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DEVELOPING PRICE STRATEGIES AND PROGRAMS

Setting the Price (Kotler et al., 2019)
Price is a crucial factor in influencing consumer choice. Making pricing decisions requires careful consideration
of various variables, including the company, market competition, brand positioning, and the target market.
Firms must set a price for the first time when developing a new product, introducing their existing product
into a new distribution channel or geographical area, or entering a new contract.
The following are the six-step procedure for setting pricing policy:
Step 1: Selecting the Pricing Objective. Identifying the pricing objective is the primary step toward pricing.
The company must decide which of the five (5) major objectives to pursue in pricing — survival, maximum
current profit, maximum market share, maximum market skimming, or product-quality leadership.

• Survival: Companies pursue this when plagued with overcapacity, intense competition, or changing
consumer demand. Under the survival objective, a company continues to operate as long as prices
cover variable costs (costs that vary with the production level) and fixed costs (costs that do not
change regardless of the quantity of goods or services produced). However, a company must learn to
add value to its product or service to stay in business or face extinction.
• Maximum current profit: Companies pursue this when the estimated demand and costs associated
with alternative pricing generate the maximum current profit, cash flow, or rate of return on
investment. Companies may sacrifice long-term performance by ignoring the effects of other
marketing variables, competitors’ reactions, and legal restraints on price by focusing on current
performance.
• Maximum market share: Companies pursue this when it wants to maximize their market share. A
company that assumes higher sales volume will lead to lower unit costs and higher long-run profit,
therefore setting the lowest price possible, considering the market is price sensitive.
• Maximum market skimming: This pricing objective is what companies pursue when it launches a new
product or service. A company may favor setting high prices to maximize market skimming and slowly
drop over time.
• Product-quality leadership: This pricing objective is what companies pursue when it aims to be the
product-quality leader in the market. The company strives to be characterized as “affordable luxuries”
by combining a high level of perceived quality, brand status, and a price just high enough not to be
out of consumers’ reach.
Step 2: Determining Demand. Demand refers to the consumer’s desire to purchase goods and services and
willingness to pay a specific price. In economics, prices lead to varying demand levels and impact a company’s
marketing objectives. The normally inverse relationship between price and demand is captured in a demand
curve (see Figure 1): The higher the price, the lower the demand. For luxury goods, the demand curve
sometimes slopes upward. Some consumers take the higher price to signify a better product. However, if the
price is too high, demand may fall.

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Figure 1. Inelastic and Elastic Demand

Source: Marketing Management: European Edition, 2019, p. 520

• Price Sensitivity. The demand curve shows how much the market is likely to purchase at alternative
prices and summarizes consumer reactions with different price sensitivities. The first step in
estimating demand is understanding what factors affect price sensitivity. Generally speaking,
customers are less price-sensitive to inexpensive items or items they rarely buy for the following
reasons:
➢ When there are few or no substitute products;
➢ When no competitor offers the same products;
➢ When customers overlooked the higher price;
➢ When customers are slow to change their buying habits;
➢ When customers think the higher prices are justified; and
➢ When the price is only a small part of the total cost of obtaining, operating, and servicing, the
product over its lifetime.

• Estimating Demand Curves. Majority of the companies attempt to measure the demand curves using
several different methods, such as:

➢ Surveys. This method explores how many units consumers would buy at different proposed prices.
➢ Price experiments. This method aims to vary the prices of different products in a store or similar
territories to see how the change affects sales.
➢ Statistical analysis. This method reveals the relationship between past prices, quantities sold, and
other sales-related factors. The data can be longitudinal (over time) or cross-sectional (from
different locations simultaneously).

• Price Elasticity of Demand. Price changes can either increase or decrease demand for a good or
service. Marketers need to know how responsive demand is to price changes to make informed
decisions. If the demand is elastic, sellers will consider lowering prices to generate more revenue. This
is true as long as the costs of producing and selling more units do not increase too much. Price
elasticity depends on the size and direction of the expected price change.

With a small price change, the effect may be negligible. With a large price change, the effect may be
more significant. Price cuts and increases often have different effects on sales. After a price increase,
buyers may continue to buy from a current supplier but eventually switch to another supplier. The

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distinction between short-run and long-run elasticity means that sellers will not know the total effect
of a price change until time passes.
Step 3: Estimating Costs. The demand for a product sets a ceiling (limit) on how much the company can charge
for its products or services, whereas costs set the floor (base). Most companies want to set a price that covers
the costs of producing, distributing, and selling the product, including a fair return for its effort and risk.
Types of Costs and Levels of Production:
• Fixed costs, also known as overhead costs, do not vary with production level or sales revenue. A
company must pay monthly bills for rent, heat, interest, salaries, and so on, regardless of output.
• Variable costs vary directly with the level of production. For example, each tablet computer produced
by Samsung incurs the cost of plastic and glass, microprocessor chips and other electronics, and
packaging. These costs are constant per unit produced and are called variable costs because the total
varies with the number of units produced.
• Total costs are the sum of the fixed and variable costs for any given production level. The average cost
is the cost per unit at that production level; it equals total costs divided by production. Management
wants to charge a price that will at least cover the total production costs at a given production level.

Step 4: Analyzing competitors’ costs, prices, and offers. When pricing a product, a company must consider
the prices of its competitors and the possible reactions these prices might generate from consumers. A firm
may follow the following method:

• If the firm’s offer includes features not offered by the competitor, it should evaluate its value to the
customer and add that value to the competitor’s price.
• If the competitor’s offer contains features not offered by the firm, it should subtract its value from its
price.

The firm can decide how much to charge; it could be the same as its competitor or less. Many companies that
offer both low prices and high quality are capturing the interests of consumers all over the world. Many upstart
firms focus on serving one or a few consumer segments, providing better delivery or just one additional benefit
while keeping costs low with efficient operations. Consumer expectations about the trade-off between price
and quality have changed significantly in recent years.

Step 5: Selecting a pricing method. Taking into consideration the customers’ demand, cost function, and
competitors’ prices, the company is now ready to select a price using the following pricing method:
• Markup pricing: The basic pricing method is to add a standard markup to the product’s cost.

𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 +
𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
𝑀𝑎𝑟𝑘𝑢𝑝 𝑝𝑟𝑖𝑐𝑒 =
(1 − 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑠𝑎𝑙𝑒𝑠)

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• Target-return pricing: The firm determines the price that yields its target rate of return on investment.
𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 × 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑇𝑎𝑟𝑔𝑒𝑡 − 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝𝑟𝑖𝑐𝑒 = 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 +
𝑢𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 =
𝑝𝑟𝑖𝑐𝑒 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
• Perceived-value pricing: Companies are increasingly basing their prices on the customer’s perceived
value. The perceived value of a product is based on various factors, such as the buyer’s image of the
product’s performance, the channel deliverables, warranty quality, customer support, and other
softer attributes. Companies must deliver the value they promise to their customers, and customers
must perceive this value. Marketers use different tools, such as advertising, sales force, and the
Internet, to communicate the perceived value of a product to buyers.

• Value pricing: Value pricing significantly impacts how a company sets prices. Companies that charge
a fair price for high-quality goods retain customers by providing a good product value. Value pricing is
not just about setting lower prices; it is about redesigning the company’s operations to become a low-
cost producer while still meeting customer expectations for quality.

• Everyday Low Pricing (EDLP): Constant prices or EDLP eliminate week-to-week price uncertainty and
the high-low pricing of competitors’ promotions. In high-low pricing, the retailer charges higher prices
daily but runs frequent promotions with prices temporarily lower than the EDLP level.
• Going-rate pricing: In going-rate pricing, small-to-medium firms base its price largely on competitors’
prices rather than when their own demand or costs change. Some may charge a small premium or
discount but still preserve the difference.
• Auction-type pricing: Auction-type pricing is growing more popular as firms dispose of excess
inventories or used goods. These are the three (3) major types of auctions and their separate pricing
procedures:
➢ English auctions. It has one seller and many buyers. The seller puts up an item, and bidders
raise their offer prices until the top price is reached. The highest bidder gets the item. English
auctions are used today for selling antiques, cattle, real estate, and used equipment and
vehicles.
➢ Dutch auctions. It has one seller and many buyers or one buyer and many sellers. In the first
kind, an auctioneer announces a high price for a product and then slowly decreases until a
bidder accepts. On the other, the buyer announces something they want to buy, and potential
sellers compete to offer the lowest price.
➢ Sealed-bid auctions. It allows potential suppliers to submit only one bid without any idea
about the others.
Step 6: Selecting the final price. Pricing methods narrow the range from which the company must select its
final price. In choosing the price, the company must consider additional factors, including the impact of other
marketing activities, company pricing policies, gain-and-risk-sharing pricing, and price impact on other parties.

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New Product Pricing Strategies

Pricing strategies usually change as the product passes through its life cycle. The introductory stage is
especially challenging. Companies who bring out a new product face the challenge of setting prices for the
first time. They can choose between two (2) broad strategies: market-skimming pricing and market-
penetration pricing.
Market-Skimming Pricing. Many companies that invent new products set high initial prices to skim revenues
layer-by-layer from the market. Market skimming makes sense only under certain conditions:
• First, the product’s quality and image must support its higher price, and enough buyers must want it
at that price.
• Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of
charging more.
Third, competitors should not be able to enter the market easily and undercut the high price.

Market-Penetration Pricing. Companies set a low initial price to penetrate the market quickly, attract many
buyers quickly, and win a large market share. Several conditions must be met for this low-price strategy to
work:
• First, the market must be highly price-sensitive so that a low price produces more market growth.
• Second, production and distribution costs must decrease as sales volume increases.
• Finally, the low price must help keep out the competition, and the penetration pricing must maintain
its low-price position. Otherwise, the price advantage may be only temporary.
Product Mix Pricing Strategies
The strategy for setting a product’s price often must be changed when the product is part of a product mix. In
this case, the firm looks for prices that maximize its profits on the total product mix. Pricing is difficult because
the various products have related demands and costs and face different degrees of competition.
Product Line Pricing. It is used when a company has more than one product in a product line. Companies
adopt this process to separate similar products into various price groups to create different quality levels in
the customers’ minds. Samsung offers smartphone series with different features at different prices.

Optional-Product Pricing. It is used when companies sell main products for a lower price than they ordinarily
would and rely on the sales of optional products to make up for the difference. Printers are cheaper to buy
than it is to buy ink.

Captive-Product Pricing. It is used when manufacturers sell the main product (core) at a low price, and the
essential accessories are sold at a high price to support the profit margins. Captive products can account for a
substantial portion of a brand’s sales and profits. Gaming apps are free to play but come with various in-app
purchases for a better gaming experience.

By-Product Pricing. It is used when manufacturers price and sell the by-product (secondary product)
separately at a specific price to earn additional revenue from the same process. Australia’s Colonial Sugar
Refinery (CSR) forged its early reputation as a sugar company. It later began selling by-products of its sugarcane
(waste sugarcane fiber) to manufacture wallboard for building and construction materials.

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Product Bundle Pricing. It is used when companies often combine two (2) or more products as a package for
a reduced price than what the items would cost if sold separately. Common bundle samples are fast food
restaurants’ value meal combos.
Price Adjustment Strategies
The price adjustment strategy determines the most effective basis on which a company settles its prices.
Companies usually adjust their basic prices to account for customer differences and changing situations.
Discount and Allowance Pricing. Most companies adjust their prices to reward customers for specific
responses, such as paying bills early, volume purchases, and off-season buying. These price adjustments can
take many forms, such as:
• Cash discount is a price reduction (discount) given in exchange for the buyer paying the invoice (bill)
earlier than the standard payment due.
• Quantity discount is a price reduction for buyers who buy large volumes.
• Trade discount (also called a functional discount) is a price reduction granted by manufacturers and
wholesalers to resellers based on order volume or as rewards to other members of the distribution
channels for performing different functions such as selling, storing, and record keeping.
• Trade-in Allowances are price reductions for turning in an old item when buying a new one. Trade-in
allowances are most common in the automobile industry and other durable goods.

