—small appliances, office machines, tractors,

mainframes, airplanes—all must provide product-support services, now a battleground for

competitive advantage. Many product companies also have a stronger online presence than before and

must ensure they offer adequate—if not superior—service online as well.

This chapter described how products could be augmented with key service differentiators—

ordering ease, delivery,installation, customer training, customer consulting, maintenance, and repair.

Some equipment companies,such as Caterpillar Tractor and John Deere, make a significant

percentage of their profits from these services.In the global marketplace, companies that make a good

product but provide poor local service support are seriously disadvantaged : 1) Identifying and

Satisfying Customer Needs, 2) Postsale Service Strategy, 3) Customer-Service Evolution, 4) The

Customer-Service Imperative.

Date post:	11-Jan-2023
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I. SEGMENTATION A. Principles Of Market Segmentation B. The ...

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