Chapter 13

Marketing played an important role in Daimler Chrysler’s successful launch of its 300M. Marketing is the process of getting the right goods or services to the right people at the right place, time, and price, using the right promotion techniques. The concept is referred to as the “right” principle.

We can say that marketing is finding out the needs and wants of potential buyers and customers and then providing goods and services that meet or exceed their expectations.

Marketing is about creating exchanges. An exchange takes place when two parties give something of value to each other to satisfy their respective needs. In a typical exchange, a consumer trades money for a good or service.

To encourage exchanges, marketers follow the “right” principle. If your local Daimler Chrysler dealer doesn’t have the right car for you when you want it, at the right price, you will not exchange money or credit for a new car. Think about the last exchange (purchase) you made: What if the price had been 30 percent higher? What if the store or other source had been less accessible? Would you have bought anything? The “right” principle tells us that marketers control many factors that determine marketing success. In this chapter, you will learn about the marketing concept and how organizations create a marketing strategy. You will learn how the marketing mix is used to create sales opportunities. Next, we examine how and why consumers and organizations make purchase decisions. Then, we discuss the important concept of market segmentation, which helps marketing managers focus on the most likely purchasers of their wares. We conclude the chapter by examining how marketing research and decision support systems help guide marketing decision making.

If you study today’s best organizations, you’ll see that they have adopted the marketing concept, which involves identifying consumers needs and then producing goods or services that will satisfy them while making a profit. The marketing concept is oriented toward pleasing consumers by offering value. Specifically, the marketing concept involves:

Today, companies of every size in all industries are applying the marketing concept. McDonald’s, for example, found that burger eaters like to determine what’s on their burger rather than buying a hamburger that is already dressed in a heated bin. Now, its restaurants deliver fresh sandwiches made to order. After McDonald’s changed its procedures to satisfy this customer need, its sales rose 9 percent and profits increased 25 percent.

Firms have not always followed the marketing concept. Around the time of the Industrial Revolution in America (1860-1910), firms had a production orientation, which meant that they worked to lower production costs without a strong desire to satisfy the needs of their customers. To do this, organizations concentrated on mass production, focusing internally on maximizing the efficiency of operations, increasing output, and ensuring uniform quality. They also asked such questions as What can we do best? What can our engineers design? What is economical and easy to produce with our equipment?

There is nothing wrong with assessing a firms capabilities. In fact, such assessments are necessary in planning. But the production orientation does not consider whether what the firm produces most efficiently also meets the needs of the marketplace. By implementing the marketing concept, an organization looks externally to the customers in the marketplace and commits to customer value, customer satisfaction, and relationship marketing as explained in this section.

Customer value is the ratio of benefits to the sacrifice necessary to obtain those benefits. The customer determines the value of both the benefits and the sacrifices. Creating customer value is a core business strategy of many successful firms. Customer value is rooted in the belief that price is not the only thing that matters. A business that focuses on the cost of production and price to the customer will be managed as though it were providing a commodity differentiated only by price. In contrast, businesses that provide customer value believe that many customers will pay a premium for superior customer service.

Customer satisfaction is the customer’s feeling that a product has met or exceeded expectations. New York State Electric and Gas Corp. says that its top priority is customer satisfaction. “We’re committed to providing superior customer service and earning the customers’ business every day,” said Ralph Tedesco, senior vice-president of the Customer Service Business Unit. “We’re very proud that our customers acknowledge our restoration efforts following devastating storms and give us high marks for customer service.”

Relationship marketing is a strategy that focuses on forging long-term partnerships with customers. Companies build relationships with customers by offering value and providing customer satisfaction. Companies benefit from repeat sales and referrals that lead to increases in sales, market share, and profits. Costs fall because it is less expensive to serve existing customers than to attract a new ones. Keeping a customer costs about one-fourth of what it costs to attract a new customer, and the probability of retaining a customer is over 60 percent, whereas the probability of landing a new customer is less than 30 percent.

Customers also benefit from stable relationships with suppliers. Business buyers have found that partnerships with their suppliers are essential to producing high-quality products while cutting costs. Customers remain loyal to firms that provide them greater value and satisfaction than they expect from competing firms.

There is no secret formula for creating goods and services that provide customer value and customer satisfaction. An organization that is committed to providing superior customer satisfaction puts customers at the very center of its marketing strategy. Creating a customer focused marketing strategy involves four main steps: understanding the external environment, defining the target market, creating a competitive advantage, and developing a market mix. This section will examine the first three steps, and the next section will discuss how a company develops a marketing mix.

Unless marketing managers understand the external environment, a firm cannot intelligently plan for the future.

Thus, many organizations assemble a team of specialists to continually collect and evaluate environmental information, a process called environmental scanning. The goal in gathering the environmental data is to identify future market opportunities and threats.

For example, as technology continues to blur the lines between personal computers, television, and compact disc players, a company like Sony may find itself competing against a company like Compaq. Research shows that children would like more games bundled with computer software, while adults desire various types of word-processing and business-related software. Is this information an opportunity or a threat to Compaq marketing managers?

Managers and employees focus on providing value for a well-defined target market. The target market is the specific group of consumers toward which a firm directs its marketing efforts. It is selected from the larger overall market. For instance, Carnival Cruse Lines says its main target market is “blue-collar entrepreneurs,” people with an income of $25,000 to $50,000 a year who own auto supply shops, dry cleaners, and the like. Unlike other cruse lines, it does not seek affluent retirees. Quaker Oats targets its grits to blue-collar consumers in the South. Kodak targets Ektar color print film, designed for use only in rather sophisticated cameras, to advanced amateur photographers. The Limited, Inc. has several different types of stores, each for a distinct target market: Express for trendy younger women, Lerner for budget-conscious women, and Henri Bendel’s for upscale, high-fashion women. These target markets are all part of the overall market for women’s clothes.

A competitive advantage, also called a differential advantage, is a set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competition. As Andrew Grove, CEO of Intel, says, “You have to understand what it is you are better at than anybody else and mercilessly focus you efforts on it.” Competitive advantage is the factor or factors that cause customers to patronize a firm and not the competition. There are three types of competitive advantage: cost, product/service differential, and niche.

A firm that has a cost competitive advantage can produce a product or service at a lower cost than all its competitors while maintaining satisfactory profit margins. Firms become cost leaders by obtaining inexpensive raw materials, making plant operations more efficient, designing products of ease of manufacture, controlling overhead costs, and avoiding marginal customers. Dupont, for example, has an exceptional cost competitive advantage in the production of titanium dioxide. Technicians created a production process using low-cost feedstock that gives Dupont a 20 percent cost advantage over its competitors. The cheaper feedstock technology is complex and can be accomplished only by investing about $100 million and several years of testing time.

A cost competitive advantage enables a firm to deliver superior customer value. Chaparral Steel, for example, is the leading low-cost U.S. steel producer because it uses only scrap iron and steel and a very different continuous-casting process to make new steel. In fact, Chaparral is so efficient that it is the only U.S. steel producer that ships to Japan. Fort Howard uses only recycled pulp, rather than the more expensive virgin pulp, to make toilet paper and other products. The quality, however, is only acceptable to the commercial market, such as office buildings, hotels, and restaurants. Therefore, the company does not try to sell to the home market through grocery stores.

A product/service differential competitive advantage exists when a firm provides something unique that is valuable to buyers beyond simply offering a low price. Differential competitive advantages tend to be longer lasting than cost competitive advantages because cost advantages fail to last for two reasons. For one thing, technology is transferable. For example, Bell Labs invented fiber optic cable that reduced the cost of voice and data transmission by dramatically increasing the number of call that could be transmitted simultaneously through a two-inch cable. Within five years, however, fiber optic technology had spread throughout the industry. Second, for most production processes or product categories (e.g., running shoes and laptop computers), there are alternative suppliers. Overtime, the high-cost producers tend to seek out lower-cost suppliers and they can compete more effectively with the industry’s low-cost producers.

The durability of a differential competitive advantage tends to make this strategy more attractive to many top managers. Common differential advantages are brand names (Lexis), a strong dealer network (Caterpillar Tractor for construction work), productivity reliability (Maytag washers), Image (Neiman Marcus in retailing), and service (Federal Express). Brand names such as Coca-Cola, BMW, and Cartier stand for quality the world over. Through continual product and marketing innovations and attention to quality and value, managers at these organizations have created enduring competitive advantages.

A company with a niche competitive advantage targets and effectively serves a single segment of the market within a limited geographic area. For small companies with limited resources that potentially face giant competitors, “niche-ing” may be the only viable option. A market segment that has good growth potential but is not crucial to the success of major competitors is a good candidate for niche strategy. Once a potential segment has been identified, the firm needs to make certain it can defend against challengers through its superior ability to serve buyers in the segment. For example, Pea-in-the-Pod is a small chain of retail stores that sells maternity clothes. Its quality materials, innovative designs, and reasonable prices serve as a barrier against competition.

Once a firm has defined its target market and identified its competitive advantage, it can create the marketing mix, that is, the blend of product offering, pricing, promotional methods, and distribution system that brings a specific group of customers superior value.

Distribution is sometimes referred to as place, so the marketing mix is based on the four Ps: product, price, promotion, and place. Every target market requires a unique marketing mix to satisfy the needs of the target customers and meet the firm’s goals. A strategy must be constructed for each of the four Ps and blended with the strategies for the other elements. Thus, the marketing mix is only as good as its weakest part. An excellent product with a poor distribution system could be doomed to failure.

A successful marketing mix requires careful tailoring. For instance, at first glance you might think that McDonald’s and Wendy’s have roughly the same marketing mix. After all, they are both in the fast-food business. But McDonald’s targets parents with young children through Ronald McDonald, heavily promoted children’s Happy Meals, and playgrounds. Wendy’s is targeted to a more adult crowd. Wendy’s has no playgrounds but it does have carpeting (a more adult atmosphere), and it pioneered fast-food salad bars.

Marketing strategy typically starts with the product. You can’t plan a distribution system or set a price if you don’t know what you’re going to market.

Marketers use the term product to refer to both goods, such as tires, stereos, and clothing, and services, such as hotels, hair salons, and restaurants.

Thus, the heart of the marketing mix is the good or service. Creating a product strategy involves choosing a brand name, packaging, colors, a warranty, accessories, and a service program.

Marketers view products in a much larger context than you might imagine. The include not only the item itself but also the brand name and the company image. The names Yves St. Laurent and Gucci, for instance, create extra value for everything from cosmetics to bath towels. That is, products with those names sell at higher prices than identical products with the names. We buy things not only for what they do, but also for what they mean. (Product strategies are discussed further in Chapter 14.)

Pricing strategy is based on demand for the product and the cost of producing it. Some special considerations can also influence the price. Sometimes, for instance, a special introductory price is used to get people to try a new products. Some firms enter the market with low prices and keep them low, such as Carnival Cruse Lines and Suzuki cars. Others enter a market with very high prices and then lower them over time, such as producers of high-definition televisions and personal computers. (You can learn more about pricing strategies in Chapter 14.)

Distribution is the means (channel) by which a product flows from the producer to the consumer. One aspect of distribution strategy is deciding how many stores and which specific wholesalers and retailers will handle the product in a geographical area. Cosmetics, for instance, are distributed in many different ways. Avon has a sales force of several hundred thousand representatives who call directly on customers. Clinique and Estee Lauder are distributed through select department stores. Cover Girl and Del Laboratories use mostly chain drugstores and other mass merchandisers. Redken sells through beauticians. Revlon uses several of these distribution channels. (Distribution is examined in detail in Chapter 15.)

Many people feel that promotion is the most exciting part of the marketing mix. Promotional strategy covers personal selling, advertising, public relations, and sales promotion. Each element is coordinated with the others to create a promotional blend. An advertisement, for instance, helps a buyer get to know the company and paves the way for a sales call. A good promotion strategy can dramatically increase a firm’s sales. (Promotion is the topic of Chapter 16.)

Public relations plays a special role in promotion. It is used to create a good image of the company and its products. Bad publicity costs nothing to send out, but it can cost a firm a great deal in lost business. Good publicity, such as a television or magazine story about a firm’s new product, may be the result of much time, money, and effort spent by a public relations department.

Sales promotion directly stimulates sales. it includes trade shows, catalogs, contests, games, premiums, coupons, and special offers. McDonald’s contests offering money and food prizes are an example. The company also issues discount coupons from time to time.

Profit oriented companies are not the only ones that analyze the marketing environment, find a competitive advantage, and create a marketing mix. The application of marketing principles and techniques is also vital to not-for-profit groups organizations. Marketing helps not-for-profit groups identify target markets and develop effective marketing mixes. In some cases, marketing has kept symphonies, museums, and other cultural groups from having to close their doors. In other organizations, such as the American Heart Association and the U.S. Army, marketing ideas and techniques have helped managers do their jobs better. The army, for instance, has identified the most effective ways to get men and women between the ages of 18 and 24 to visit a recruiter.

In the private sector, the profit motive is both an objective for guiding decisions and a criterion for evaluating results. Not-for-profit organizations do not seek to make a profit for redistribution to owners or shareholders. Rather, their focus is often on generating enough funds to cover expenses. For example, the Methodist Church does not gauge its successes by the amount of money left in offering plates. The museum of Science and Industry does not base its performance evaluations on the dollar value of tokens put into the turnstile.