Segmented Pricing. Companies often adjust their basic prices for customer-, product-, and location-related
differences. In segmented pricing, the company sells a product or service at two (2) or more prices, even
though the price difference is not based on differences in costs. Segmented pricing takes several forms, such
as:
• Customer-segment pricing. Different customers pay different prices for the same product or service.
Museums, movie theaters, and retail stores may charge lower prices for students, people in the
military, and senior citizens.
• Product form pricing. Different product versions are priced differently but not according to differences
in their costs. The differences in costs to the airlines — Business-class and Economy seats — are based
on the additional comfort and services.
• Location-based pricing. A company charges different prices for different locations, even though the
cost of offering in each location is the same. Some State Universities in America charge higher tuition
for out-of-state students, and theaters vary their seat prices because of audience preferences for
certain locations.
• Time-based pricing. A company’s price varies by season, month, day, or even hour. Movie theaters
charge less during the daytime, and resorts give weekend and seasonal discounts.

Psychological Pricing. In using psychological pricing, sellers consider the psychology of prices, not simply
economics. This pricing strategy utilizes the power of psychology to influence customers to take action, make
a purchase, and spend more than they usually would.

Promotional Pricing. With promotional pricing, companies will reduce the price of their products drastically
for a short period to create buying excitement and urgency. Promotional pricing takes several forms, such as:

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• Special-event pricing. It involves price reduction of products according to special events or certain
seasons to draw more customers and gain revenue.
• Limited-time offer pricing. It involves promotional deals such as online flash sales, free shipping, and
discount codes that can create buying urgency and make buyers feel lucky to have gotten in on the
deal.
• Rebates. This promotional deal offers a cash back incentive based on the portion of interest or
dividends by the buyer. Companies employ this strategy to increase the volume of purchases made by
customers.

Dynamic and Personalized Pricing. Dynamic pricing is a pricing strategy that applies variable prices instead of
fixed prices. Instead of deciding on a set price for a season, retailers can update their prices multiple times per
day to capitalize on the ever-changing market.

International Pricing. A company’s price in a specific country depends on many factors, including economic
conditions, competitive situations, laws and regulations, and the nature of the wholesaling and retailing
system.

References
Kotler, P., Keller, K. L, Ang S.W., Tan C.T., Leong S.W. (2018). Marketing Management 7th Edition: An Asian
Perspective. Pearson Education Limited.
Kotler, P., Keller, K.L., Brady M., Goodman, M., Hansen T. (2019). Marketing Management 4th European Edition.
Pearson Education Limited.

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RETAILING AND WHOLESALING

Retailing (Kotler, 2019)
McKinsey & Company, an American management and marketing consulting firm, published an article on their
website last 2009 entitled “The consumer decision journey.” The company claimed that the consumer decision
journey is a circular process focusing on adding customer loyalty and building advocacy. The circular process
maps the steps a consumer follows, from an awareness of a product to becoming a loyal customer.

Figure 1. Stages in Developing Effective Communication

Source: https://www.forbes.com/marketers-need-to-drastically-rethink-the-customer-decision-journey

• Stage 1: Consumers consider a set of brands based on initial perception or exposure to recent touch
points.
• Stage 2: Consumers add or subtract brands to evaluate which one fits their criteria.
• Stage 3: Consumers ultimately select a brand that satisfies their needs and wants.
• Stage 4: Consumers build expectations based on experience, which helps build loyalty to the brand.
• Stage 5: Consumers may encounter triggering points that could potentially break their loyalty loop
with the brand.

According to McKinsey (2019), many industries launched large-scale omnichannel transformations to improve
consumer experience and keep up with the rising consumer expectations. In addition, omnichannel provides
substantial business benefits through the leaner and more efficient service process.

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➢ Retailing
Retailing includes all the activities in selling goods or services (market offerings) directly to final consumers for
personal or nonbusiness use. A retailer or retail store purchases goods in large quantities from manufacturers,
directly or through a wholesaler, then sells in smaller quantities to consumers for a profit. Retailers are the
final link to complete the supply chain.
Any organization selling to final consumers—whether a manufacturer, wholesaler or retailer—is doing
retailing. It does not matter how (in person, via e-mail, by telephone, or by a vending machine) or where (in a
store, on the street, or in the consumer’s home) the goods or services are sold.
➢ Classification of Retailers

A. Store Retailers. Different formats of store retailers will have different competitive and price dynamics.
Store retailers cater to different consumer preferences for service levels and specific services.
Specifically, by offering one (1) of four (4) levels of service:

• Self-service: Self-service is the cornerstone of all discount operations. Many customers are
willing to carry out their “locate-compare-select” process to save money.
• Self-selection: Customers find their goods, though they can ask for assistance.

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• Limited service: These retailers carry more shopping goods and services, such as credit and
merchandise return privileges. Customers need more information and assistance.
• Full service: Salespeople are ready to assist in every phase of the “locate-compare-select”
process. Customers who like to be waited prefer this type of store. The high staffing cost and
many services, along with the higher proportion of specialty goods and slower-moving items,
result in high-cost retailing.

Major types of Retail Stores:

➢ Speciality store: Limited product line (e.g., The Body Shop)

➢ Department store: Multiple product lines. (e.g., SM Department Store)
➢ Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to
meet total needs for food and household product. (e.g., Puregold and S&R)
➢ Convenience store: Small store in a residential area, often open 24/7, limited line of high-
turnover convenience products plus takeout (e.g., 7-Eleven and Ministop)
➢ Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume
stores (e.g., Wal-Mart, Daiso, and My Dollar Store)
➢ Neighborhood Sundry Store (Sari-sari store): A small neighborhood retail shop that carries
basic goods to community members
➢ Catalog showroom: Broad selection of high-markup, fast-moving, brand-name goods sold
by catalog at a discount. Customers pick up merchandise at the store
➢ Pharmacy Store (Drugstore): Provides pharmaceutical drugs and cosmetics (E.g., Mercury
Drug and Watsons)

