Principles of Marketing
Principles of Marketing
Chapter One
MARKETING: CREATING AND CAPTURING CUSTOMER VALUE
Chapter overview
• In broader sense, marketing is applied in every
aspect of life regarding the activities performed
by individuals and groups; profit oriented, and
non-profit organizations.
1. Introduction
The term marketing can be defined from different
perspectives. Many people think it means the
same as personal selling. Others think marketing
is the same as personal selling and advertising.
1.1. Definitions of Marketing
The major marketing mix tools are classified into four broad groups,
called the four Ps of marketing: product, price, place, and
promotion. To deliver on its value proposition, the firm must first
create a need-satisfying market offering (product).
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It must then decide how much it will charge for the offering
(price) and how it will make the offering available to target
consumers (place).
Finally, it must communicate with target customers about the
offering and persuade them of its merits (promotion). The
firm must blend each marketing mix tool into a
comprehensive integrated marketing program that
communicates and delivers the intended value to chosen
customers.
1.2.4. Building Customer Relationships
The first three steps in the marketing process—understanding
the marketplace and customer needs, designing a customer-
driven marketing strategy, and constructing a marketing
program—all lead up to the fourth and most important step:
building and managing profitable customer relationships.
Customer Relationship Management
Customer relationship management is perhaps the most
important concept of modern marketing. Some marketers
define it narrowly as a customer data management activity (a
practice called CRM). By this definition, it involves managing
detailed information about individual customers and carefully
managing customer touch points to maximize customer
loyalty.
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Most marketers, however, give the concept of customer
relationship management a broader meaning. In this broader
sense, customer relationship management is the overall
process of building and maintaining profitable customer
relationships by delivering superior customer value and
satisfaction. It deals with all aspects of acquiring, keeping, and
growing customers.
Relationship Building Blocks:
The key to building lasting customer relationships is to create
superior customer value and satisfaction. Satisfied customers
are more likely to be loyal customers and give the company a
larger share of their business.
Customer Relationship Levels and Tools
Companies can build customer relationships at many levels,
depending on the nature of the target market.
At one extreme, a company with many low-margin customers
may seek to develop basic relationships with them. For
example, Nike does not phone or call on all of its consumers
to get to know them personally.
Instead, Nike creates relationships through brand-building
advertising, public relations, and its numerous websites.
At the other extreme, in markets with few customers and high
margins, sellers want to create full partnerships with key
customers.
For example, Nike sales representatives work closely with the
Sports Authority, Dick’s Sporting Goods, Foot Locker, and
other large retailers.
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In between these two extremes, other levels of customer
relationships are appropriate.
Beyond offering consistently high value and satisfaction,
marketers can use specific marketing tools to develop
stronger bonds with customers.
For example, many companies offer frequency marketing
programs that reward customers who buy frequently or
in large amounts.
Other companies sponsor club marketing programs that
offer members special benefits and create member
communities.
The Changing Nature of Customer Relationships
Significant changes are occurring in the ways companies
relate to their customers.
Yesterday’s companies focused on mass marketing to all
customers at arm’s length.
Today’s companies are building deeper, more direct, and
lasting relationships with more carefully selected customers.
Here are some important trends in the way companies and
customers are relating to one another:
Relating with more carefully selected customers uses selective
relationship management to target fewer, more profitable
customers.
Relating more deeply and interactively by incorporating more
interactive two way relationships through websites, online
communities and social networks.
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Customer-managed relationships Customers, empowered by
today’s new digital technologies, interact with companies and
each other to shape their relationships with brands.
Partner relationship management involves working closely
with partners in other company departments and outside the
company to jointly bring greater value to customers.
Marketers connect with their suppliers, channel partners, and
competitors by developing partnerships. Supply chain is a
channel that stretches from raw materials to components to
final products to final buyers
1.2.5. Capturing Value from Customers
Losing a customer means losing more than a single sale. It
means losing the entire stream of purchases that the
customer would make over a lifetime of patronage.
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The final step in the marketing process involves capturing value in
return in the form of sales, market share, and profits. By creating
superior customer value, the firm creates highly satisfied
customers who stay loyal and buy more. This, in turn, means
greater long-run returns for the firm. Here, we discuss the
outcomes of creating customer value: customer loyalty and
retention, share of market and share of customer, and customer
equity.
Creating Customer Loyalty and Retention
Customer lifetime value is the value of the entire stream of
purchases that the customer would make over a lifetime of
patronage.