Not-for-profit marketing is also concerned with social marketing, that is, the application of marketing to social issues and causes. The goals of social marketing are to effect social change (for instance, by helping the homeless), and evaluate the relationship between marketing and society (for instance, by asking whether society should allow advertising on television shows for young children). Individual organizations also engage social marketing. The Southern Baptist Radio and Television Convention promotes brotherhood and goodwill by promoting religion and good deeds. M.A.D.D. counsels against drunk driving, and the National Wildlife Federation asks your help in protecting endangered animals and birds.

Buyer behavior is the actions people take in buying and using goods and services. Marketers who understand buyer behavior, such as how a price increase will affect a product’s sales, can create a more effective marketing mix.

To understand buyer behavior, marketers must understand how customers make buying decisions. The decision-making process has several steps, which are shown in Exhibit 13-3. Then entire process is affected by a number of personal and social factors.

A buying decision starts (step 1) with a stimulus. A stimulus is anything that affects one or more of our senses (sight, smell, taste, touch, or hearing). A stimulus might be the feel of a sweater, the sleek shape of a new-model car, the design on a package, or a brand name mentioned by a friend.

The stimulus leads to problem recognition (step 2): “This sweater feels so soft and looks good on me. Should I buy it?” In other words, the consumer decides that there is a purchase need.

The consumer next gets information about the price (step 3). What other styles of sweaters are available? At what price? Can this sweater be bought at a lower price elsewhere?

Next, the consumer weighs the options and decides whether to make the purchase (step 4).

If the consumer buys the product (step 5), certain outcomes are expected. These outcomes may or may not become reality: the sweater may last for years, or the shoulder seams may pull out the first time it is worn.

Finally, the consumer assesses the experience with the product (step 6) and uses this information to update expectations about future purchases (step 7).

As Exhibit 13-3 shows, individual and social factors can influence the consumer decision-making process. Individual factors are within the consumer and are unique to each person. They include perception, beliefs and attitudes, values, learning, self-concept, and personality. Companies often conduct research to better understand individual factors that cause consumers to buy or not to buy. For instance, Hyatt Hotels found that people who stayed at Hyatt while on business chose other hotels when they traveled on vacation with their children. Hyatt was perceived as a businessperson’s hotel. So Hyatt came up with a program called Camp Hyatt, which caters to children with a year-round program that varies by season. It combines attractive rates that appeal to parents with lots of activities for kids.

Social factors that affect the decision-making process include all interactions between a consumer and the external environment: family, opinion leaders, social class, and culture. Families may be the most important of these social factors. Yet families have limited resources, so many buying decisions are compromises. Since a number of decisions include input from several family members, marketing managers sometimes promote products using a family theme, such as Camp Hyatt.

Business buyer behavior and business markets are different from consumer markets. Business markets include institutions such as hospitals and schools, manufacturers, wholesalers and retailers, and various branches of government.

The key difference between a consumer product and a business product is the intended use. If you purchase a certain model Dell computer for your home so you can surf the internet, it is a consumer good. If a purchasing agent for MTV buys exactly the same computer for an MTV script writer, it is a business good. Why? The reason is that MTV is a business, so the computer will be used in a business environment.

The main differences between consumer markets and business markets are as follows:

quantities than consumers. Think how many truckloads of sugar Mars must purchase to make one day’s output of M&Ms. Imagine the number of batteries Sears buys each day for resale to consumers. Think of the number of pens the federal government must use each day.

fewer customers than consumer marketers. As a result, it is much easier to identify prospective buyers and monitor current needs. Think about how few customers for airplanes or industrial cranes there are compared to the more than 70 million consumer households in the United States.

geographically concentrated than consumers. The computer industry is concentrated in Silicon Valley and a few other areas. Aircraft manufacturing is found in Seattle, St. Louis, and Dallas/Fort Worth. Suppliers to these manufacturers of locate close to the manufacturers to lower distribution costs and facilitate communication.

the buyer because such sales frequently involve large quantities or custom-made items like heavy machinery. Consumer goods are more likely to be sold through intermediaries like wholesalers and retailers.

buyers usually approach purchasing rather formally. Businesses use professionally trained purchasing agents or buyers who spend their entire career purchasing a limited number of items. They get to know the items and the sellers quite well.

The study of buyer behavior helps marketing managers better understand why people make purchases.

To identify the target markets that may be most profitable for the firm, managers use market segmentation, which is the process of separating, identifying, and evaluating the layers of a market to design a marketing mix. For instance, a target might be segmented into two groups: families with children and families without children. Families with young children are likely to buy hot cereals and presweetened cereals. Families with no children are more likely to buy health-oriented cereals. You can be sure that cereal companies plan their marketing mixes with this difference in mind. A business market may be segmented by large customers and small customers or by geographic area.

The five forms of consumer market segmentation are demographic, geographic, psychographic, benefit, and volume. Their characteristics are summarized in Exhibit 13-4, page 395, and discussed in the following sections.

Demographic segmentation uses categories such as age, education, gender, income, and household size to differentiate among markets. This form of market segmentation is the most common. The U.S. Census Bureau provides a great deal of demographic data. For example, marketing researchers can use census data to find areas within cities that contain high concentrations of high-income consumers, singles, blue-collar workers, and so forth.

You don’t have to be an adult to have market clout. One study found that aggregate spending by or on behalf of children ages 4 to 12 roughly doubled every decade in the 1960s, 1970s, and 1980s. It tripled in the 1990s to more than $24 billion. And whereas children in the 1960s spent almost all of their money on candy, today only one-third of the money goes to food and drink, with the balance spent on toys, clothes, movies, and games.

Mature Americans (those born before 1945), baby boomers (consumers born between 1946 and 1967), and Generation Xers (younger consumers born between 1968 and 1979) all have different needs, tastes, and consumption patterns. Exhibit 13-5, page 396, shows some of the generational differences; note that baby boomers tend to be more nostalgic and prefer the old to the new, whereas Generation Xers tend to be video oriented and would rather see a movie than read the book.

Certain markets are segmented by gender. These include clothing, cosmetics, personal care items, magazines, jewelry, and footwear.

…Income is another popular way to segment markets. Income level influences consumer’s wants and determines their buying power. Housing, clothing, automobiles, and alcoholic beverages are among the many markets segmented by income. Budget Gourmet frozen dinners are targeted to lower-income groups whereas the Le Menu line is aimed at higher-income consumers.

Geographic segmentation means segmenting markets by region of the country, city or county size, market density, or climate.

Market density is the number of people or businesses within a certain area. Many companies segment their markets geographically to meet regional preferences and buying habits. Pizza Hut, for instance, gives easterners extra cheese, westerners more ingredients, and Midwesterners both. Both Ford and Chevrolet sell more pickup trucks and truck parts in the middle of the country than on either coast. The well-defined “pickup truck belt” runs from the upper Midwest south through Texas and the Gulf states. Ford “owns” the northern half of this truck belt, and Chevrolet the southern half.

Race, income, occupation, and other demographic variables help in developing strategies but often do not paint the entire picture of consumer needs.

Demographics provide the skeleton, but psychographics add the meat to the bones. Psychographic segmentation is market segmentation by personality or lifestyle. People with common activities, interests, and opinions are grouped together and given a “lifestyle name.”

Benefit segmentation is based on what a product will do rather than on consumer characteristics. For years Crest toothpaste was targeted toward consumers concerned with preventing cavities. Recently, Crest subdivided its market. It now offers regular Crest, Crest Tartar Control for people who want to prevent cavities and tartar build-up, Crest for kids with sparkles that taste like bubble gum, and another Crest that prevents gum disease. Another toothpaste, Topol, targets people who what whiter teeth—teeth without coffee, tea, or tobacco stains. Sensodyne toothpaste is aimed at people with highly sensitive teeth.

The fifth main type of segmentation is volume segmentation, which is based on the amount of the product purchased. Just about every product has heavy, moderate, and light users, as well as nonusers. Heavy users often account for a very large portion of a product’s sales. Thus, a firm might want to target its marketing mix to the heavy user segment. Kraft recently ran a $30 million advertising campaign directed at heavy users of Miracle Whip. A heavy user consumes 550 servings or 17 pounds of Miracle Whip a year.

Retailers are aware that heavy shoppers not only spend more, but also visit each outlet more frequently than other shoppers. Heavy shoppers visit the grocery store 122 times per year, compared with 93 annual visits for the medium shopper. They visit discount stores more than twice as often as medium shoppers, and they visit convenience/gas stores more than five times as often. On each trip, they consistently spend more than their medium-shopping counterparts.

How do successful companies learn what their customers value? Through marketing research, companies can be sure they are listening to the voice of the customer. Marketing research is the process of planning, collecting, and analyzing data relevant to a marketing decision. The results of this analysis are then communicated to management. The information collected through marketing research includes the preferences of customers, the perceived benefits of products, and consumer lifestyles. Research helps companies make better use of their marketing budgets. Marketing research has a range of uses from fine-tuning products to discovering whole new market concepts.

For example, everything at the Olive Garden restaurant chain from the décor to the wine list is based on marketing research. Each new menu item is put through a series of consumer taste tests before being added to the menu. Hallmark Cards uses marketing research to test messages, cover designs, and even the size of the cards. Hallmark’s experts know which kinds of cards will sell best in which places. Engagement cards, for instance, sell best in the Northeast, where engagement parties are popular. Birthday cars for “Daddy” sell best in the South because even adult southerners tend to call their fathers Daddy.

This section examines the marketing research process, which consists of the following steps:

The most critical step in the marketing research process is defining the marketing problem. This involves either writing a problem statement or a list of research objectives. If the problem is not defined properly, the remainder of the research will be a waste of time and money. Two key questions can help in defining the marketing problem correctly.

After a problem is correctly defined, a research method is chosen. There are three basic research methods: survey, observation, and experiment.

With survey research, an interviewer interacts with respondents, either in person or by mail, to obtain facts, opinions, and attitudes. A questionnaire is used to provide an orderly and structured approach to data gathering. Face-to-face interviews may take place at the respondent’s home, in a shopping mall, the Internet, or at a place of business.

Observation research is research that monitors respondents’ actions without direct interaction. In the fastest growing form of observation research, researchers use cash registers with scanners that read tags with barcodes to identify the item being purchased. Technological advances are rapidly expanding the future of observation research. For example, A.C. Nielsen has been using black boxes for years on television sets to silently obtain information on a family’s viewing habits. But what if the set is on and no one is in the room? To overcome that problem, researchers will soon rely on infrared passive “people meters” that will identify the faces of family members watching the television program. Thus, the meter will duly record when the set is on and one is watching.

In the third research method, experiment, the investigator changes one or more variables—price, package, design, shelf space, advertising theme, or advertising expenditures—while observing the effects of those changes on another variable (usually sales). The objective of experiments is to measure causality. For example, an experiment may reveal the impact that a change in package design has on sales.

Two types of data are used in marketing research: primary data, which are collected directly from the original source to solve a problem; and secondary data, which is information that has already been collected for a project other than the current one but may be used to help solve it. Secondary data can come from a number of sources, among them government agencies, trade associations, research bureaus, universities, the Internet, commercial publications, and internal company records. Company records include sales invoices, accounting records, data from previous research studies, and historical data.

Primary data are usually gathered through some form of survey research. As described earlier, survey research often relies on interviews (see Exhibit 13-6, page 400, for the different types of interviews). Today, conducting surveys over the Internet is the fastest growing form of survey research, as the Applying Technology box on p. 398 describes.

After the data have been collected, the next step in the research process is data analysis. The purpose of this analysis is to interpret and draw conclusions from the mass of collected data. Many software statistical programs such as SAS and SPSS are available to make this task easier for the researcher.

After completing the data analysis, the researcher must prepare the report and communicate the conclusions and recommendations to management. This is a key step in the process because marketing researchers who want their conclusions acted upon must convince the manager that the results are credible and justified by the data collected. Today, presentation software like Power Point and Astound provides easy-to-use tools for creating reports and presentations that are more interesting, compelling, and effective than was possible just a few years ago.

To discover exactly what customers value most, organizations are using innovative techniques for collecting customer information. some of the more sophisticated marketing research techniques that are growing in popularity are advertised observation research methods, decision support systems (DDSs), and data base marketing.

All forms of observation research are increasingly using more sophisticated technology. The major television networks, for example, are supporting an advanced technology that provides highly accurate market data about television viewers’ behavior. The networks have been discouraged by the data flowing from A.C. Nielsen media research, which indicate that the networks are losing market share. The networks say that Nielson’s research is faulty and are backing a new measurement system created by Statistical Research Inc. (SRI). the stakes are about $13 billion in advertising revenue generated annually by the major networks. SRI has developed systems for Measuring and Reporting Television, or SMART, at a cost of $160 million. The SMART setup consists of meters with sensors that can pick up signals from the air. The meter looks like a VCR and sits on top of the television. Users log in and out before and after watching television by pressing a device similar to a TV remote control, which is designed for ease for use. The device accurately tracks which program is being watched and by whom.

Technology is also being applied to measure Internet traffic. By 2004, online advertising revenue is expected to reach $24 billion, and advertisers want to make certain that people are seeing their Web adds. Web sites measure their own popularity, largely by the number of “hits,” or the times a page or parts of a page are called up. Sites then try to convert that measurement into “unique visitors” so that one person calling up several pages is not counted more than once.

…Perhaps most astounding of all is the new technology that is allowing us to learn how the brain receives and processes information. Brain science has come so far that the researchers are able to routinely eavesdrop on brains while they think. The new technology offers insights about how we perceive, think, and make decisions. This information will enable researchers to uncover consumers’ root motivations—or hot buttons. These come from the subliminal regions of our brains, where values, needs, and motivations originate.