B. Nonstore Retailing. Nonstore retailing has been growing much faster than store retailing, especially e-
commerce. Nonstore retailing falls into four (4) major types:
• Direct Marketing: has roots in direct-mail and catalog marketing. It includes telemarketing,
television, direct-response marketing, and online shopping. People can order a greater variety
of goods and services from a wider range of Web sites.
• Direct Selling (multilevel selling or network marketing): a multibillion-dollar industry with
companies selling door-to-door products, such as Avon, Tupperware, or Mary Kay Cosmetics.
• Automatic Vending: offers a variety of merchandise, including impulse goods such as soft
drinks, coffee, candy, newspapers, magazines, and other products such as hosiery, cosmetics,
hot food, and paperbacks. Vending machines are found in factories, offices, large retail stores,
gasoline stations, hotels, restaurants, and many other places. They offer 24-hour selling, self-
service, and merchandise that is stocked to be fresh.
• Buying Service: a storeless retailer that serves a specific clientele entitled to buy from a list of
retailers that have agreed to give discounts in return for membership. In this scenario, the
products consumers expect to buy would be delivered directly to their homes. Facebook live
sellers and marketplace are examples of this service.

C. Corporate Retailing and Franchising. Although many retail stores are independently owned, an
increasing number are part of a corporate retailing organization. These organizations achieve economies
of scale, greater purchasing power, wider brand recognition, and better-trained employees than
independent stores can usually gain alone.

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• Corporate chain store: the corporation owns and oversees the chain stores’ day-to-day
operations. Since the store is company owned, the corporation handles contracts from suppliers
and employee recruitment. Penshoppe, Bench, and Uniqlo are examples of corporate chain
stores.
• Voluntary chain: an association of independent retailers who engage in bulk buying and
collective merchandising. For example, Independent Grocers Alliance and ACON’s True Value.
• Retailer cooperative: employs independent retailers who build an organization to create chain-
like stores to acquire discounts from manufacturers and share marketing expenses. Home
Depot, Ace Hardware, and Wilcon Dept. are the best examples of retailer cooperatives.
• Consumer cooperative: owned by the consumers who choose to be members of a cooperative.
It utilizes the cooperative principles of democratic member control, the one member-one vote
principle. Examples are Asiapro Cooperative, Dairy Farmers of America, and Ang Gawad Pinoy
Consumer’s Cooperative (an organization devoted to empowering Filipino products and services
through cooperativism, such as livelihood programs and development, technology integration
and application, and cooperative training).
• Franchise organization: an umbrella term used to describe a parent company that establishes a
successful business model and licenses it to prospective business owners. McDonald’s, 7/11,
and Jollibee are some of the most popular franchised companies in the world.
• Merchandising conglomerate: combines seemingly unrelated business lines and forms under
central ownership. Araneta Group, Ayala Corporation, and SM Investments are examples of top
conglomerates here in the Philippines.
Retailer Marketing Decisions (Kotler, 2019)
Retailers are always searching for new marketing strategies to attract and hold customers. In the past, retailers
attracted customers with unique product assortments and more or better services. Today, the goods and
services of various retailers are looking more and more alike. Thus, it’s now more difficult for any retailer to
offer exclusive merchandise.
For all these reasons, many retailers today are rethinking their marketing strategies in terms of:
A. Target Market Decision. Mistakes in choosing target markets can be costly. To better hit the target
market, retailers must first analyze, define, and profile their target market and then decide how to
differentiate and position themselves in these markets. By doing so, retailers can make consistent
decisions about product assortment, services, pricing, advertising, store décor, online and mobile site
design, or any other decisions that must support their positions.

B. Product Assortment and Services Decision. Identifying the right product assortment can be especially
challenging in fast-moving industries such as fashion, technology, or consumer goods. Retailers must
decide on three (3) major product variables: product assortment, service mix, and store atmosphere.
These decisions, more than any other, can help store retailers differentiate themselves from online
sellers. Of course, store retailers must add effective online elements to their marketing mixes.

C. Price Decision. All retailers are seeking to cut costs to improve their profit margin. A retailer’s price
policy must fit its target market and positioning, product and service assortment, competition, and
economic factors. All retailers would like to charge high markups and achieve high volume, but the two
seldom go together. Most retailers seek high markups on lower volume (most specialty stores) or low
markups on higher volume (mass merchandisers and discount stores).

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D. Promotion Decision. The most common combinations of promotion tactics used today to reach
consumers are advertising, personal selling, sales promotion, public relations, and social media
marketing. Retailers are making the most of conventional marketing techniques, including newspaper,
magazine, radio, and television advertising. Additionally, some businesses offer in-store displays and
initiatives like brand-new shop openings, special events, newsletters and blogs, store magazines, and
community service initiatives. Most retailers also communicate with customers digitally through
websites and catalogs, online video commercials, social media, mobile apps and ads, blogs, and e-mail.
Almost all retailers, big or small, have active social media accounts.

E. Place Decision. Store owners frequently emphasize the importance of location. Retailers must choose
areas compatible with their positioning that are accessible to their target market. For instance, Apple
places its stores in upscale malls and hip retail areas rather than cheap strip malls on the outskirts of
cities. In contrast, small merchants must make do with whatever spaces they can locate or afford.
Wholesaling (Kotler et al., 2018 & 2019)
Wholesaling is the act of buying large quantities of items from a manufacturing firm and reselling them to
retailers, who subsequently sell them to consumers. Firms engaged primarily in wholesaling activities are
called wholesalers.
➢ Functions of Wholesalers

A. Selling and promoting: Wholesalers’ sales forces help manufacturers reach many small customers at a
low cost. The wholesaler has more contacts and is often more trusted by the buyer than the distant
manufacturer.

B. Buying and assortment building: Wholesalers can select items and build assortments their customers
need, thereby saving much work.

C. Bulk breaking: Wholesalers save customers money by buying carload lots and breaking bulk (breaking
large lots into small quantities).

D. Warehousing: Wholesalers hold inventories, reducing suppliers’ and customers’ inventory costs and
risks.

E. Transportation: Wholesalers can provide quick delivery to buyers because they are closer to buyers than
producers.

F. Financing: Wholesalers finance their customers by giving credit and finance their suppliers by ordering
early and paying bills on time.