Growing Share of Customer
Beyond simply retaining good customers to capture customer
lifetime value, good customer relationship management can help
marketers increase their share of customer—the share they get
of the customer’s purchasing in their product categories.
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To increase share of customer, firms can offer greater variety
to current customers. Or they can create programs to cross-sell
and up-sell to market more products and services to existing
customers.
Customer Equity
The value of a company comes from the value of its current
and future customers.
Customer relationship management takes a long-term view.
Companies want not only to create profitable customers but
also “own” them for life, earn a greater share of their
purchases, and capture their customer lifetime value.
The ultimate aim of customer relationship management is to
produce high customer equity.
Customer equity is the total combined customer lifetime
values of all of the company’s current and potential customers.
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As such, it’s a measure of the future value of the company’s
customer base.
Clearly, the more loyal the firm’s profitable customers, the
higher its customer equity.
Customer equity may be a better measure of a firm’s
performance than current sales or market share.
Whereas sales and market share reflect the past, customer
equity suggests the future.
Marketers should care not just about current sales and market
share. Customer lifetime value and customer equity are the
name of the game.
Building Customer Equity
Right relationships with the right customers involves treating
customers as assets that need to be managed and maximized
Different types of customers require different relationship
management strategies
Chapter Two
III. New Task-a company buying a product or service for the first
time faces a new task situation. In such cases, the greater the
cost or risk, the larger will be the number of decision
participants and the greater their efforts to collect
information. The new-task situation is the marketer's greatest
opportunity and challenge.
3.2.3. The Buying Center
• The buying center includes all members of the organization
who play any of seven roles in the purchase decision process.
1. Initiators- those who request that something be purchased.
They may be users or others in the organization.
2. Users- those who will use the product or service. In many
cases, the users initiate the buying proposal and help define
the product requirements.
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3. Influencers- people who influence the buying decision. They often
help define specifications and also provide information for
evaluating alternatives. Technical personnel are particularly
important influencers.
4. Deciders- people who decide on product requirements or on
suppliers.
5. Approvers- people who authorize the proposed actions of deciders
or buyers.
6. Buyers- people who have formal authority to select the supplier and
arrange the purchase terms. Buyers may help shape product
specifications, but they play their major role in selecting vendors
and negotiating. In more complex purchases, the buyers might
include high-level managers.
7. Gatekeepers- people who have the power to prevent sellers or
information from reaching members of the buying center. For
example, purchasing agents, receptionists, and telephone operators
may prevent salespersons from contacting users or deciders.
3.2.4. The Process of Organizational Buying
• Externally the buyer may get new ideas at a trade show, see an ad,
or receive a call from a sales representative who offers a better
product or a lower price. Business marketers can stimulate problem
recognition by direct mail, telemarketing, and calling on prospects.
2. General Need Description and Product Specification
• Next, the buyer determines the needed item's general
characteristics and required quantity. For standard items, this is
simple. For complex items, the buyer will work with others—
engineers, users—to define characteristics like reliability, durability,
or price.
3. Supplier Search
• The buyer next tries to identify the most appropriate suppliers
through trade directories, contacts with other companies,
trade advertisements, and trade shows. Business marketers
also put products, prices, and other information on the
Internet.
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4. Proposal Solicitation
• The buyer invites qualified suppliers to submit proposals. If
the item is complex or expensive, the buyer will require a
detailed written proposal from each qualified supplier. After
evaluating the proposals, the buyer will invite a few suppliers
to make formal presentations.
5. Supplier Selection
• Before selecting a supplier, the buying center will specify
desired supplier attributes and indicate their relative
importance. Business marketers need to do a better job of
understanding how business buyers arrive at their
evaluations. The choice and importance of different attributes
varies with the type of buying situation.
• Delivery reliability, price, and supplier reputation are
important for routine-order products.
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• For procedural-problem products, such as a copying machine,
the three most important attributes are technical service,
supplier flexibility, and product reliability.
6. Order-Routine Specification
• After selecting suppliers, the buyer negotiates the final order,
listing the technical specifications, the quantity needed, the
expected time of delivery, return policies, warranties, and so
on.
7. Performance Review
• The buyer periodically reviews the performance of the chosen
supplier(s).
• The performance review may lead the buyer to continue,
modify, or end a supplier relationship.
Chapter Four
3. Niche Marketing
• Niche marketing focuses on subgroups within these segments.