More and more managers are turning to another form of technology called a decision support system (DSS), an interactive, flexible computerized information system that allows managers to make decisions quickly and accurately. Managers use DSS to conduct sales analyses, forecast sales, evaluate advertising, analyze product lines, and keep tabs on market trends and competitors’ actions. A DSS not only allows managers to ask “what if” questions, but enables them to slice the data any way they want. A DSS has the following characteristics:

results generated on the spot. The process is under the manager’s direct control; no computer programmer is needed.

data in a variety of ways. It will shift gears as the user changes topics, matching information to the problem at hand. For example, the chief executive can see highly aggregated figures, while the marketing analyst views detailed breakouts.

computer knowledgeable. Novice users can elect a standard, or “default, “ method of using the system that enables them to bypass optional features and work with the basic system while they gradually learn its possibilities. This minimizes the frustration that frequently accompanies new computer software.

Perhaps the fastest growing use of DSS is for database marketing, which is the creation of a large computerized file of the profiles and purchase patterns of customers and potential customers. Using the very specific information in the database, a company can, if it wishes, direct a different individualized message to every customer or potential customer.

Beginning in the 1950s, network television enabled advertisers to “get the same message to everyone simultaneously.” Database marketing can get a customized, individual message to everyone simultaneously through direct mail. This is why database marketing is sometimes called micromarketing. Specifically, database marketing can:

Database marketing can create a computerized from of the old-fashioned relationship that people used to have with the corner grocer, butcher, or baker. “A database is sort of a collective memory,” says Richard G. Barlow, president of Frequency Marketing, Inc., a Cincinnati based consulting firm. “It deals with you in the same personalized way as a mom-and-pop grocery store, where they knew customers by name and stocked what they wanted.” American Express, for example, can pull from its database all cardholders who made purchases at golf pro-shops in the past six months, attended symphony concerts, or traveled to Europe more than once in the last year.

As a consumer, you participate in shaping consumer products by the choices you make and the products and services you buy. You can become a better consumer by actively participating in market surveys and learning more about the products you buy.

All of us get tired of telephone solicitations where people try to sell us everything from new carpet to chimney sweeping. Recognize that marketing research surveys are different. A true marketing research survey will never involve a sales pitch nor will the research firm sell you name to a database marketer. The purpose of marketing research is to build better goods and services for you and me. Help out the researchers and ultimately help yourself. The Council for Marketing and Opinion Research (CMOR) is an organization of hundreds of marketing professionals that is dedicated to preserving the integrity of the research industry. If you receive a call from someone who tries to sell you something under the guise of marketing research, get the name and address of the organization. Call CMOR at 1-800-887-CMOR and report the abuse.

When making a major purchase, particularly when the item is expensive and choices are similar, consumers typically experience cognitive dissonance; that is, they have beliefs or knowledge that are internally inconsistent or that disagree with their behavior. In other words, instead of feeling happy with their new purchase, they experience doubts, feel uneasy, and wonder if they have done the right thing. Understand that this feeling of uneasiness is perfectly normal and goes away over time. Perhaps the best way to avoid cognitive dissonance is to insist on a strong warranty or money-back guarantee. A second approach is to read everything you can find about your purchase. Go to the Internet chat rooms about your product and join in the discussion. And, before you buy, check out Consumer Reports ratings on your product at www.consumerreports.org.

Marketing includes those business activities that are designed to satisfy consumer needs and wants through the exchange process. Marketing managers use the “right” principle—getting the right goods or services to the right people at the right place, time, and price, using the right promotional techniques. Today, many firms have adopted the marketing concept. The marketing concept involves identifying customer needs and wants and then producing goods or services that will satisfy them while making a profit. Relationship marketing entails forging long-term relationships with customers, which can lead to repeat sales, reduced costs, and stable relationships.

A firm creates a marketing strategy by understanding the external environment, defining the target market, determining a competitive advantage, and developing a marketing mix. Environmental scanning enables companies to understand the external environment. The target market is the specific group of consumers toward which a firm directs its marketing efforts. A competitive advantage is a set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competition.

To carry out the marketing strategy, firms create a marketing mix—a blend of products, distribution systems, prices, and promotion. Marketing managers use this mix to satisfy target consumers. The mix can be applied to nonbusiness as well as business situations.

Buyer behavior is what people and businesses do in buying and using goods and services. The consumer decision-making process consists of the following steps: responding to a stimulus, recognizing a problem or opportunity, seeking information, evaluating alternatives, purchasing the product, judging the purchase out come, and engaging in postpurchase behavior. A number of factors are within the individual consumer and are unique to each person. Social factors include all interactions between a consumer and the external environment, such as family, social classes, and culture. The main differences between consumer and business markets are purchase volume, number of customers, location of buyers, direct distribution, and rational purchase decisions.

Success in marketing depends on understanding the target market. One technique used to identify a target market is market segmentation. The five basic forms of segmentation are demographic (population statistics), geographic (location), psychographic (personality or lifestyle), benefit (product features), and volume (amount purchased).

Much can be learned about consumers through marketing research, which involves collecting, recording, and analyzing data important in marketing goods and services and communicating the results to management. Marketing researchers may use primary data, which are gathered through door-to-door, mall-intercept, telephone, the Internet, and mail interviews. The Internet is becoming a quick, cheap, and efficient way to gather primary data. Secondary data are available from a variety of sources including government, trade, and commercial associations. Secondary data save time and money, but they may not meet researchers’ needs. Both primary and secondary data give researchers a better idea of how the market will respond to the product. Thus, they reduce the risk of producing something the market doesn’t want.

New technology has increased the sophistication of observation research techniques and improved the accuracy of data, such as measurements of the size of television audiences and Web traffic to specific sites. Researchers are also analyzing the brain to better understand how people think. A second trend is the growing use of decision support systems. These enable managers to make decisions quickly and accurately. A third trend is the growing use of databases for micromarketing.

The creation of a marketing mix normally begins with the first of the four Ps, product. Only when there is something to sell can marketers create a promotional theme, set a price, and establish a distribution channel. Organizations prepare for long-term success by creating and packaging products that add value and pricing them to meet the organization’s financial objectives. In addition, organizations respond to changing customer needs by creating new products. This chapter will examine products, brands, and the importance of packaging. We discuss how new products are created and how they go through periods of sales growth and then decline. Next, you will discover how managers set prices to reach pricing goals. Alternative pricing strategies used to reach specific target markets are then discussed. We conclude with a look at trends in products and pricing.

In marketing, a product is any good or service, along with its perceived attributes and benefits, that creates value for the customer. Attributes can be tangible or intangible. Among the tangible attributes are packaging and warranties as illustrated in Exhibit 14-1, page 412. Intangible attributes are symbolic, such as brand image. People make decisions about which products to buy after considering both tangible and intangible attributes of a product. For example, when you buy a pair of jeans, you consider price, brand, store image, and style before you buy. These factors are all part of the marketing mix.

Products are often a blend of goods and services as shown in Exhibit 14-2, page 413. For example, Honda Accord (a good) would have less value without Honda’s maintenance agreement (a service). Although Burger King sells such goods as sandwiches and French fries, customers expect quality service as well, including quick food preparation and cleanliness. When developing a product, an organization must consider how the combination of goods and services will provide value to the customer.

Because most things sold are a blend of goods and services, the term product can be used to refer to both. After all, consumers are really buying packages of benefits that deliver value. The person who buys a plane ride on United Airlines is looking for a quick way to get from one city to another (the benefit). Providing this benefit requires goods (a plane, food) and services (ticketing, maintenance, piloting).

Marketers must know how consumers view the types of products their companies sell so they can design the marketing mix to appeal to the selected target market.

To help them define their target markets, marketers have devised product categories. Products that are bought by the end user are called consumer products. They include electric razors, sandwiches, cars, stereos, magazines, and houses.

Consumer products that get used up, such as Breck hair mousse and Lays Potato Chips, are called nondurables.

Those that last for a long time, such as Whirlpool washing machines and computers, are consumer durables.

Another way to classify consumer products is by the amount of effort consumers are willing to make to acquire them. The four major categories of consumer products are unsought products, convenience products, shopping products, and specialty products, as summarized in Exhibit 14-3.

Degree of Effort

Consumer Product Examples Expended by Consumer

Unsought products Life insurance No effort

Burial plots

New products

Convenience products Soft drinks Very little or minimum effort

Bread

Milk

Coffee

Shopping products Automobiles Considerable effort

Homes

Vacations

Specialty products Expensive jewelry Maximum effort

Gourmet dinners

Limited-production

automobiles

Unsought products are products unknown to the potential buyer or known products that the buyer does not actively seek. New products fall into this category until advertising and distribution increase consumer awareness of them. Some goods are always marketed as unsought items, especially products we do not like to think about or care to spend money on. Insurance, burial plots, encyclopedias, and similar items require aggressive personal selling and highly persuasive advertising. Salespeople actively seeks leads to potential buyers. Because consumers usually do not seek out this type of product, the company must go directly to them through a salesperson, direct mail, telemarketing, or direct-response advertising.

Convenience products are relatively inexpensive items that require little shopping effort. Soft drinks, candy bars, milk, bread, and small hardware items are examples. We buy them routinely without much planning. This does not mean that such products are unimportant or obscure. Many, in fact, are well known by their brand names—such as Pepsi-Cola, Pepperidge Farm breads, Domino’s Pizza, Sure deodorant, and UPS shipping.

In contrast to convenience products, shopping products are bought only after a brand-to-brand and store-to-store comparison of price, suitability, and style. Examples are furniture, automobiles, a vacation in Europe, and some items of clothing. Convenience products are bought with little planning, but shopping products may be chosen months or even years before their actual purchase.

Specialty products are products for which customers search long and hard and for which they refuse to accept substitutes. Expensive jewelry, designer clothing, state-of-the art stereo equipment, limited-production automobiles, and gourmet dinners fall into this category. Because consumers are willing to spend much time and effort to find specialty products, distribution is often limited to one or two sellers in a given region, such as Neiman-Marcus, Gucci, or the Porsche dealer.

Products bought by businesses or institutions for use in making other products or in providing services are called business or industrial products. They are classified as either capital or expense items.

Capital products are usually large, expensive items with a long life span. Examples are buildings, large machines, and airplanes.

Expense items are typically smaller, less expensive items that usually have a life span of less than a year. Examples are printer ribbons and paper. Industrial products are sometimes further classified in the following categories:

determine the nature, scope, and efficiency of a company. Capital products like General Motors’ Saturn assembly plant in Tennessee represent a big commitment against future earnings and profitability. Buying an installation requires longer negotiations, more planning, and the judgments of more people than buying any other type of product.

the firm as installations, and they are less expensive and more standardized. But they are still capital products. Minolta copy machines, IBM personal computers (PCs), and smaller machines such as Black and Decker table drills and saws are typical accessories. Marketers of accessories often rely on well-known brand names and extensive advertising as well as personal selling.

3. Component parts and materials. These are expense items that are built into the end product. Some component parts are custom made, such as a drive shaft for an automobile, a case for a computer, or a special pigment for painting U.S. Navy harbor buoys; others are standardized for sale to many industrial users. Intel’s Pentium chip for PCs and cement for the construction trade are examples of standardized component parts and materials.

undergone little or no processing and are used to create a final product. Examples include lumber, copper, and zinc.

are bought routinely and in fairly large quantities. Supply items run the gamut from pencils and paper to paint and machine oil. The have little impact on the firm’s long-run profits. Bic pens, Champion copier paper, and Pennzoil machine oil are typical supply items.

Most industrial and consumer products have a brand name. If everything cam in a plain brown wrapper, life would be less colorful and competition would decrease. Companies would have less incentive to put out better products because customers would be unable to tell one company’s products from those of another.

The product identifier for a company is its brand. Brands appear in the form of words, names, symbols, or designs. They are used to distinguish a company’s products from those of its competitors. Examples of well-named brands are Kleenex tissues, Jeep automobiles, and IBM computers.

A trademark is the legally exclusive design, name or other identifying mark associated with a company’s brand. No other company can use that same trademark.

Branding has three main purposes: product identification, repeat sales, and new product sales. The most important purpose is product identification. Branding allows marketers to distinguish their products from all others. Exhibit 14-4, page 417, identifies the characteristics of an effective brand name. Many brand names are familiar to consumers and indicate quality.

Brand equity refers to the value of a company and brand names. A brand that has high awareness, perceived quality, and brand loyalty among customers has high brand equity. Brand equity is more than awareness of a brand—it is the personality, soul, and emotion associated with the brand. Think of the feelings you have when you see the brand name Harley-Davidson, Nike, or even Microsoft. A brand with strong brand equity is a valuable asset. Some brands such as Coke, Kodak, Marlboro, and Chevrolet are worth millions of dollars.

A brand so dominant in consumers’ minds that they think of it immediately when a product category, use, attribute, or customer benefit is mentioned is a master brand. Exhibit 14-5, page 417, lists some of Americas master brands in several categories.

U.S. brands command substantial premiums in many places around the world. Procter & Gamble’s Whisper sanitary napkins sell for 10 times the price of local brands in China. Johnson & Johnson brands like Johnson’s baby shampoo and Band-Aids command a 500 percent premium in China.

Even entrepreneurs are beginning to see the value of having their own brands. Sometimes entrepreneurs develop their brand even before they open an office. This notion is explored further in the Focusing on Small Business box on p. 418.

A consumer who tries one or more brands may decide to buy a certain brand regularly.

The preference for a particular brand is brand loyalty. It lets consumers buy with less time, thought, and risk.