G. Risk bearing: Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage, and
obsolescence.

H. Market information: Wholesalers give information to suppliers and customers about competitors, new
products, and price developments.

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➢ Types of Wholesalers

A. Merchant wholesalers: Independently owned businesses that take title to all merchandise handled.
B. Full-service wholesalers: Provide a full line of services: carrying stock, maintaining a sales force, offering
credit, making deliveries, and providing management assistance. Full-service wholesalers include
wholesale merchants and industrial distributors.

1. Wholesale merchants: Sell primarily to retailers and provide a full range of services. General
merchandise wholesalers carry several merchandise lines. In contrast, general line wholesalers
carry one (1) or two (2) lines in great depth. Specialty wholesalers specialize in carrying only part
of a line.

2. Industrial distributors: Sell to manufacturers rather than to retailers. Provide several services,
such as carrying stock, offering credit, and providing delivery. It may carry a broad range of
merchandise, a general line, or a specialty line.

C. Limited-service wholesalers: Offer fewer services than full-service wholesalers. Limited-service

wholesalers are of several types:

1. Cash-and-carry wholesalers: Carry a limited line of fast-moving goods and sell to small retailers
for cash. They normally do not deliver.

2. Truck wholesalers: Perform a selling and delivery function primarily. Carry a limited line of semi-
perishable merchandise (such as milk, bread, and snack foods), which is sold for cash as deliveries
are made to supermarkets, small groceries, hospitals, restaurants, factory cafeterias, and hotels.

3. Drop shippers: Do not carry inventory or handle the product. Drop shippers select a manufacturer
on receiving an order, then ship the merchandise directly to the customer. Drop shippers operate
in bulk industries, such as coal, lumber, and heavy equipment.

4. Rack jobbers: Serve grocery and drug retailers, mostly in nonfood items. Rack jobbers send
delivery trucks to stores, where the delivery people set up toys, paperbacks, hardware items,
health and beauty aids, or other items. Rack jobbers price the goods, keep them fresh, set up
point-of-purchase displays, and keep inventory records.

5. Producers’ cooperatives: Farmer-owned members assemble farm produce for sale in local
markets. Producers’ cooperatives often improve product quality and promote a co-op brand
name, such as Sun-Maid raisins, Sunkist oranges, or Diamond nuts.

6. Mail-order or web wholesalers: Send catalogs to or maintain websites for retail, industrial, and
institutional customers featuring jewelry, cosmetics, specialty foods, and other small items. Its
primary customers are businesses in small outlying areas.

D. Brokers and agents: They do not take title to goods. Its main function is to facilitate buying and selling,
for which they earn a commission on the selling price. Generally, specialize by product line or customer
type.

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1. Brokers: Bring buyers and sellers together and assist in negotiation. Brokers are paid by the
party who hired the broker and do not carry inventory, get involved in financing, or assume
risk. Examples include food, real estate, insurance, and security brokers.

2. Agents: Represent either buyers or sellers on a more permanent basis than brokers do. There
are four (4) types:

• Manufacturers’ agents: Represent two (2) or more manufacturers of complementary

lines. Often used in such lines as apparel, furniture, and electrical goods. A
manufacturer’s agent is hired by small manufacturers who cannot afford their field
sales forces and large manufacturers who use agents to open new territories or cover
territories that cannot support full-time salespeople.

• Selling agents: Have contractual authority to sell a manufacturer’s entire output. The
selling agent serves as a sales department and significantly influences prices, terms,
and conditions of sale. Selling agents typically work in products such as textiles,
industrial machinery and equipment, coal and coke fossil fuels, chemicals, and metals.

• Purchasing agents: Generally have a long-term relationship with buyers and make
purchases for them, often receiving, inspecting, warehousing, and shipping the
merchandise to buyers. Purchasing agents help clients obtain the best goods and
prices available.

• Commission merchants: Take physical possession of products and negotiate sales.

Used most often in agricultural marketing by farmers who do not want to sell their
output. Take a truckload of commodities to a central market, sell it for the best price,
deduct a commission and expenses, and remit the balance to the producers.

E. Manufacturers’ and retailers’ branches and offices: Wholesaling operations are conducted by sellers or
buyers rather than through independent wholesalers. Separate branches and offices can be dedicated
to either sales or purchasing.

1. Sales branches and offices: Set up by manufacturers to improve inventory control, selling, and
promotion. Sales branches carry inventory and are found in industries such as lumber and
automotive equipment and parts. Sales offices do not carry inventory and are most prominent
in the dry goods and notions industries.

2. Purchasing offices: Perform a role similar to brokers or agents but are part of the buyer’s
organization. Many retailers set up purchasing offices in major market centers, such as New
York and Chicago.

➢ Trends in Wholesaling
Today’s wholesalers face considerable challenges. The industry remains vulnerable to one of its most enduring
trends—the need for ever-greater efficiency. Tight economic conditions and retailer woes have led to
demands for even lower prices and the winnowing out of suppliers who are not adding value based on cost

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and quality. Progressive wholesalers constantly watch for better ways to meet the changing needs of their
suppliers and target customers. They recognize that their only reason for existence comes from adding value,
which increases the efficiency and effectiveness of the entire marketing channel.
Wholesalers have worked to increase asset productivity by better managing inventories and receivables. They
are also reducing operating costs by investing in more advanced materials-handling technology, information
systems, and the Internet. Finally, they are improving their strategic decisions about target markets, product
assortment and services, price, communications, and distribution.
Four (4) ways to strengthen relationships with manufacturers:
1. They sought a clear agreement with their manufacturers about their expected functions in the
marketing channel.
2. They gained insight into the manufacturers’ requirements by visiting their plants and attending
manufacturer association conventions and trade shows.
3. They fulfilled their commitments to the manufacturer by meeting the volume targets, paying bills
promptly, and feeding back customer information to their manufacturers.
4. They identified and offered value-added services to help their suppliers.