A niche is a more narrowly defined group, usually identified
by dividing a segment into subsegments or by defining a
group with a distinctive set of traits who may seek a special
combination of benefits.
• Whereas segments are fairly large and normally attract
several competitors, niches are smaller and normally attract
only one or a few competitors.
• Niching offers smaller companies an opportunity to compete
by focusing their limited resources on serving niches that may
be unimportant to or overlooked by larger competitors.
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4. Micro Marketing
• Segment and niche marketers tailor their offers and marketing
programmes to meet the needs of various market segments.
At the same time, however, they do not customize their offers
to each individual customer.
• Micromarketing is the practice of tailoring products and
marketing programmes to suit the tastes of specific
individuals and locations. Micromarketing includes local
marketing and individual marketing.
Local Marketing- Local marketing involves tailoring brands
and promotions to the needs and wants of local customer
groups - cities, neighborhoods and even specific stores.
Some Drawbacks of Local Marketing
• It can drive up manufacturing and marketing costs by reducing
economies of scale.
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• It can also create logistical problems as companies try to meet the
varied requirements of different regional and local markets.
• Moreover, a brand's overall image may be diluted if the product
and message vary in different localities.
Some Advantages of Local Marketing
• Local marketing helps a company to market more effectively in the
face of pronounced regional and local differences in community
demographies and lifestyles.
• It also meets the needs of the company's 'first-line customers' -
retailers — who prefer more fine-tuned product assortments for
their neighborhoods.
Individual Marketing-In the extreme, micromarketing becomes
individual marketing tailoring products and marketing programmes
to the needs and preferences of individual customers. Individual
marketing has also been labelled 'markets-of-one marketing',
'customized marketing' and 'one-to-one marketing'.
Segmenting Consumer Markets
C. Psychographic Segmentation
Psychographic segmentation divides buyers into groups based
on social class, lifestyle or personality characteristics. People
in the same demographic group can have very different
psychographic make-ups.
D. Behavioral Segmentation
Behavioral segmentation divides buyers into groups based on
their knowledge, attitudes, uses or responses to a product.
Many marketers believe that behavior variables are the best
starting point for building market segments.
Behavior variables for segmenting a market include the
following: occasions, benefits sought, user status, usage rate,
loyalty status
Segmenting Consumer Markets…
Occasions
Buyers can be grouped according to occasions when they get
the idea to buy, make their purchase or use the purchased item.
Occasion segmentation can help firms build up product usage.
For example, most people drink orange juice at breakfast, but
orange growers have promoted drinking orange juice as a cool
and refreshing drink at other times of the day.
Benefits sought- A powerful form of segmentation is to group
buyers according to the different benefits that they seek from
the product.
User status-Some markets are segmented into non-users, ex-
users, potential users, first-time users and regular users of a
product. Potential users and regular users may require different
kinds of marketing appeal.
Segmenting Consumer Markets…
• Clearly, there are many ways to segment a market, but not all
segmentations are effective. To be useful, market segments
must have the following characteristics: measurability,
accessibility, substantiality, and actionability.
I. Measurability- The size, buying power and profiles of the
segments need measuring. Certain segmentation variables
are difficult to measure. For example, there arc 30 million left-
handed people in Europe – almost equaling the entire
population of Canada - yet few firms target them.
II. Accessibility-Can market segments be effectively reached and
served?
III. Substantiality-The market segments should be large or
profitable enough to serve. A segment should be the largest
possible homogeneous group worth pursuing with a tailored
marketing programme.
Requirements for Effective Segmentation
IV. Actionability-Effective programmes need to attract and serve
the segments.
4.2. Market Targeting
Marketing segmentation reveals the firm's market-segment
opportunities. The firm now has to evaluate the various
segments and decide how many and which ones to target. At
this point, we will look at how companies evaluate and select
target segments.
Evaluating Market Segments
In evaluating different market segments, a firm must look at
two dimensions: segment attractiveness and company fit.
Segment Attractiveness
The company must first collect and analyze data on current
sales value, projected sales-growth rates and expected profit
margins for the various segments.
Segment Attractiveness…
Differentiated Marketing
Using a differentiated marketing strategy, a firm decides to
target several market segments and designs separate offers
for each.
Differentiated marketing typically creates more total sales
than does undifferentiated marketing.
Concentrated Marketing
A third market-coverage strategy, concentrated marketing, is
especially appealing when company resources are limited.