Brand loyalty ensures future sales for the firm. It can also help protect a firm’s share of the market, discourage new competitors, and thus prolong the brand’s life. Brand loyalty even allows companies to raise prices. Quaker Oats Co., maker of Cap’n Crunch, Life, and Quaker oatmeal, recently raised its prices 3.8 percent. Analysts said that Quaker could do this, even though other cereal makers didn’t raise prices, because of the strong consumer loyalty to Quaker products.

What makes people loyal to a brand? Though pricing, promotion, and product quality are important, customer interaction with the company may be most critical. A recent study found that 90 percent of consumers who were delighted with their experience say they will continue to buy the product/service whereas only 37 percent of the customers who were dissatisfied with their experience say they will remain loyal. Brand loyalty to a particular company’s products is a marketer’s dream come true.

The third main purpose of branding is to facilitate new product sales. Let’s assume that your class forms a company to market frozen tarts and pies under the name “University Frozen Desserts.” Now, assume that Pepperidge Farms develops a new line of identical frozen tarts and pies. Which ones will consumers try? The Pepperidge Farms products, without doubt. Pepperidge Farms is known for its quality frozen bakery products. Consumers assume that its new tarts and pies will be of high quality and are therefore willing to give them a try. The well known Pepperidge Farm brand is facilitating new product introduction.

Brands owned by national or regional manufacturers and widely distributed are manufacture brands. (These brands are sometimes called national brands, but since some of the brands are not owned by nationwide or international manufacturers, manufacturer brands is a more than accurate term.) A few well-known manufacturer brands are Polaroid, Liz Claiborne, Nike, and Sony.

Manufacturer brands can bring new customers and new prestige to small retailers. For instance, a small bicycle repair shop in a Midwestern college town got the franchise to sell and repair Schwinn bicycles. The shop’s profits grew quickly, and it became one of the most successful retail businesses in the university area. Because manufacturer brands are widely promoted, sales are often high. Also, most manufacturers of these brands offer frequent deliveries to their retailers. Thus retailers can carry less stock and have less money tied up in inventory.

Brands that are owned by the wholesaler or retailer, rather than that of the manufacturer, are dealer brands. Sears has several well-known dealer (or private) brands, including Craftsman, Diehard, and Kenmore. The Independent Grocers Association (IGA), a large wholesale grocery organization, uses the brand name Shurefine on its goods. Dealer brands tie customers to particular wholesalers or retailers. If you want a Kenmore washing machine, you must go to Sears.

Although profit margins are usually higher on dealer brands than on manufacturer brands, dealers must still stimulate demand for their products. Sear’s promotion of its products has made the company one of the largest advertisers in the United States. But promotion costs can cut heavily into profit margins. And if a dealer-brand item is of poor quality, the dealer must assume responsibility for it. Sellers of manufacturer brands can refer a disgruntled customer to the manufacturer.

Many customers don’t want to pay the costs of manufacturer or dealer brands. One popular way to save money is to buy generic products. These products carry no brand name, come in plain containers, and sell for much less than brand name products. They are typically sold in black and white packages with such simple labels as “liquid bleach” or “spaghetti.” Generic products are sold by 85% of U.S. supermarkets. Sometimes manufacturers simply stop the production line and substitute a generic package for a brand package, though the product is exactly the same. The most popular generic products are garbage bags, jelly, paper towels, coffee cream substitutes, cigarettes, and paper napkins.

Just as a brand gives a product identity, its packaging also distinguishes it from competitors’ products and increases its customer value. When you go to the store and reach for a bottle of dishwashing detergent, the package is the last chance a manufacturer has to convince you to buy its brand over a competitor’s. A good package may cause you to reach for Joy rather than Palmolive.

A basic function of packaging is to protect the product from breaking or spoiling and thus extend its life. A package should be easy to ship, store, and stack on a shelf and convenient for the consumer to buy. Many new packaging methods have been developed recently. Aseptic packages keep foods fresh for months without refrigeration. Examples are Borden’s “sipp packs” for juices, the Brik Pak for milk, and Hunt’s/Del Monte’s aseptic boxes of tomato sauce. Some package developers are creating “micro-atmospheres” that allow meat to stay fresh in the refrigerator for weeks.

Why do people usually skip drinks when they buy take-out from a restaurant? According to research conducted by Pepsi, consumers dislike paper cups because they get soggy and can easily spill is jostled, so customers stop someplace else to pick up a bottle or can. But restaurants don’t like selling drinks in bottles and cans, which have lower margins than soda from the fountain. Pepsi’s solution is a plastic “twist’n go” cup with a dome-shaped lid that is screwed on (see Exhibit 14-6, page 420).

…A second basic function of packaging is to help promote the product by providing clear brand identification and information about the product’s features. For example, Ralston Purina Co.’s Dog Chow brand, the leading dog food, was losing market share. The company decided that the pictures of dog breeds on the package were too old-fashioned and rural. With a new package featuring a photo of a dog and a child, sales have increased.

An implied warranty is an unwritten guarantee that the product is fit for the purpose for which it was sold. All sales have an implied warranty under the Uniform Commercial Code (a law that applies to commercial dealings in most states).

An express warranty is made in writing. Express warranties range from simple statements, such as “100 percent cotton” (a guarantee of raw materials) and “complete satisfaction guaranteed” (a statement of performance), to extensive documentation that accompanies a product.

In 1975, Congress passed the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act to help consumers understand warrantees and to help them get action from manufacturers and dealers.

A full warranty means the manufacturer must meet certain minimum standards, including repair of any defects “within a reasonable time and without charge” and replacement of the merchandise or a full refund if the product does not work “after a reasonable amount of attempts” at repair. Under the law, any warranty that does not live up to this tough standard must be “conspicuously” promoted as a limited warranty.

New products pump life into company sales, enabling the firm not only to survive but also to grow. Companies like Allegheny Ludlum (steel), Corning (fiber optics), Dow (chemicals), Hewlett-Packard (computers), Campbell Soup (foods), and Stryker (medical products) get most of their profits from new products. Companies that lead their industries in profitability and sales growth get 49 percent of their revenues from products developed within the last five years.

Marketers have several different terms for new products, depending on how the product fits into a company’s existing product line. When a firm introduces a product that has a new brand name and is in a product category new to the organization, it is classified as a new product.

A new flavor, size, or model using an existing brand name in an existing category is called a line extension. Diet Cherry Coke and caffeine-free Coke are line extensions. The strategy of expanding the line by adding new models has enabled companies like Seiko (watches), Kraft (cheeses), Oscar Mayer (lunch meats), and Sony (consumer electronics) to tie up a large amount of shelf space and brand recognition in a product category.

In large organizations, such as Proctor & Gamble and Kraft General Foods, new product departments are responsible for generating new products. The department typically includes people from production, finance, marketing, and engineering. In smaller firms, committees perform the same functions as a new product department.

For major new product development tasks, companies sometimes form venture teams. IBM, for example, formed a venture group to create the first PC. Like a new product department, a venture team includes members from most departments of the company. The idea, however, is to isolate the team members from the organization’s day-to-day activities so that they can think and be creative. IBM is headquartered in New York, but the PC venture team is located in Florida.

Developing new products is both costly and risky. About 67 percent of all new products fail. To increase their chances for success, most firms use the following product development process, which is summarized in Exhibit 14-7.

Exhibit 14-7: Steps to Develop New Products That Satisfy Customers

(1)

Set New Product Goals

(2)

Develop New Product Ideas

(3)

Screen Ideas/Concepts

(4)

Develop the Concept

(5)

Test-Market the New Product

(6)

Introduce the Product to the Marketplace

financial objectives. For example, a company may want to recover its investment in three years or less. Or it may want to earn at least a 15 percent return on the investment. Nonfinancial goals may include existing equipment or facilities.

Larger companies use these sources and more structured marketing research techniques, such as focus groups and brainstorming. A focus group consists of 8 to 12 participants led by a moderator in an in-depth discussion on one particular topic or concept. The goal of focus group research is to learn and understand what people have to say and why. The emphasis is on getting people talking at length and in detail about the subject at hand. The intent is to find out how they feel about a product, concept, idea, or organization, how it fits into their lives, and their emotional involvement with it. Focus groups often generate excellent product ideas. A few examples are the interior design of the Ford Taurus, Stick-Up room deodorizers, Dustbusters, and Wendy’s salad bar. In the industrial market, machine tools, keyboard designs, aircraft interiors, and backhoe accessories evolved from focus groups.

Brain storming is also used to generate new product ideas. With brain storming the members of a group think of as many ways to vary a product or solve a problem as possible. Criticism is avoided, no matter how ridiculous an idea seems at the time. The emphasis is on sheer numbers of ideas. Evaluation of these ideas is postponed to later steps of the development.

against the firm’s new product goals and its long-range strategies. Many product concepts are rejected because they don’t fit well with existing products, needed technology is not available, the company doesn’t have enough resources, or the sales potential is low.

involves creating a prototype of the product, testing the prototype, and building the marketing strategy. The type and amount of product testing vary, depending on such factors as the company’s experience with similar products, how easy it is to make the item, and how easy it will be for customers to use it. Suppose that Seven Seas is developing a new salad dressing flavor. The company already has a lot of experience in this area, so the new dressing will go directly into advanced taste tests and perhaps home-use tests. To develop a new line of soft drinks, however, Seven Seas would most likely do a great deal of testing. It would study many aspects of the new product before actually making it.

While the product is tested, the marketing strategy is refined. Channels of distribution are selected, pricing policies are developed and tested, the target market is further defined, and demand for the product is estimated. Management also continually updates the profit plan.

As the manufacturing strategy and prototype tests mature, a communication strategy is developed. A logo and package wording are created. As part of the communication strategy, promotion themes are developed, and the product is introduced to the sales force.

Test-marketing is testing the product among potential users. It allows management to evaluate various strategies and to see how well the parts of the marketing mix fit together. Few new product concepts reach this stage. For those that pass this stage, the firm must decide whether to introduce the product on a regional or national basis.

A product that passes test-marketing is ready for market introduction, called rollout, which requires a lot of logistical coordination. Various divisions of the company must be encouraged to give the new item the attention it deserves. Packaging and labeling in a different language may be required. Sales training sessions must be scheduled, spare parts inventoried, service personnel trained, advertising and promotion campaigns readied, and wholesalers and retailers informed about the new item. If the new product is to be sold internationally, it may have to be altered to meet the requirements of the target countries. For instance, electrical products may have to run on different electrical currents.

When a new product enters the marketplace in large organizations, it is often placed under the control of a product or brand manager. A product manager develops and implements a complete strategy and marketing program for a specific product or brand. Product management first appeared at Proctor & Gamble in 1929. A new company soap, Camay, was not doing well, so a young Proctor & Gamble executive was assigned to devote his exclusive attention to developing and promoting this product. He was successful, and the company soon added other product managers. Since then, many firms, especially consumer products companies, have set up product management organizations.

Product managers create marketing mixes for their products as they move through the life cycle. The product life cycle is a pattern of sales and profits over a time for a product (Ivory dishwashing liquid) or a product category (liquid detergents). As the product moves through the stages of the life cycle, the firm must keep revising the marketing mix to stay competitive and meet the needs of target customers.

As illustrated in Exhibit 14-8, page 425, the product life cycle consists of the following stages:

Although competition may be light, the introductory stage usually features frequent product modifications, limited distribution, and heavy promotion. The failure rate is high. Production and marketing costs are also high, and sales volume is low. Hence, profits are usually small or negative.

advances to the growth stage of the cycle. In this stage, sales grow at an increasing rate, profits are healthy, and many competitors enter the market. Large companies may start to acquire small pioneering firms that have reached this stage. Emphasis switches from primary demand promotion to aggressive brand advertising and communicating the differences between brands. For example, the goal changes from convincing people to buy compact disc players to convincing them to buy Sony or Panasonic or RCA.

Distribution becomes a major key to success during the growth stage, as well as in later stages. Manufacturers scramble to acquire dealers and distributors and to build long-term relationships. Without adequate distribution, it is impossible to establish a strong market position.

Toward the end of the growth phase, prices normally begin falling and profits peak. Price reductions result from increased competition and from cost reductions from producing larger quantities of items (economics of scale). Also most firms have recovered their development costs by now, and their priority is in increasing or retaining market share and enhancing profits.

This is the maturity stage. Most products that have been on the market for a long time are in this stage. Thus, most marketing strategies are designed for mature products. One such strategy is to bring out several variations of the basic product (line extension). Kool-Aid, for instance, was originally flavored in three flavors. Today there are more than 10, as well as sweetened and unsweetened varieties.

reached the decline stage. The rate of decline is governed by two factors: the rate of change in consumer tastes and the rate at which new products enter the market. Sony turntables are an example of a product in the decline stage. The demand for turntables has now been surpassed by the demand for compact disc players and cassette players.

The product life may be used in planning. Marketers who understand the cycle concept are better able to forecast future sales and plan new marketing strategies. Exhibit 14-9 is a brief summary of strategic needs at various stages of the product life cycle.

Exhibit 14-9: Strategies for Success at Each Stage of the Product Life Cycle

Life Cycle Stage

Category Introduction Growth Maturity Decline

Marketing Encourage trial, Get triers to Seek new Reduce marketing

objectives establish repurchase users or expenses, keep

distribution attract new uses loyal users

users

Product Establish Maintain Modify Maintain product

competitive product product

advantage quality

Promotional Build brand Provide Reposition Eliminate most

awareness information product advertising and sales

promotions

Pricing Set introductory Maintain Reduce Maintain prices

price (skimming or prices prices to

penetration pricing) meet

competition

Marketers must be sure that a product has moved from one stage to the next before changing its marketing strategy. A temporary sales decline should not be interpreted as a sign that the product is dying. Pulling back marketing support can become a self-fulfilling prophecy that brings about the early death of a healthy product.