References
Court, D., Elzinga, D., Mulder, S., Vetvik, O. (2009) The consumer journey decision. https://www.mckinsey.com/capabilities/growth-
marketing-and-sales/our-insights/the-consumer-decision-journey
Hedwig, M., Friesdorf, M., Goryunov, Y., Niedermann, F. (2019) Omnichannel consumer interactions – a payer perspective.
https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/omnichannel-consumer-interactions-
a-payer-perspective
Kotler, P., Keller, K. L, Ang S.W., Tan C.T., Leong S.W. (2018). Marketing Management 7th Edition: An Asian Perspective. Pearson
Education Limited.
Kotler, P., Keller, K.L., Brady M., Goodman, M., Hansen T. (2019). Marketing Management 4th European Edition.
Peason Education Limited.

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MANAGING ADVERTISING AND SALES PROMOTIONS

Developing and managing an advertising program (Kotler P. K., 2018)
Modern marketing requires more than developing good market offerings (goods and services). It also requires
companies to communicate with present and potential customers, stakeholders, and the public. Since
customers are now taking a more active role in the communication process, companies must seek to engage
and excite people, persuade them to purchase and make them experience the market offerings they promote.
Effective marketing communication should establish a connection, promise a reward, inspire action, and stick
in the customers’ memory. The ideal marketing communication should ensure the following:

Figure 1. Steps in Developing Effective Communication

Source: Marketing Management 4th European Edition, 2019, p. 556

1. Target Audience. The target audience critically influences the marketer’s decisions on what to say,
how, when, and to whom. Companies must have a clear target audience in mind.
2. Communications Objectives. Marketers must determine and set objectives to establish the need for
the marketing offerings category, build awareness, build the brand’s ability to meet a relevant need,
and influence brand purchase intention.
3. Design communications. Marketers search for themes or ideas that will tie into the brand and help
establish what to say (message strategy), how to say it (creative strategy), and who should say it
(message source).
4. Communication channels. Finding the most important communication channel for delivering a
message is crucial in ensuring the success of business communications. Communication channels may
be personal or non-personal.
5. Total Marketing Communications Budget. Companies should set their overall budget from product
and market need levels. Budgets tend to be higher when there is low channel support or a change in
the marketing program.
6. Media mix (Marketing communications mix). Companies should allocate the budget over the eight
(8) major modes of communication – advertising, sales promotion, public relations and publicity,
events and experiences, direct marketing, interactive marketing, word-of-mouth marketing, and
personal selling

7. Evaluating advertising effectiveness. The essence of measuring results is to determine the influence
the advertisement has on the customers’ psychological and emotional buying decisions.

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8. Managing integrated marketing communications. Integrated marketing communications help

communicate the brand message on all essential marketing components. It ensures a similar message
is delivered to all potential and existing customers.

➢ Advertising
Advertising is any paid form of non-personal presentation of ideas. It can be a cost-effective way to
disseminate messages, whether to build brand preferences or educate people. Even in today’s challenging
media environment, good ads can pay off.
In developing an advertising program, marketing managers must always identify the target market and buyer
motives. Then they can make the five (5) major decisions known as “the five (5) Ms”:
A. Mission: What are the advertising objectives of the company?
B. Money: How much is the company willing to spend, and how to allocate spending across media types?
C. Message: What should the ad campaign say?
D. Media: What effective media channel should the company use?
E. Measurement: How should the company evaluate the results?

Figure 2. The Five Ms of Advertising

Source: Marketing Management 4th European Edition, 2019, p. 556

➢ Setting the Advertising Objectives

Advertising objectives must flow from earlier decisions about the target market, brand positioning, and
marketing program. An advertising objective is a specific communications task and achievement level to be
accomplished with a specific audience within a particular period. Its objective should emerge from a thorough
analysis of the current marketing situation:
1. The objective to stimulate more usage — If the product class is mature, the company is the market
leader, and brand usage is low, the objective is to stimulate more usage.

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2. The objective to convince the market of the brand’s superiority — If the product class is new, the
company is not the market leader, and the brand is superior to the leader.

➢ Classifications of advertising objectives:

A. Informative advertising aims to create brand awareness and knowledge of new products or new
features of existing products. Consumer packaged goods companies like Colgate, General Mills, and
Unilever often focus on key product benefits.

B. Persuasive advertising aims to create liking, preference, conviction, and purchase of a product or
service. Some persuasive advertising uses comparative advertising, which makes an explicit
comparison of the attributes of two or more brands. Samsung ran a TV advertisement claiming to offer
more and better phone features than its rival Apple.

C. Reminder advertising aims to stimulate repeat purchases of products and services. Expensive, four-
color Coca-Cola ads in magazines remind people to purchase Coca-Cola.

D. Reinforcement advertising aims to convince current purchasers they have made the right choice.
Automobile ads often depict satisfied customers enjoying the special features of their new car.

➢ Deciding on the advertising budget

Although advertising is a current expense, part of it is an investment in building brand equity and customer
loyalty. The allocation decision considers the media type, marketing budget, and production costs since it
affects company profits. Ideally, companies should align their budget with the overall marketing goals so that
it does not spend too much or too little on advertising.
Factors affecting budget decisions:
1. Stage in the product life cycle — New products typically merit large advertising budgets to build
awareness and gain consumer trials. Established brands usually are supported by lower advertising
budgets, measured as a ratio to sales.

2. Market share and consumer base — High-market-share brands usually require less advertising
expenditure to maintain their share as a percentage of sales. Building share by increasing market size
requires larger expenditures.

3. Competition and clutter — A brand must advertise more heavily to be heard in a market with many
competitors and high advertising spending. Even advertisements not directly competitive with the
brand create clutter and a need for heavier advertising.

4. Advertising frequency — The number of repetitions needed to convey the brand’s message to
consumers obviously impacts the advertising budget.

5. Product substitutability — Brands in less-differentiated or commodity-like product classes (beer, soft

drinks, banks, and airlines) require heavy advertising to establish a unique image.