Instead of going after a small share of a large market, the firm
goes after a large share of one or a few submarkets.
Concentrated marketing is an excellent way for small new
businesses to get a foothold against larger competitors.
Segment Strategy…
What is a product?
• Many people think a product is a tangible offering, but it can
be more than that. Broadly, a product is anything that can be
offered to a market for attention, acquisition, use, or
consumption that might satisfy a want or need. It includes
physical goods, services, experiences, events, persons, places,
properties, organizations, information, and ideas.
5.1.1 Levels of Product and Services
• Product planners need to think about products and services
on three levels. Each level adds more customer value.
1. Core customer value, which addresses the question: What is
the buyer really buying? A hotel guest is buying rest and
sleep,
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2. Actual product. Which includes; product and service features,
design, a quality level, a brand name, and packaging. It is the
product that delivers the core customer value.
3. Augmented product, which is created around the core benefit
and actual product by offering additional consumer services
and benefits.
Consumers see products as complex bundles of benefits that
satisfy their needs.
When developing products, marketers first must identify the
core customer value that consumers seek from the product.
They must then design the actual product and find ways to
augment it in order to create this customer value and the
most satisfying customer experience.
5.2.1 Product Classifications
What Is A Price?
• In the narrowest sense, price is the amount of money charged
for a product or service.
• More broadly, price is the sum of all the values that customers
give up in order to gain the benefits of having or using a
product or service.
• Price is the only element in the marketing mix that produces
revenue. It is also one of the most flexible marketing mix
elements.
5.2.1 Pricing Strategies
The firm has to consider many factors in setting its pricing
policy. The factors can broadly be classified as internal and
external factors. Internal factors includes: the firms overall
marketing strategies, objectives, marketing mixes, and costs.
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• For example, General Motors sells its cars through more than
8,000 dealer outlets in North America alone. Even General
Motors would be hard-pressed to raise the cash to buy out its
dealers.
Producers who do establish their own channels can often earn
a greater return by increasing investment in their main
business. If a company earns a 20 percent rate of return on
manufacturing and a 10 percent return on retailing, it does not
make sense to do its own retailing.
In some cases direct marketing simply is not feasible. It would
not be practical to establish small retail gum shops throughout
the world or to sell gum by mail order.
It would have to sell gum along with many other small products
and would end up in the drugstore and grocery store business.
It is easier to work through the extensive network of privately
owned distribution organizations.
5.4.2 Channel Functions and Flows
• A marketing channel performs the work of moving goods from
producers to consumers. It overcomes the time, place, and
possession gaps that separate goods and services from those
who need or want them. Members of the marketing channel
perform a number of key functions:
They gather information about potential and current
customers, competitors, and other actors and forces in the
marketing environment.
They develop and disseminate persuasive communications to
stimulate purchasing.
They reach agreement on price and other terms so that
transfer of ownership or possession can be effected.
They place orders with manufacturers and acquire the funds
to finance inventories at different levels in the marketing
channel.
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They assume risks connected with carrying out channel work.
They provide for the successive storage and movement of physical
products.
They provide for buyers’ payment of their bills through banks and
other financial institutions.
They oversee actual transfer of ownership from one organization
or person to another
• Some functions (physical, title, promotion) constitute a forward
flow of activity from the company to the customer; other
functions (ordering and payment) constitute a backward flow
from customers to the company. Still others (information,
negotiation, finance, and risk taking) flow in both directions.
5.4.3 Channel Levels
• The producer and the final customer are part of every channel.
We will use the number of intermediary levels to designate the
length of a channel.
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• A zero-level channel (also called a direct-marketing channel)
consists of a manufacturer selling directly to the final customer.
The major examples are door-to-door sales, home parties, mail
order, telemarketing, TV selling, Internet selling, and
manufacturer-owned stores.
• A one-level channel contains one selling intermediary, such as a
retailer. A two-level channel contains two intermediaries. In
consumer markets, these are typically a wholesaler and a
retailer. A three-level channel contains three intermediaries. In
the meatpacking industry, wholesalers sell to jobbers, who sell to
small retailers.
• An industrial-goods manufacturer can use its sales force to sell
directly to industrial customers; or it can sell to industrial
distributors, who sell to the industrial customers; or it can sell
through manufacturer’s representatives or its own sales
branches directly to industrial customers, or indirectly to
industrial customers through industrial distributors.
5.4.4 Channel-Design Decisions