An important part of the product development process is setting the right price. Price is the perceived value that is exchanged for something else. Value in our society is most commonly expressed in dollars and cents. Thus, price is typically the amount of money exchanged for a good or service.

Note that perceived value refers to the time of the transaction. After you’ve used a product you’ve bought, you may decide that its actual value was less than its perceived value at the time you bought it.

The price you pay for a product is based on the expected satisfaction you will receive and not necessarily the actual satisfaction you will receive.

Although price is usually a dollar amount, it can be anything with perceived value.

When goods and services are exchanged for each other, the trade is called barter. If you exchange this book for a math book at the end of the term, you have engaged in barter.

Price is important in determining how much a firm earns. The prices charged customers times the number of units sold equals the gross revenue for the firm. Revenue is what pays for every activity of the company (production, finance, sales, distribution, and so forth). What’s left over (if anything) is profit. Managers strive to charge a price that will allow the firm to earn a fair return on its investment.

The chosen price must be neither too high nor too low. And the price must equal the perceived value to target consumers. If consumers think the price is too high, sales opportunities will be lost. Lost sales mean lost revenue. If the price is too low, consumers may view the product as a great value, but the company may not meet its profit goals. Three common pricing objectives are maximizing profits, achieving a target return on the investment, and offering good value at a fair price.

Profit maximization means producing a product as long as the revenue from selling it exceeds the cost of producing it. In other words, the goal is to get the largest possible profit from the product. For example, suppose Carl Morgan, a builder of houses, sells each house for $100,000. His revenue and cost projections are shown in Exhibit 14-10.

(1) (2) (3) (4) (5)

Unit of Output Selling Price Cost of Building Profit on Total

(House) House House Profit

1^st$100,000 $76,000 $24,000 $24,000

2^nd 100,000 75,000 25,000 49,000

3^rd 100,000 73,000 27,000 76,000

4^th 100,000 70,000 30,000 106,000

5^th 100,000 70,000 30,000 136,000

6^th 100,000 77,000 23,000 159,000

7^th 100,000 90,000 10,000 169,000

8^th 100,000 115,000 ( 15,000 ) 154,000

Notice in column 3 that the cost of building each house drops for the second through the fifth house. The lower cost per house results from two things: First, by having several houses under construction at one time, Morgan can afford to hire a full-time crew. The crew is more economical than the independent contractors to whom he would otherwise subcontract each task. Second, Morgan can order materials in greater quantities than usual and thus get quantity discounts on his orders.

Morgan decides that he could sell 15 houses a year at the $100,000 price. But he knows he cannot maximize profits at more than seven houses a year. Inefficiencies begin to creep in at the sixth house. (Notice in column 3 that the sixth house costs more to build than any of the first five houses.) Morgan can’t supervise more than seven construction jobs at once, and his full-time crew can’t handle even those seven. Thus, Morgan has to subcontract some of the work on the sixth and seventh houses. To build more than seven houses, he would need a second full-time crew.

(1) (2) (3) (4) (5)

Unit of Output Selling Price Cost of Building Profit on Total

(House) House House Profit

1^st$100,000 $76,000 $24,000 $24,000

2^nd 100,000 75,000 25,000 49,000

3^rd 100,000 73,000 27,000 76,000

4^th 100,000 70,000 30,000 106,000

5^th 100,000 70,000 30,000 136,000

6^th 100,000 77,000 23,000 159,000

7^th 100,000 90,000 10,000 169,000

8^th 100,000 115,000 ( 15,000 ) 154,000

The table also shows why Morgan should construct seven houses a year. Even though the profit per house is falling for the sixth and seventh houses (column 4), the total profit is still rising (column 5). But at the eighth house, Morgan would go beyond profit maximization. That is, the eighth unit would cost more than its selling price. He would lose $15,000 on the house, and total profit would fall to $154,000 from $169,000 after the seventh house.

Another pricing objective used by many companies is target return on investment where a price is set to give the company the desired profitability in terms of return on its money. Among the companies that use target return on investment as their main pricing objective are 3M, Procter & Gamble, General Electric, and DuPont.

To get an idea of how target return works, imagine that you are a marketing manager for a cereal company. You estimate that developing, launching, and marketing a new hot cereal will cost $2 million. If the net profit for the first year is $200,000, the return on investment will be $200,000 ¸ 2,000,000, or 10 percent. Let’s say that top management sets a 15 percent target return on investment. (The average target return on investment for large corporations is now about 14 percent.) Since a net profit of $200,000 will yield only a 10 percent return, one of two things will happen: either the cereal won’t be produced, or the price and marketing mix will be changed to yield the 15 percent target return.

Value pricing has become a popular pricing strategy. Value pricing means offering the target market a high-quality product at a fair price and with good service. It is the notion of offering the customer a good value. Value pricing doesn’t mean high quality that’s available only at high prices. Nor does it mean bare-bones service or low-quality products. Value pricing can be used to sell a variety of products, from a $35,000 Jeep Grand Cherokee to a $2.99 package of L’eggs hosiery.

launched Lexus, the company had to order a recall. The weekend before the recall, dealers phoned every Lexus owner in the United States and arranged to pick up their cars and provide replacement vehicles.

mile power train warranty. Michelin recently introduced a tire warranted to last 80,000 miles.

program, Hyatt’s Passport Club, and Whirlpool’s 800-number hot line all help build good customer relations.

The internet has influenced managerial pricing decisions like no other phenomenon in recent history. It has also given consumers more pricing power than ever before, as the Applying Technology box on p. 428 explains.

After establishing a pricing objective, managers must set a specific price for the product. Two techniques that are often used to set a price are markup pricing and breakeven analysis.

One of the most common forms of pricing is markup pricing. In this method, a certain percentage is added to a product’s cost to arrive at the retail price. (The retail price is thus cost plus markup.) The cost is the expense of manufacturing the product or acquiring it for resale. The markup is the amount added to the cost to cover expenses and leave a profit. For example, if Banana Boat suntan cream costs Walgreen’s drugstore $5 and sells for $7, it carries a markup of 29 percent.

Several elements influence markups. Among them are tradition, the competition, store image, and stock turnover. Traditionally, department stores used a 40 percent markup. But today competition has forced retailers to respond to consumer demand and meet competitors prices. A department store that tried to sell household appliances at a 40 percent markup would lose customers to such discounters as Wal-Mart and Target. However, a retailer trying to develop a prestige image will use markups that are much higher than those used by a retailer trying to develop an image as a discounter.

Manufacturers, wholesalers (companies that buy from manufacturers and sell to retailers and institutions), and retailers (firms that sell to end users) need to know how much of a product must be sold at a certain price to cover all costs. The point at which the costs are covered and additional sales result in profit is the breakeven point.

To find the breakeven point, the firm measures the various costs associated with the product:

manufacturing facility is a fixed cost. It must be paid whether production is one unit or a million units.

Let’s see how this works: Grey Corp., a manufacturer of aftershave lotion, has variable costs of $3 per bottle and fixed costs of $50,000. Grey’s management believes the company can sell up to 100,000 bottles at $5 a bottle without having to lower its price. Grey’s fixed-cost contribution is $2 ($5 selling price per bottle minus $3 variable cost per bottle). Therefore, $2 per bottle is the amount that can be used to cover the company’s fixed costs of $50,000.

Grey Corp. will therefore break even when it sells 25,000 bottles of after-shave lotion. After that point, at which the fixed costs are met, the $2 per bottle becomes profit. If Grey’s forecasts are correct and it can sell 100,000 bottles at $5 a bottle, its total profit will be $150,000 ($2 per bottle x 75,000 bottles).

By using the equation, Grey Corp. can quickly find out how much it needs to sell to break even. It can then calculate how much profit it will earn if it sells more units. A firm that is operating close to the breakeven point may change the profit picture in two ways. Reducing costs will lower the breakeven point and expand profits. Increasing sales will not change the breakeven point, but it will provide more profits.

Managers use various pricing strategies when determining the price of a product, as this section explains. Price-skimming and penetration pricing are strategies used in pricing new products; other strategies such as leader pricing and bundling may be used for established products as well.

The practice of introducing a new product on the market with a high price and then lowering the price over time is called price skimming. As the product moves through its life cycle, the price usually is lowered because competitors are entering the market. As the price falls, more and more consumers can buy the product. Price skimming has four important advantages. First, a high initial price can be a way to find out what buyers are willing to pay. Second, if consumers find the introductory price too high, it can be lowered. Third, a high introductory price can create an image of quality and prestige. Fourth, when the price is lowered later, consumers think they are getting a bargain. The disadvantage is that high prices attract competition.

Price skimming can be used to price virtually any new products such as high definition televisions, PCs, and color computer printers. Recently, Gillette introduced the Oral-B Cross Action toothbrush. The bristles on the new brush don’t stand upright. Instead three rows of multicolored bristles of varying sizes are angled in opposing directions, an innovation that the company says enables the brush to remove 25 percent more plaque than the leading toothbrush. The Cross Action was introduced at a price of $5.00 compared with $2.50 of a typical toothbrush. Products don’t have to be expensive to use a skimming strategy.

A company that doesn’t use price skimming will probably use penetration pricing. With this strategy, the company offers new products at low prices in the hope of achieving a large sales volume. Penetration pricing requires more extensive planning than skimming does because the company must gear up for mass production and marketing, When Texas Instruments entered the digital watch market, its facilities in Lubbock, Texas, could produce 6 million watches a year, enough to meet the entire world demand for low-priced watches. It the company had been wrong about demand, its loses would have been huge.

Penetration pricing has two advantages. First the low initial price may induce consumers to switch brands or companies. Using penetration pricing on its jug wines, Gallo has lured customers away from Taylor California Cellars and Inglenook. Second, penetration pricing may discourage competitors from entering the market. Their costs would tend to be higher, so they would need to sell more at the same price to break even.

Pricing products below the normal markup or even below cost to attract customers to a store where they wouldn’t otherwise shop is leader pricing.

A product priced below cost is referred to as a loss leader. Retailers hope that this type of pricing will increase their overall sales volume and thus their profit.

Items that are leader priced are usually well known and priced low enough to appeal to many customers. They also are items that consumers will buy at a lower price, even if they have to switch brands. Supermarkets often feature coffee and bacon in their leader pricing. Department stores and specialty stores also rely heavily on leader pricing.

Bundling means grouping two or more related products together and pricing them as a single product. Marriott’s special weekend rates often include the room, breakfast, and one night’s dinner. Department stores may offer a washer and a dryer together for a price lower than if the units were sold separately.

The idea behind bundling is to reach a segment of the market that the products sold separately would not reach as effectively. Some buyers are more than willing to buy one product but have much less use for the second. Bundling the second product to the first at a slightly reduced price thus creates some sales that otherwise would not be made. Aussie 3-Minute Miracle Shampoo is typically bundled with its conditioner because many people use shampoo more than conditioner so they don’t need a new bottle of conditioner.

Psychology often plays a big role in how consumers view prices and what prices they will pay. Odd-even pricing (or psychological pricing) is the strategy of setting a price at an odd number to connote a bargain and at an even number to imply quality. For years, many retailers have priced their products in odd numbers—for example, $99.95 or $49.95—to make customers feel that they are paying a lower price for the product.

Some retailers favor odd-numbered prices because they believe that $19.99 sounds much less imposing to customers than $10.00. Other retailers believe that an odd-numbered price signals to consumers that the price is at the lowest level possible, thereby encouraging them to buy more units. Neither theory has ever been conclusively proved, although one study found that consumers perceive odd-priced products as being on sales.

Even numbered pricing is sometimes used to denote quality. Examples include a fine perfume at $100 a bottle, a good watch at $500, or a mink coat at $3,000.

The strategy of raising the price of a product so consumers will perceive it as being of higher quality, status, or value is called prestige pricing. This type of pricing is common where high prices indicate high status. In the specialty shops on Rodeo Drive in Beverly Hills, which cater to the super-rich of Hollywood, shirts that would sell for $15 elsewhere sell for at least $50. If the price were lower, customers would perceive them as being of low quality.

As customer expectations increase and competition becomes fiercer, perceptive managers will find innovative strategies to satisfy demanding consumers and establish unique products in the market. For example, strategies that build instant brand recognition and use technology to meet individual consumer needs will help ensure the ultimate success of new products.

Building brand recognition has traditionally been a long-term process. Popular brand names like Coca-Cola, Chevrolet, Sony, and Whirlpool took decades to become household words. Startup technology companies, however, don’t have decades to build brand recognition. To survive and thrive, they must use powerful, precise strategies for building rapid brand awareness. Consider that half of U.S. households are familiar with America Online (AOL) and 42 percent know Yahoo. And PalmPilot, the electronic personal organizer, sold more than one million units in only 18 months, surpassing even the Sony Walkman.

How did these high-tech start-ups accomplish levels of brand recognition that took Procter & Gamble a generation? For one thing, they gave away lots of product. AOL is the leader in giveaways. For several years it has been blanketing the country with diskettes and CD-ROMs offering consumers a one-month free trial. For another, these companies rely heavily on public relations. Sun has built the visibility of Java—its flagship software platform—within the corporate community almost entirely through public relations techniques such as sending managers out on speaking tours and making high-profile announcements every time a licensing agreement is signed.