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Sales Promotion (Kotler P. K., 2018)

A sales promotion is a marketing strategy in which a business uses a temporary campaign or offer to increase
interest or demand in its market offering. It is more budget-friendly and consists of a collection of incentive
tools, mostly short-term, designed to stimulate quicker or greater purchases of particular products or services
by consumers or the trade.
Advertising, on the other hand, is a permanent strategy that involves expensive marketing and sales campaign.
It presents a reason for consumers to buy a product or service and helps increase the loyalty of existing
customers.
➢ Advertising vs. Promotion
Consumer franchise development is one type of sales marketing tactic. They include free samples, frequent
rewards, coupons with a selling message, and premiums associated with the product to impart a selling
message along with the bargain. Price-off packs, customer premiums unrelated to a product, competitions
and sweepstakes, consumer refund offers, and trade allowances are examples of sales promotion tactics that
often do not establish brands.

Sales promotions in markets with a high level of brand similarity can result in a significant sales reaction in the
short term but no long-term permanent gain. They could be able to change market shares in markets with
significant brand dissimilarity permanently. Consumers may stockpile in addition to switching brands — buying
earlier than usual or in larger amounts. But the sales can then decline.

Since small-share competitors cannot match the advertising budgets of market leaders, secure shelf space
without paying trade allowances, or encourage consumer trials without providing incentives, they may gain
from focusing on sales promotion. Because most promotions primarily benefit current users, dominant market
leader brands tend to give deals less frequently.

Consumer promotions that promote brand building and product movement can provide the best of both
worlds. They frequently result in greater long-term sales of high-quality goods. For instance, digital coupons
that may be redeemed on a smartphone or downloaded to a customer’s printer are the area of sales
promotions that is expanding the fastest. Digital coupons feature higher redemption rates, less printing
expenses, less paper waste, and are quickly updated.

Events and Experiences (Kotler P. K., 2019)

➢ Events Objectives. Events can deliver beneficial impacts and outcomes for the organizers, the host
community, and other stakeholders such as participants, spectators, sponsors, and the media. Marketers
report several reasons to sponsor events:

1. To identify with a particular target market or lifestyle — Customers can be targeted geographically,
demographically, psychographically, or behaviorally according to events. Old Spice, an American
brand of male grooming products, sponsors a collegiate basketball tournament to highlight product
relevance and sample among its target audience of 16- to 24-year-old males.

2. To increase the salience of the company or product name — Sponsorship offers sustained exposure
for a brand, a necessary condition for reinforcing brand salience. Top soccer sponsors Emirates,

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Hyundai, Kia, and Sony benefited from the repeated brand and ad exposure over the month-long
World Cup tournament.

3. To create or reinforce perceptions of key brand image associations — Events have associations that
help create or strengthen brand associations. To toughen its image and appeal to the American
cultural region, Toyota Tundra sponsors BASS fishing tournaments and has sponsored Brooks & Dunn
country music tours.

4. To enhance the corporate image — Sponsorship can improve perceptions that a company is likable
and prestigious. Although Visa views its long-standing Olympic sponsorship to enhance international
brand awareness and increase usage and volume, it also engenders patriotic goodwill and taps into
the emotional Olympic spirit.

5. To create experiences and evoke feelings — The feelings engendered by an exciting or rewarding
event may indirectly link to the brand. Audi models featured prominently in the 2010 blockbuster Iron
Man 2, including the main character Tony Stark’s R8 Spyder and the A8, Q5 and Q7 SUVs, and A3
hatchback. After a month-long marketing blitz, positive word of mouth doubled for the brand.

6. To express commitment to the community or social issues — Cause-related marketing sponsors

nonprofit organizations and charities. Firms such as Globe’s Gcash Forest (a charity program to battle
deforestation in the Philippines), SM’s Trash-to-Cash (a waste collection program to support earth
day), and San Miguel Corporation’s river clean-up and mangrove tree planting projects. These
companies have made their support of causes a vital cornerstone of their marketing programs.

7. To entertain key clients or reward key employees — Many events include lavish hospitality tents and
other special services or activities only for sponsors and guests. These perks arouse goodwill and
establish valuable business contacts. PLDT-Smart Philippines used its Ka-Partner Reward Program to
give back to its load retailers from all over the Philippines. The event includes fun games, exciting
prizes, and entertainment from today’s celebrities.
8. To permit merchandising or promotional opportunities — Many marketers tie contests or
sweepstakes, in-store merchandising, direct response, or other marketing activities with an event.
Ford and Coca-Cola have used their sponsorship of the popular TV show American Idol in this way.
Despite these potential advantages, the result of an event can still be unpredictable and beyond the
sponsor’s control. And although many consumers credit sponsors for providing the financial assistance to
make an event possible, some may resent its commercialization.
➢ Major Sponsorship decisions. Making sponsorships successful requires choosing the appropriate events,
designing the optimal sponsorship program, and measuring the effects of sponsorship.

A. Choosing events — Because there are so many expensive sponsorship options, many marketers are
becoming selective. The event must adhere to the brand’s marketing goals and communication plan.
The event needs to have the desired appearance and produce the required consequences. A perfect
event reflects or strengthens the sponsor’s brand or corporate image, is distinct but not overrun with
sponsors, and lends itself to auxiliary marketing initiatives.

B. Designing sponsorship programs — Many marketers think that an event sponsorship’s success
ultimately depends on the marketing strategy that goes with it. Spending on associated marketing

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initiatives should be at least two (2) to three (3) times the amount of the sponsorship expense. More
businesses are now utilizing their names to sponsor stadiums, arenas, and other locations where
events are held, investing billions of dollars in the naming rights to significant venues. However, like
any sponsorship, additional marketing initiatives should be prioritized.

C. Measuring sponsorship activities — The media coverage of an event is evaluated using supply-side
metrics, such as the length of time a brand is visible on television or the number of column inches of
press clippings that mention it. The cost of advertising a particular vehicle can be calculated based on
these possible “impressions.” The advertiser employs media time and space to spread a carefully
thought-out message.

D. Creating Experience. A large part of local, grassroots marketing is experiential marketing, which
communicates features and benefits and connects a product or service with unique and interesting
experiences. “The idea is not to sell something, but to demonstrate how a brand can enrich a
customer’s life.” Many firms create events and experiences for consumer and media interest and
involvement.