A third way to quickly build a brand is to use the Internet effectively. Amazon.com strives to make every customer interaction highly personal, the antithesis of the anonymous strip-mall experience. When customers log on to the site, they are welcomed by name and offered a list of recommended books based on previous purchases. Through a service called BookMatcher, Amazon.com asks customers to rate 10 books. The ratings give it more insight into readers’ preferences and enable it to suggest additional titles they might like. All of this adds up to relationship marketing that land-based retailers can only dream about.

A silent revolution is changing the way many goods are made and services are delivered. Companies as diverse as BMW, Dell Computer, Levi Strauss, Mattel, McGraw Hill, Wells Fargo, and many leading Web businesses are adapting mass customization to maintain or obtain a competitive advantage. As we described earlier, mass customization involves tailoring mass-market goods and services to the unique needs of the individuals who buy them.

Mass producers dictate a one-to-many relationship, whereas mass customizers engage in a continual dialogue with customers. Although production is cost-efficient, the flexibility of mass customization can cut inventory. And mass-customization offers two other advantages over mass-production: it provides superior customer service, and it makes full use of cutting-edge technology.

A number of technological advances are making customization possible. Computer-controlled factory equipment and industrial robots make it easier to quickly readjust assembly lines. Bar-code scanners make it possible to track virtually every part and product. Databases now store trillions of bytes of information, including individual customers’ preferences for everything from cottage cheese to cowboy boots. Digital printers make it easy to change product packaging.

And then there’s the Internet, which ties these disparate pieces together. Says Joseph Pine, author of the pioneering book Mass Customization: “Anything you can digitize, you can customize.” The Internet makes it easy for companies to move data from on online order form to the factory floor. The Internet makes it easy for manufacturing to communicate with marketers. Most of all, the Internet makes it easy for a company to conduct an ongoing, one-on-one dialogue with each of its customers to learn about and respond to their exact preferences.

The Internet is also becoming the source of information on competitive prices. Name the product—computers, airline tickets, rare coins—and chances are there’s a Website where you can name your price. The internet Auction List counted more than 1,500 auction-related Web sites in more than 40 product categories in 1998. You can think of Internet auctions as a new distribution outlet where companies with excess inventory can reach eager customers. Web auctions aren’t necessarily a great place to save money. The advantage of the auctions is that they five consumers a access to products that are hard to find (like a concert poster from an old Rolling Stones tour) or that aren’t available in stores (like overstocked computer inventory, refurbished laser printers, or last year’s fancy consumer electronics equipment).

This chapter makes several important points than can affect your life right now. First, businesses are using mass customization to deliver low-cost, specialized products and services that meet the unique needs of individual customers. The Internet has helped usher in mass customization and has opened up vast sources of information on business and consumer products as explained in this section.

Mass customization means that now, more than ever, you can get exactly the product that will fit your needs. A number of companies have adapted this strategy for competition, including AT&T, Coke and Pepsi, and fast-food companies such as McDonalds. The internet is frequently the primary avenue for delivering customized products, giving you easy access to product and pricing information. For example, customerdisc.com allow music lovers to pick their favorite songs from various music categories and organize them on their own personalized CD. Consumers may even choose title and cover art for their customized CD. Mass customization is not limited to consumer products. As a business manager, you will find many companies are creating new product and pricing strategies designed to meet your specific company needs.

It has been said that people can raise their standard of living by one-third by becoming intelligent consumers. Now the Internet makes intelligent shopping easier than ever. You can go to Consumer Reports on the Net and find our how products are ranked. Go to CompareNet and compare products feature-by-feature and dollar-for-dollar. You can shop price for an infinite variety of products and then ask your local retailer to meet or beat the price. You can also bid on almost anything in an Internet auction.

A product is any good or service, along with its perceived attributes and benefits, that creates customer value. Tangible attributes include the good itself, packaging, and warranties. Intangible attributes are symbolic like a brand’s image.

Most items are a combination of goods and services. Services and goods are categorized as either consumer products or industrial products. Consumer products are goods and services that are bought and used by the end users. They can be classified as unsought products, convenience products, shopping products, or specialty products, depending on how much effort consumers are willing to exert to get them.

Industrial products are those bought by organizations for use in making other products or in rendering services. Capital products are usually large, expensive items with a long life span. Expense items are typically smaller, less expensive items that usually have a life span of less than a year.

Products usually have brand names. Brands identify products by words, names, symbols, designs, or a combination of these things. The two major types of brands are manufacturer (national) brands and dealer (private) brands. Generic products carry no brand name. Branding has three main purposes: product identification, repeat sales, and new product sales.

Often the promotional claims of well-known brands are reinforced in the printing on the package. Packaging is an important way to promote sales and protect the product. A package should be easy to ship, store, and stack on a store shelf. Companies can add value to products by giving warranties. A warranty guarantees the quality of a good or service.

To succeed, most firms must continue to design new products to satisfy changing customer demands. But new product development can be risky. May new products fail. To be successful, new product development requires input from production, finance, marketing, and engineering personnel. In large organizations, these people work in a new product development department. The steps in new product development are setting new product goals, exploring ideas, screening ideas, developing the concept (creating a prototype and building the marketing strategy), test-marketing, and introducing the product. When the product enters the marketplace, it is often managed by a product manager.

After a product reaches the marketplace, it enters the product life cycle. This cycle typically has four stages: introduction, growth, maturity, and decline (and possibly death). Profits usually are small in the introductory phase, reach a peak at the end of the growth phase, and then decline. Marketing strategies for each stage are listed in Exhibit 14-9.

Exhibit 14-9: Strategies for Success at Each Stage of the Product Life Cycle

Life Cycle Stage

Category Introduction Growth Maturity Decline

Marketing Encourage trial, Get triers to Seek new Reduce marketing

objectives establish repurchase users or expenses, keep

distribution attract new uses loyal users

users

Product Establish Maintain Modify Maintain product

competitive product product

advantage quality

Promotional Build brand Provide Reposition Eliminate most

awareness information product advertising and sales

promotions

Pricing Set introductory Maintain Reduce Maintain prices

price (skimming or prices prices to

penetration pricing) meet

competition

Price indicates value, helps position a product in the marketplace, and is the means for earning a fair return on investment. If a price is too high, the product won’t sell well, and the firm will lose money. If the price is too low, the firm may lose money even after the product sells well. Prices are set according to pricing objectives. Among the most common objectives are profit maximization, target return on investment, and value pricing.

A cost-based method for determining price is markup pricing. A certain percentage is added to the product’s cost to arrive at the retail price. The markup is the amount added to the cost to cover expenses and earn a profit. Breakeven analysis determines the level of sales that must be reached before total cost equals total revenue. Breakeven analysis provides a quick look at how many units the firm must sell before it starts earning a profit. The technique also reveals how much profit can be earned with higher sales volumes.

The two main strategies for pricing a new product are price skimming and penetration pricing. Price skimming involves charging a high introductory price and then, usually, lowering the price as the product moves through its life cycle. Penetration pricing involves selling a new product at a low price in the hope of achieving a large sales volume.

Pricing tactics are used to fine-tune the base prices of products. Among these tactics are leader pricing, bundling, odd-even pricing, and prestige pricing. Sellers that use leader pricing set the prices of some their products below the normal markup or even below cost to attract customers who might otherwise not shop at those stores. Bundling is grouping two or more products together and pricing them as one. The notion is that the seller will sell more items than if the products were priced separately. Psychology often plays a role in how consumers view products and in determining what they will pay. Setting a price at an odd number tends to create a perception that the item is cheaper than the actual price. Prices in even numbers denote quality and status. Raising the price so an item will be perceived as having high quality and status is called prestige pricing. Consumers pay more because of the perceived quality or status.

Two important trends in product design and branding are building immediate brand recognition and using technology to meet individual customer needs.

This chapter explores how organizations use a distribution system to enhance the value of a product and examines the methods they use to move products to locations where consumers wish to buy them. First, we’ll discuss the functions and members of a distribution system. Next, we’ll explore the role of wholesalers and retailers in delivering products to customers. We’ll also discuss how physical distribution increases efficiency and customer satisfaction. Finally, we’ll look at the trends in distribution.

Physical distribution (logistics) is the movement of products from the producer or manufacturer, to industrial users and consumers. Physical distribution activities are usually the responsibility of the marketing department and are part of the large series of activities included in the supply chain. As discussed in Chapter 12, a supply chain is the system through which an organization acquires raw material. produces products, and delivers the products and services to its customers. Exhibit 15-1, page 445, illustrates the supply chain.

The physical distribution process is managed through logistics management, which involves managing (1) the movement of materials, (2) the movement of materials and products within plants and warehouses, and (3) the movement of finished goods to intermediaries and buyers.

Supply chain management helps increase the efficiency of logistics service by minimizing inventory and moving goods efficiently from producers to the ultimate users.

A recent innovation in logistics management is vendor-managed inventory, which was pioneered by Wal-Mart when it challenged the traditional roles of suppliers and distributors in building its superb supply chain. Using its vast wealth of sales information and working directly with manufacturers, the company surrendered responsibility for managing its warehouse inventories to its suppliers in exchange for having the right products delivered to the right store exactly when needed. Key manufacturers like Proctor & Gamble placed managers at Wal-Mart’s headquarters; there they managed the restocking of stores, replacing Wal-Mart buyers. The outside managers also pooled sales information and market research with Wal-Mart executives, helping the retailer improve store sales and the manufacturers to focus their marketing efforts. Vendor-managed inventory is now sweeping across a variety of industries from processed foods to health care.

On their way from producers to end users and consumers, goods and services pass through a series of marketing entities known as a distribution channel. This section will look first at the entities that make up a distribution channel and then will examine the functions that channels serve.

A distribution channel is made up of marketing intermediaries, or organizations that assist in moving goods and services from producers to end users and consumers. Marketing intermediaries are so called because they are in the middle of the distribution process between the product and the end user. The following market intermediaries most often appear in the distribution channel

manufacturers and wholesalers, and brokers are entities that bring buyers and sellers together. Both agents and brokers are usually hired on commission basis by either a buyer or a seller. Agents and brokers are go-betweens whose job is to make deals. They do not own or take possession of goods.

related product lines from many manufacturers and sell them to industrial users. They often have a sales force to call on purchasing agents, make deliveries, extend credit, and provide information. Industrial distributions are used in such industries as aircraft manufacturing, mining, and petroleum.

manufacturers, and institutions (such as schools and hospitals). Historically, their function has been to buy from manufacturers and sell to retailers.

At the end of the distribution channel are final consumers, like you and me, and industrial users. Industrial users are firms that buy products for internal use or for producing other products or services. They include manufacturers, utilities, airlines, railroads, and service institutions, such as hotels, hospitals, and schools.

Exhibit 15-2, page 446, shows various ways marketing intermediaries can be linked. For instance, a manufacturer may sell to a wholesaler that sells to a retailer that in turn sells to a customer. In any of these distribution systems, goods and services are physically transferred from one organization to the next. As each takes possession of the products, it may take legal ownership of them. As the exhibit indicates, distribution channels can handle either consumer products or industrial products.

Why do distribution channels exist? Why can’t every firm sell its products directly to the end user or consumer? Why are go-betweens needed? Channels serve a number of functions.

Channels make distribution simpler by reducing the number of transactions required to get a product from the manufacturer to the consumer. Assume for the moment that only four students are in your class. Also assume that your professor requires five textbooks, each from a different publisher. If there were no bookstore, 20 transactions would be necessary for all students in the class to buy the books, as shown in Exhibit 15-3, page 447. If the bookstore serves as a go-between, the number of transactions is reduced to nine. Each publisher sells to one bookstore rather than to four students. Each student buys from one bookstore instead of five publishers.

Dealing with channel intermediaries frees producers from many of the details of distribution activity. Producers are traditionally not as efficient or as enthusiastic about selling products directly to end users as channel members are.

First, producers may wish to focus on production. They may feel that they cannot both produce and distribute in a competitive way. Some firms also may not have the resources to invest in distributing their own products.

Channels make distribution easier in several ways. The first is by sorting which consists of the following:

(Allocating at the wholesale level is called breaking bulk.) For instance, a tank-car load of milk could be broken down into gallon jugs. The process of allocating generally is done when the goods are dispersed by region and as ownership of the good changes.

Without the sorting, accumulating, and allocating processes, modern society would not exist. We would have home-based industries providing custom or semi-custom products to local markets. In short, we would return to a much lower level of consumption.

A second way channels ease the flow of goods is by locating buyers for merchandise. A wholesaler must find the right retailers to sell a profitable volume of merchandise. A sporting goods wholesaler, for instance, must find the retailers who are most likely to reach sporting goods customers. Retailers have to understand the buying habits of consumers and put stores where consumers want and expect to find the merchandise. Every member of a distribution channel must locate buyers for the products it is trying to sell.

Channel members also store merchandise so that goods are available when customers want to buy them. The high cost of retail space often means that goods are stored by the wholesaler or the manufacturer.

The functions performed by channel members help increase the efficiency of the channel. Yet consumers sometimes feel that go-betweens create higher prices. They doubt that these intermediaries perform useful functions. Actually, however, if channel members did not perform important and necessary functions at a reasonable cost, they would cease to exist. If firms could earn a higher profit without using certain channel members, they would not use them.

A useful rule to remember is that, although channel members can be eliminated, their functions cannot. The manufacturer must either perform the functions of the intermediaries itself or find new ways of getting them carried out. Publishers can bypass bookstores, for instance, but the function performed by the bookstores then has to be performed by the publishers or by someone else.

In an efficient distribution channel, all the channel members work smoothly together and do what they’re expected to do. A manufacturer expects wholesalers to promote its products to retailers and to perform several other functions as well. Not all channels have a leader or a single firm that sets channel policies. But all channels have members who rely on one another.

To increase the efficiency of distribution channels, many firms have turned to vertical marketing systems. In a vertical marketing system, firms are aligned in a hierarchy (manufacturer to wholesaler to retailer). Such systems are planned, organized, formulized versions of distribution channels. The three basic types of vertical marketing systems are corporate, administrative, and contractual.

In a corporate distribution system, one firm owns the entire channel of distribution. Corporate systems are tops in channel control. A single firm that owns the whole channel has no need to worry about channel members. The channel owner will always have supplies of raw materials and long-term contact with consumers. It will have good distribution and product exposure in the marketplace.

Examples of corporate distribution systems abound. Evans Products Co. (a manufacturer of plywood), for instance, bought wholesale lumber distributors to better market its products to retail dealers.

This move is an example of forward integration. Forward integration occurs when a manufacturer acquires a marketing intermediary closer to the customer, such as a wholesaler or retailer. A wholesaler could integrate forward by buying a retailer. Other examples of forward integration include Sherwin-Williams, a paint maker that operates over 2,000 paint stores, and Hart Schaffner and Marx, a long-established menswear manufacturer that owns more than 100 clothing outlets. Or a manufacturer might integrate forward by buying a wholesaler. For decades, Pepsi-Cola focused on supplying syrup and concentrate to independent bottlers. But in the 1980s, it decided it could best satisfy retailers’ demands by serving them itself. After spending several billion dollars to buy out independent bottlers, Pepsi-Cola today owns bottling and distributing operations that account for half the soda in its system. This strategy created many opportunities for supply chain improvement through a reorganization of its bottling and distribution network. To guide those decisions, Pepsi analyzed demographic trends to identify locations that would yield long-term growth and warrant future expansion. It coupled this information with soft drink consumption trends and marketing forecasts, thus determining when and where new plants should be located. But none of this would have been possible without the purchase of its bottling and distribution outlets.

Backward integration is just the reverse of forward integration. It occurs when a wholesaler or retailer gains control over the production process. Many large retail organizations have integrated backward. Sears has part ownership of production facilities that supply over 30 percent of its inventory. Wal-Mart bought McLane Co., a Texas wholesaler with a reputation as one of the best specialty distributors of cigarettes, candy, and perishables in the United States. With McLane, Wal-Mart can avoid outside distributors and can lower costs.

In an administrative distribution system, a strong organization takes over as leader and sets channel policies. The leadership role is informal; it is not written into a contract. Companies such as Gillette, Hanes, Campbell’s, and Westinghouse are administrative system leaders. They can often influence or control the policies of other channel members without the costs and expertise required to set up a corporate distribution system. They may be able to dictate how many wholesalers will be in the channel or require that the wholesalers offer 60-day credit to customers, among other things.

The third form of vertical marketing is a contractual distribution system. It is a network of independent firms at different levels (manufacturer, wholesaler, retailer) that coordinate their distribution activities through a written contract. Franchises are a common form of the contractual system. The parent companies of McDonald’s and Chemlawn, for instance, control distribution of their products through the franchising agreement.

All types of distribution systems must be concerned with market coverage. How many dealers will be used to distribute the product in a particular area? As Exhibit 15-4, page 451, the three degrees of coverage are exclusive, selective, and intensive. The type of product determines the intensity of the market coverage.

When a manufacturer selects one or two dealers in an area to market its products, it is using exclusive distribution. Only items that are in strong demand can be distributed exclusively because consumers must be willing to travel some distance to buy them. If Wrigley’s chewing gum were sold in only one drugstore per city, Wrigley’s would soon be out of business. However, Bang and Olufen stereo components, Jaguar automobiles, and Adrienne Vittadini designer clothing are distributed exclusively with great success.

A manufacturer that chooses a limited number of dealers in an area (but more than one or two) is using selective distribution. Since the number of retailers handling the product is limited, consumers must be willing to seek it out. Timberline boots, a high-quality line of footwear, are distributed selectively. So are Sony televisions, Maytag washers, Waterford crystal, and Tommy Hilfiger clothing. When choosing dealers, manufacturers look for certain qualities. Sony may seek retailers that can offer high-quality customer service. Tommy Hilfiger may look for retailers with high-traffic locations in regional shopping malls. All manufacturers try to exclude retailers that are a poor credit risk or that have a weak or negative image.

A manufacturer that wants to sell its products everywhere there are potential customers is using intensive distribution. Such consumer goods as bread, tape, and light bulbs are often distributed intensively. Usually these products cost little and are bought frequently, which means that complex distribution channels are necessary. Coca-Cola is sold in just about every type of retail business, from gas stations to supermarkets.

Wholesalers are channel members that buy finished products from manufacturers and sell them to retailers. Retailers in turn sell the products to consumers. Manufacturers that use selective or exclusive distribution normally sell directly to retailers. Manufacturers that use intensive distribution often rely on wholesalers.

Wholesalers also sell products to institutions, such as manufacturers, schools, and hospitals, for use in performing their own missions. A manufacturer, for instance, might buy typing paper from Nationwide Papers, a wholesaler. A hospital might buy its cleaning supplies from Lagasse Brothers, one of the nation’s largest wholesalers of janitorial supplies.

Sometimes wholesalers sell products to manufacturers for use in the manufacturing process. A builder of custom boats, for instance, might buy batteries from a battery wholesaler and switches from an electrical wholesaler. Some wholesalers even sell to other wholesalers, creating yet another stage in the distribution channel.

About half of all wholesalers offer financing for their clients. They sell products on credit and expect to be paid within a certain time, usually 60 days. Other wholesalers operate like retail stores. The retailer goes to the wholesaler, selects the merchandise, pays cash for it, and transports it to the retail outlet.

Because wholesalers usually serve limited areas, they are often located closer to retailers than the manufacturers are. Retailers can thus get faster delivery at lower cost from wholesalers. A retailer who knows that a wholesaler can restock store shelves within a day can keep a low level of inventory on hand. More money is then available for other things because less cash is tied up in items sitting on the shelves or in storerooms.

The two main types of wholesalers are merchant wholesalers and agents and brokers, as shown in Exhibit 15-5, page 452. Merchant wholesalers take title to the product (ownership rights); agents and brokers simply facilitate the sale of a product from producer to end user.

Merchant wholesalers make up 80 percent of all wholesaling establishments and conduct slightly under 60 percent of all wholesale sales. A merchant wholesaler is an institution that buys goods from manufacturers and resells them to retailers. All merchant wholesalers take title to the goods they sell. Most merchant wholesalers operate one or more warehouses where they receive goods, store them, and later reship them. Customers are mostly small or moderate-size retailers, but merchant wholesalers also market to manufacturers and institutional clients. Merchant wholesalers can be categorized as either full-service or limited-service wholesalers, depending on the number of channel functions they perform.

Full-service merchant wholesalers perform many functions. They assemble an assortment of products for their clients, provide credit, and offer promotional help and technical advice. In addition, they maintain a sales force to contact customers, store and deliver merchandise, and perhaps offer research and planning support. Depending on the product line, full-service merchant wholesalers sometimes provide installation and repair as well. Full service also means “going the extra mile” to meet special customer needs, such as offering fast delivery in emergencies.

Limited-service merchant wholesalers perform only a few of the full-service merchant wholesalers activities. Generally, limited-service merchant wholesalers carry a limited line of fast-moving merchandise. They do not extend credit or supply market information.

One type of limited-service merchant wholesaler is the cash and carry wholesaler. This wholesaler doesn’t offer credit or delivery, hence the term “cash and carry” wholesaler. Sam’s Clubs and Costco are nationally known cash and carry wholesalers. About 60 percent of Sam’s volume is done with small businesses. These companies are unique because they are not only wholesalers but also do business with consumers. Government employees, credit union members, and employees of large corporations, among others, can pay an annual fee (usually $35) and shop at Costco or Sam’s. Retail customers typically pay a 5 percent markup as well. Exhibit 15-6, page 454, lists additional types of limited-service merchant wholesalers.

Manufacturers’ representatives (also called manufacturers’ agents) represent noncompeting manufacturers. These salespeople function as independent agents rather than as salaried employees of manufacturers. They do not take title to or possession of merchandise. They get commissions if the make sales—and nothing if they don’t. They are found in a variety of industries, including electronics, clothing, hardware, furniture, and toys.

Brokers bring buyers and seller together. Like agents, brokers do not take title to merchandise, they receive commissions on sales, and they have little say over company sales policies. They are found in markets where the information that would join buyers and sellers is scarce. These markets include real estate, agriculture, insurance, and commodities.

Some 30 million Americans are engaged in retailing. Of this number, almost 16 million work in service businesses like barber shops, lawyers’ offices, and amusement parks. Although most retailers are involved in small businesses, most sales are made by giant retail organizations, such as Sears, Wal-Mart, Kmart, and JC Penny. Half of all retail sales come from fewer than 10 percent of all retail businesses. This small group employs about 40 percent of all retail workers. Retailers feel the impact of changes in the economy more than any other types of businesses. Survival depends on keeping up with changing lifestyles and customer shopping patterns.

There is a great deal of variety in retail operations. The major types of retailers are described in Exhibit 17-7, page 455, which divided them into two main categories: in-store and nonstore retailing. Examples of in-store retailing include Sears, Wal-Mart, Kmart, Saks, and Dayton Hudson. These retailers get most of their revenue from people from people who come to the store to buy what they want. Many in-store retailers also do some catalog and telephone sales.

Nonstore retailing includes vending, direct selling, direct-response marketing, home shopping networks, and internet retailing. Vending uses machines to sell food and other items, usually as a convenience to institutions like schools and hospitals.

Direct selling involves face-to-face contact between the buyer and seller, but not in a retail store. Usually, the seller goes to the consumer’s home. Sometimes contracts are made at the place of work. Mary Kay Cosmetics, Avon, Herbalife, and Amway each employ over 100,000 direct salespeople. Some companies, such as Tupperware and Longaberger baskets, specialize in parties in a person’s home. Most parties are a combination social affair and sales demonstration. The hostess usually gets a discount and a special gift for rounding up a group of friends. Such parties seem to be replacing door-to-door canvassing. The sales of many direct-sales companies have suffered, however, as women continue to enter the workforce on a full-time basis.

Direct-response marketing is conducted through media that encourage a customer to reply. Popular direct-response media are catalogs, direct mail, television, newspapers, and radio. The ads invite a person to “call the toll-free number now” or to fill out an order blank. Direct response marketing includes K-Tel selling “golden oldies” and Ed McMahon shouting from an envelope that “you may have just won $10 million.” It also includes the catalogs sent out by Land’s End, L. L. Bean, J. Crew, Lillian Vernon, and countless others.

Internet retailing, also called e-commerce, is the selling of merchandise over the Internet. E-commerce sales are exploding and will have a profound impact on retailers around the world. It is also going to change how you shop. Internet retailing is discussed later in this chapter. Meanwhile, some of the hottest entrepreneurs around are those starting e-commerce businesses on the Net. Winning in cyberspace is discussed in the Focusing on Small Business box.

Retailing is a very competitive business. Managers have to develop an effective strategy to survive. The key tasks in building a retail strategy is to define the target market. This process begins with market segmentation, the topic of an earlier chapter, and the determination of a target market. For example, Target’s merchandising approach for sporting goods is to match its product assortment to the demographics of the local store and region. Target stores in the Northeast stock a variety of ski equipment to satisfy the local interest in downhill and cross-country skiing. The amount of space devoted to sporting goods, as well as in-store promotions also varies according to each store’s target market. Target markets in retailing are often defined by demographics. Dollar General and Family Dollar stores target households earning less than $25,000 per year. Eddie Bauer targets suburban 25 to 45 year olds. Claire’s, a retailer selling inexpensive costume jewelry, such as Y-shaped necklaces, wire triceps bracelets and headbands, targets 12- to 14-year-old girls.

The second element in determining a retail strategy is the product offering, also called the product assortment or merchandise mix. Retailers decide what to sell on the basis of what their target market wants to buy. They can base their decision on market research, past sales, fashion trends, customer requests, and other sources. For example, after more companies began promoting office casual days, Brooks Brothers, the upscale retailer of men’s and women’s conservative business wear, updated its product line with khaki pants, casual shirts, and a selection of brightly colored shirts and ties.

After determining what products will satisfy target customers’ desires, retailers must find sources of supply and evaluate the products. When the right products are located, the retail buyer negotiates a purchase contract. The buying function can be performed in-house or delegated to an outside firm. The goods must then be moved from the seller to the retailer, which means shipping, storing, and stocking the inventory. The trick is to manage the inventory by cutting prices to move slow goods and by keeping adequate supplies of hot-selling items in stock.

One of the more efficient new methods of managing inventory and streamlining the way products are moved from supplier to distributor to retailer is called efficient consumer response (ECR).

At the heart of ECR is electronic data interchange (EDI), the computer-to-computer exchange of information including automatic shipping notifications, invoices, inventory data, and forecasts. In a full implementation of ECR, products are scanned at the retail store when purchased, which updates the store’s inventory lists. Headquarters then polls the stores to retrieve the data needed to produce an order. The vendor confirms the order, shipping date, and delivery time, then ships the order, and transmits the invoice electronically. The item is received at the warehouse, scanned into inventory, and then sent to the store. The invoice and receiving data are reconciled, and payment via an electronic transfer of funds completes the process. Many retailer are experimenting with or have successfully implemented ECR and EDI. Dillard’s one of the fastest-growing regional department store chains, has one of the most technologically advanced ECR systems in the industry.