Public Relations (Kotler P. K., 2019)

A public is any group with an actual or potential interest in or impacts a company’s ability to achieve its
objectives. Public relations (PR) includes a variety of programs to promote or protect a company’s image or
individual products.
The wise company takes concrete steps to manage successful relationships with its key public. Most have a
public relations department that monitors the organization’s public attitudes and distributes information and
communications to build goodwill. The best PR departments counsel top management to adopt positive
programs and eliminate questionable practices so negative publicity doesn’t arise in the first place. They
perform the following five (5) functions:
1. Press relations — Presenting news and information about the organization in the most positive light.
2. Product publicity — Sponsoring efforts to publicize specific products.
3. Corporate communications — Promoting understanding of the organization through internal and
external communications.
4. Lobbying — Dealing with legislators and government officials to promote or defeat legislation and
regulation.
5. Counseling — Advising management about public issues, company positions, and image during good
times and bad.

➢ Marketing public relations. Many companies use marketing public relations (MPR) to support corporate
or product promotion and image-making. MPR goes beyond simple publicity and plays a vital role in the
following tasks:

• Launching new products. The remarkable one-time commercial success of toys such as LeapFrog,
Beanie Babies, and Silly Bandz owes a great deal to strong publicity.

• Repositioning mature products. In a classic PR case study, New York City had horrible press from
the 1970s until the “I Love New York” campaign.

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• Building interest in a product category. Companies and trade associations have used MPR to
rebuild interest in declining commodities such as eggs, milk, beef, and potatoes and to expand
consumption of such products as tea, pork, and orange juice.

• Influencing specific target groups. McDonald’s sponsors special neighborhood events in Latino
and African American communities to build goodwill.

• Defending products that have encountered public problems. PR professionals must be adept at
managing crises, such as those weathered by well-established brands such as Johnson & Johnson’s
cyanide-laced Tylenol capsules (1982), Jollibee’s fried towel Incident (2021), and Cherry Mobile’s
Trident Q300 model plagued with numerous software and hardware issues (2010).

• Building the corporate image in a way that reflects favorably on its products. The late Steve
Jobs’s heavily anticipated Macworld keynote speeches helped create an innovative, iconoclastic
image for Apple Corporation.
MPR is also effective in blanketing local communities and reaching specific groups, and it can be more
cost-effective than advertising. Increasingly, MPR takes place online, but it must be planned jointly with
advertising and other marketing communications. Creative public relations can affect public awareness at
a fraction of the cost of advertising.
The company does not pay for media space or time but only for staff to develop and circulate stories and
manage certain events. An interesting story picked up by the media can be worth millions of dollars in
equivalent advertising. Some experts say consumers are five (5) times more likely to be influenced by
editorial copy than by advertising.

➢ Major decision in Marketing Public Relations. When and how to use MPR, management must establish
the marketing objectives, choose the PR messages and vehicles, implement the plan, and evaluate the
results.
The main tools of MPR are:
• Publications: Companies rely extensively on published materials to reach and influence their target
markets. These include annual reports, brochures, articles, company newsletters and magazines, and
audiovisual materials.

• Events: Companies can draw attention to new products or other company activities by arranging and
publicizing special events such as news conferences, seminars, outings, trade shows, exhibits, contests
and competitions, and anniversaries to reach the target public.

• Sponsorships: Companies can promote their brands and corporate name by sponsoring and
publicizing sports and cultural events and highly regarded causes.

• News: One of the PR professionals’ major tasks is finding or creating favorable news about the
company, its products, and its people and getting the media to accept press releases and attend press
conferences.

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• Speeches: Increasingly, company executives must field questions from the media or give talks at trade
associations or sales meetings, and these appearances can build the company’s image.

• Public Service Activities: Companies can build goodwill by contributing money and time to good
causes.

• Identity Media: Companies need a visual identity that the public immediately recognizes. The visual
identity is carried by company logos, stationery, brochures, signs, business forms, business cards,
buildings, uniforms, and dress codes.
➢ Establishing objectives. MPR can build awareness by placing stories in the media to bring attention to a
product, service, person, organization, or idea. It can build credibility by communicating the message in
an editorial context. It can help boost sales force and dealer enthusiasm with stories about a new product
before it is launched. It can reduce promotion costs because MPR costs less than direct mail and media
advertising.

➢ Implementing the plan and evaluating results. MPR’s contribution to the bottom line is difficult to
measure because MPR is used along with other promotional tools. The easiest gauge of its effectiveness
is the number of exposures carried by the media. For example, how many people recall hearing the news
item? How many told others about it (a measure of word of mouth)? How many changed their minds after
hearing it?

References
Bhasin, K. (2011) 9 PR Fiascos That Were Handled Brilliantly By Management https://www.businessinsider.com/pr-
disasters-crisis-management-2011-5
Bueno, F.(2022) Going Green: 8 Companies Paying it Forward with Environmental Commitments in the Philippines.
https://pinoybuilders.ph/going-green-8-companies-with-environmental-commitments-in-the-philippines/
Kotler, P., Keller, K. L, Ang S.W., Tan C.T., Leong S.W. (2018). Marketing Management 7th Edition: An Asian Perspective.
Pearson Education Limited.
Kotler, P., Keller, K.L., Brady M., Goodman, M., Hansen T. (2019). Marketing Management 4th European Edition.
Pearson Education Limited.
Olandres, A. (2010) Cherry Mobile’s Trident plagued with problems. https://www.yugatech.com/mobile/cherry-mobiles-
trident-plagued-with-problems
Penalosa, G. (2021) Why is Jollibee still trending after its ‘Fried Towel’ incident? https://pop.inquirer.net/110788/why-is-
jollibee-still-trending-after-its-fried-towel-incident#ixzz7giSEE4J4
Smart Communications Inc. (2019) PLDT, Smart retailers win big at Ka-Partner Rewards 2019
https://smart.com.ph/About/newsroom/full-news/2019/08/19/pldt-smart-retailers-win-big-at-ka-partner-
rewards-2019

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