The pioneer and market leader in ECR systems is Wal-Mart, discussed in the Applying Technology box on page 458.

The third task in developing a retail strategy is to create an image and a promotional strategy. Promotion combines with the store’s merchandise mix, service level, and atmosphere to make up a retail image. We’ll discuss promotion in more detail in the next chapter.

Atmosphere refers to the physical layout and décor of the store. They can create a relaxed or busy feeling, a sense of luxury, a friendly or cold attitude, and a sense of organization or clutter.

general characteristics—for instance, neat, friendly, knowledgeable, or service oriented. Density is the number of employees per 1,000 square feet of selling space. A discounter such as Kmart has a low employee density that creates a “do-it-yourself” casual atmosphere.

and how it is displayed add to the atmosphere the retailer is trying to create. A prestigious retailer such as Saks or Marshall Field’s carries the best brand names and displays them in a neat uncluttered arrangement.

trendy (chrome and smoked glass), or old, beat-up tables, as in an antique store. The fixtures should be consistent with the general atmosphere the store is trying to create. By displaying its merchandise on tables and shelves rather than on traditional pipe racks, the Gap creates a relaxed and uncluttered atmosphere that enables customers to see and touch the merchandise more easily.

Classical music at a nice Italian restaurant helps create ambiance, just as country and western music does at a truck stop. Music can also entice customers to stay in the store longer and buy more or encourage them to eat quickly and leave a table for others.

wonderful smell of pastries and breads entices bakery customers, Conversely, customers can be repulsed by bad odors, such as cigarette smoke, musty smells, antiseptic odors, and overly powerful room deodorizers.

The next task in creating a retail strategy is figuring out where to put the store. First, a community must be chosen. This decision depends on the strength of the local economy, the nature of the competition, the political climate, and so forth. Then a specific site must be selected. One important decision is whether to locate in a shopping center. Large retailers like Kmart and Target and sellers of shopping goods like furniture and cars can use a free-standing store because customers will seek them out. Such a location also has the advantages of low-cost land or rent and no direct competitors close by. It may be harder to attract customers to a free-standing location, however. Another disadvantage is that the retailer can’t share costs for promotion, maintenance, and holiday decorating, as do store in a mall.

Another strategic task of the retail manager is to set prices. The strategy of pricing was presented in Chapter 14. Retailing’s goal is to sell products, and the price is critical in ensuring that sales take place.

Price is also one of the three key elements in the store’s image and positioning strategy. Higher prices often imply quality and help support the prestige image of such retailers as Lord and Taylor, Saks Fifth Avenue, Gatch, Carrier, and Neiman-Marcus. On the other hand, discounters and off-price retailers offer good value for the money.

Using Physical Distribution to Increase Efficiency and Customer Satisfaction

Physical distribution is an important part of the marketing mix. Retailers don’t sell products they can’t deliver, and salespeople don’t (or shouldn’t) promise deliveries they can’t make. Late deliveries and broken promises may mean loss of a customer. Accurate order filling and billing, timely delivery, and arrival in good condition are important to the success of the product.

Distribution managers are responsible for making decisions that affect the successful delivery of a product to the end consumer. These decisions, presented in this section, include choosing a warehouse location and type, setting up a materials-handling system, and choosing among the available modes of transportation.

Deciding where to put a warehouse is mostly a matter of deciding which markets will be served and where production facilities will be located. A storage warehouse is used to hold goods for a long time. For instance, Jantzen makes bathing suites at an even rate throughout the year to provide steady employment and hold costs down. It then stores them in a warehouse until the selling season.

Distribution centers are a special form of warehouse. They specialize in changing shipment sizes rather than storing goods. Such centers make bulk (put shipments together) or break bulk. They strive for rapid inventory turnover. When shipments arrive, the merchandise is quickly sorted into orders for various retail stores. As soon as the order is complete, it is delivered. Distribution centers are the wave of the future, replacing traditional warehouses. Companies simply can’t afford to have a lot of money tied up in idle inventory.

A materials-handling system moves and handles inventory. The goal of such a system is to move items as quickly as possible while handling them as little as possible. When Kodak built a new plant for making photographic coated paper, for example, it designed a way to minimize materials handling. It build a 10-level concrete rack to hold the one-ton rolls of raw paper. A computer handles inventory control and commands machines that can retrieve and carry the rolls without damage and then load the paper onto the assembly line.

Transportation typically accounts for between 5 and 10 percent of the price of goods. Physical distribution managers must decide which mode of transportation to use to move products from producer to buyer. This decision is, of course, related to all other physical distribution discussions. The five major modes of transportation are railroads, motor carriers, pipelines, water transportation, and airways. Distribution managers generally choose a mode of transportation on the basis of several criteria:

including the time required for pickup and delivery, handling, and movement between the point of origin and the destination.

equipment and conditions for moving specific kinds of goods, such as those that must be transported in a controlled environment (for example, under refrigeration).

Using these six criteria, a shipper selects the mode of transportation that will best meet its needs. Exhibit 15-8, page 461, shows the basic modes of transportation rank in terms of these criteria.

Companies are using new distribution strategies to boost their profits and gain a competitive edge. The Internet is spurring many of these new strategies by opening up a whole new avenue for buying goods and services. In this section we’ll discuss two emerging trends in distribution, stocklifting and the growth of the physical distribution of services. Chapter 18 will explore how the Internet is offering vast new methods for distributing products and services.

At the giant Lowe’s Home Improvement Warehouse store in Athens, Georgia, in aisle 23 near the lawn mowers, hundreds of garden gloves recently vanished. The missing merchandise was manufactured by Wells Lamont, the nation’s largest garden-glove company. Almost overnight, the empty shelves were restocked with gloves made by Wells Lamont’s archrival, Midwest Quality Gloves, Inc. The same scene played out in 100 other Lowe’s stores: Wells Lamont gloves were replaced by Midwest gloves—floral, pigskin, cowhide, and others. Behind the inventory switch was Midwest. It had struck a deal with Lowe’s to buy 225,000 pairs of Wells Lamont gloves and clear them all out so that it could fill shelf after shelf with its own product.

This shadowy tactic—called a stocklift or a buyback—is spreading. Makers of everything from party napkins to bicycle chains are lifting truckloads of competitors’ products everywhere from Kmarts to Revco drugstores. Then they dump the merchandise into an underground distribution network for resale by faraway, sometimes foreign, retailers. Wells Lamont, the stocklift victim, had no immediate recourse. “Of course we mind it, but that’s not illegal,” shrugs Richard Stoller, a Wells Lamont vice-president, referring to any stocklift. “We sold the product to the customer,” the retailer. “it’s their inventory, not ours.”

Manufacturers say store managers increasingly consider stocklifts the normal way to do business with vendors. “It costs a ton of money,” says Nicolaus Bruns, group product manager for humidifiers and other housewares at Bemis Manufacturing Co. But “if you want to land a major [retail] account, you’re gong to have to do it.”

The fastest-growing part of our economy is the service sector. Although distribution in the service sector is difficult to visualize, the same skills, techniques, and strategies used to manage goods inventory can also be used to manage service inventory, such as hospital beds, bank accounts, or airline seats. The quality of the planning and execution of distribution can have a major impact on costs and customer satisfaction. Because service industries are so customer oriented, customer service is a priority. Service distribution focuses on three main areas.

- Minimizing wait times. Minimizing the amount of time customers wait to deposit a check, obtain their food at a restaurant, or see a doctor for an appointment is a key factor in maintaining the quality of service. FedEx, for example, revolutionized the delivery market when it introduced guaranteed overnight delivery of packages and documents to commercial and residential customers.

- Managing service capacity. For a product manufacturer, inventory acts as a buffer, enabling it to provide the product during periods of peak demand without extraordinary efforts. Service firms don’t have the this luxury. If they don’t have the capacity to meet demand, they must either turn down some prospective customers, let service levels slip, or expand capacity. For instance, at tax time so many customers may desire tax preparation services that a tax preparation firm will have to either turn business away or add temporary offices or preparers.

- Improving delivery through new distribution channels. Like manufacturers, service firms are now experimenting with different distribution channels for their services. These new channels can increase the time that services are available (like round-the-clock automated teller machines) or add to customer convenience (like pizza delivery or walk-in medical clinics). For example, alternatives to hospitals called medical malls now offer one-stop shopping for all types of medical services. Like traditional malls, these shopping areas are equipped with fountains, food courts, and other amenities. The only difference lies in their product assortment, which ranges from radiology and cardiac treatment to outpatient surgery.

This chapter has two important implications for you, both of which involve the Internet. First, the Web is going to make it easier for you to shop. Second, just as the automobile transformed consumers’ lives in the 20^th century, the Web will change your life in this century.

If you want to sniff several new perfumes, mall walk, or simply be around other people and people watch, then the old familiar mall is the place to go. If you want convenience and the ability to comparison shop, go to the Net. To find the best fare for traveling, use one of the sites listed in Exhibit 15-9, page 464.

The Net is about choice, freedom, and control. Online consumers can take out of cyberspace anything that interests them and leave behind what doesn’t. In the offline world, products and services are built far in advance of customer needs, and customers can do little to configure those products and services to their own requirements. That situation is fading into history. The Net allows a vendor to build to demand. Already Gateway and Dell let customers configure personal computers and servers to their liking.

Consumers like you may save time and money by shopping online, which offers easy access to information and the opportunity to compare prices. Just about everything will soon be obtainable over the Web. Through the years retailers and manufacturers have made billions of dollars in profits from the inability of consumers to compare prices quickly. Now search engines and product comparison sites can save you time as never before. They can make you a smarter shopper. You may be able to raise you standard of living by one-third just by becoming an intelligent buyer. The Web can easily make this happen for you.

Physical distribution, or logistics, is the movement of products from the producer to industrial users and consumers. Logistics management involves managing (1) the movement of raw materials, (2) the movement of materials and products within plants and warehouses, and (3) the movement of finished goods to intermediaries and buyers. Supply chain management helps increase the efficiency of logistics service by minimizing inventory and moving goods efficiently.

Distribution channels are the series of marketing entities through which goods and services pass on their way from producers to end users. Distribution systems focus on the physical transfer of goods and services and on their legal ownership at each stage of the distribution process. Channels (1) reduce the number of transactions, (2) ease the flow of goods, and (3) increase channel efficiency.

A vertical marketing system is a planned, hierarchical organized distribution channel. There are three types of vertical marketing systems: corporate, administrative, and contractual. In a corporate system, one firm owns the entire channel. In an administrative system, a strong organization takes over as leader and sets channel policies. In a contractual distribution system, the independent firms coordinate their distribution activities by written contract. Forward integration occurs in a distribution channel when a manufacturer acquires a marketing intermediary closer to the customer, such as a retailer. Backward integration occurs when a wholesaler or retailer gains control over the production process.

The degree of intensity depends in part on they type of product being distributed . Exclusive distribution (one or two dealers in an area) is used when products are in high demand in the target market. Selective distribution has a limited number of dealers per area, but more than one or two. This form of distribution is used for consumer shopping goods, some specialty goods, and some industrial accessories. Intensive distribution occurs when the manufacturer sells its products in virtually every store willing to carry them. It is used mainly for consumer convenience goods.

Wholesalers typically sell finished products to retailers and to other institutions, such as manufacturers, schools, and hospitals. They also provide a wide variety of services, among them storing merchandise, financing inventory, breaking bulk, providing rapid delivery to retailers, and supplying market information. The three main types of wholesalers are merchant wholesalers, and agents and brokers. Merchant wholesalers buy from manufacturers and sell to other businesses. Full-service merchant wholesalers offer a complete array of services to their customers, who are retailers. Limited-service merchant wholesalers typically carry a limited line of fast-moving merchandise and offer few services to their customers. Agents and brokers are essentially independents who provide buying and selling services. They receive commissions according to their sales.

Some 30 million Americans are engaged in retailing. Retailing can be either instore or nonstore. In-store retail operations include department stores, off-price retailers, factory outlets, and catalog showrooms. Nonstore retailing includes vending machines, direct sales, direct-response marketing, and Internet retailing (e-commerce).

Creating a retail strategy is important in all kinds of retailing and involves defining a target market, developing a product offering, creating an image and a promotional strategy, choosing a location, and setting prices. The most important factors in creating a store’s atmosphere are employee type and density, merchandise type and density, fixture type and density, sound, and odors.

The functions of physical distribution include choosing a warehouse location and type, setting up a materials-handling system, and choosing modes of transportation (air, highway, rail, water, or pipeline). Criteria for selecting a mode of transportation include cost, transit time, reliability, capability, accessibility, and traceability.

The tactic of stocklifting, or buyback, is becoming increasingly popular among large manufacturers. It occurs when a company buys all of its competitor’s stock from a retailer and replaces the inventory with its own merchandise. Physical distribution for services is becoming increasingly important because service providers must build good relationships with customers. This involves minimizing wait times, managing service capacity, and improving service delivery through new distribution channels.

It is estimated that by 2005 everyone in the developed world will have Internet access. Millions of consumers are now engaged in e-commerce as a result. Web shopping is safe, quick, and convenient. It enables consumers to compare product features and prices like never before. Consumers can use the Internet to shop all over the world.