Download The Twelfth Edition Creating More Value for You! Marketing: Creating Customer Value and Relationships. Five Maj...
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Preface The Twelfth Edition—Creating More Value for You! The goal of Principles of Marketing, twelfth edition, is to introduce new marketing students to the fascinating world of modern marketing in an innovative yet practical and enjoyable way. Like any good marketer, we’re out to create more value for you, our customer. We’ve poured over every page, table, figure, fact, and example in an effort to make this the best text from which to learn about and teach marketing. Today’s marketing is all about creating customer value and building profitable customer relationships. It starts with understanding consumer needs and wants, deciding which target markets the organization can serve best, and developing a compelling value proposition by which the organization can win, keep, and grow targeted consumers. If an organization does these things well, it will reap the rewards in terms of market share, profits, and customer equity. Marketing is much more than just an isolated business function—it is a philosophy that guides the entire organization. The marketing department cannot create customer value and build profitable customer relationships by itself. This is a companywide undertaking that involves broad decisions about who the company wants as its customers, which needs to satisfy, what products and services to offer, what prices to set, what communications to send, and what partnerships to develop. Marketing must work closely with other company departments and with other organizations throughout its entire value-delivery system to delight customers by creating superior customer value.
Marketing: Creating Customer Value and Relationships From beginning to end, Principles of Marketing develops an innovative customer-value and customer-relationships framework that captures the essence of today’s marketing.
Five Major Value Themes The twelfth edition builds on five major value themes: ■
Marketing: Creating and Capturing Customer Value Create value for customers and build customer relationships Understand the marketplace and customer needs and wants
Design a customer-driven marketing strategy
Construct an integrated marketing program that delivers superior value
Research customers and the marketplace
Select customers to serve: market segmentation and targeting
Product and service design: build strong brands
Decide on a value proposition: differentiation and positioning
Pricing: create real value
Manage marketing information and customer data
Distribution: manage demand and supply chains
Capture value from customers in return Build profitable relationships and create customer delight
Capture value from customers to create profits and customer equity
Customer relationship management: build strong relationships with chosen customers
Create satisfied, loyal customers
Partner relationship management: build strong relationships with marketing partners
Promotion: communicate the value proposition
Harness marketing technology
Manage global markets
FIGURE 1.6 An expanded model of the marketing process
Ensure ethical and social responsibility
Capture customer lifetime value Increase share of market and share of customer
Creating value for customers in order to capture value from customers in return. Today’s marketers must be good at creating customer value and managing customer relationships. They must attract targeted customers with strong value propositions. Then, they must keep and grow customers by delivering superior customer value and effectively managing the company-customer interface. Today’s outstanding marketing companies understand the marketplace and customer needs, design value-creating marketing strategies, develop integrated marketing programs that deliver customer value and delight, and build strong customer relationships. In return, they capture value from customers in the form of sales, profits, and customer loyalty.
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Preface This innovative customer-value framework is introduced at the start of Chapter 1 in a five-step marketing process model, which details how marketing creates customer value and captures value in return. The framework is carefully explained in the first two chapters, providing students with a solid foundation. The framework is then integrated throughout the remainder of the text. ■
Building and managing strong, value-creating brands. Well-positioned brands with strong brand equity provide the basis upon which to build customer value and profitable customer relationships. Today’s marketers must position their brands powerfully and manage them well.
Managing return on marketing to recapture value. In order to capture value from customers in return, marketing managers must be good at measuring and managing the return on their marketing investments. They must ensure that their marketing dollars are being well spent. In the past, many marketers spent freely on big, expensive marketing programs, often Measuring and Managing Return without thinking carefully about the finanon Marketing Investment cial and customer response returns on their spending. But all that is changing rapidly. Marketing investments Measuring and managing return on marketing investments has become an important part of strategic marketing decision making. Marketing returns ■
FIGURE 2.8 Return on marketing Source: Adapted from Roland T. Rust, Katherine N. Lemon, and Valerie A. Zeithamal, “Return on Marketing: Using Consumer Equity to Focus Marketing Strategy,” Journal of Marketing, January 2004, p. 112.
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Improved customer value and satisfaction
Increased customer attraction
Increased customer retention
Increased customer lifetime values and customer equity
Return on marketing investment
Cost of marketing investment
Harnessing new marketing technologies. New digital and other high-tech marketing developments are dramatically changing how marketers create and communication customer value. Today’s marketers must know how to leverage new computer, information, communication, and distribution technologies to connect more effectively with customers and marketing partners in this digital age.
Marketing in a socially responsible way around the globe. As technological developments make the world an increasingly smaller place, marketers must be good at marketing their brands globally and in socially responsible ways that create not just short-term value for individual customers but also long-term value for society as a whole. ■
Important Changes and Additions We’ve thoroughly revised the twelfth edition of Principles of Marketing to reflect the major trends and forces impacting marketing in this era of customer value and relationships. Here are just some of the major changes you’ll find in this edition. ■
This new edition builds on and extends the innovative customer-value framework from previous editions. No other marketing text presents such a clear and comprehensive customervalue approach.
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The integrated marketing communications chapters have been completely restructured to reflect sweeping shifts in how today’s marketers communicate value to customers. ■
A newly revised Chapter 14—Communicating Customer Value—addresses today’s shifting integrated marketing communications model. It tells how marketers are now adding a host new-age media—everything from interactive TV and the Internet to iPods and cell phones to reach targeted customers with more personalized messages.
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Advertising and public relations are now combined in Chapter 15, which includes important new discussions on “Madison & Vine” (the merging of advertising and entertainment to break through the clutter), return on advertising, and other important topics. A restructured Chapter 16 now combines personal selling and sales promotion.
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The new Chapter 17—Direct and Online Marketing—provides focused new coverage of direct marketing and its fastest-growing arm, marketing on the Internet. The new chapter includes a section on new digital direct-marketing technologies, such as mobile phone marketing, podcasts and vodcasts, and interactive TV.
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We’ve revised the pricing discussions in Chapter 10—Pricing: Understanding and Capturing Customer Value. It now focuses on customer-value-based pricing—on understanding and capturing customer value as the basis for setting and adjusting prices. The revised chapter includes new discussions of “good-value” and “value-added” pricing strategies, dynamic pricing, and competitive pricing considerations.
In line with the text’s emphasis on measuring and managing return on marketing, we’ve added a new Appendix 2: Marketing by the Numbers. This comprehensive new appendix introduces students to the marketing financial analysis that helps to guide, assess, and support marketing decisions in this Appendix 2 age of marketing accountability. MARKETING BY THE NUMBERS Madison & Vine: The New Intersection The Return on Marketing section Real Marketing of Advertising and Entertainment in Chapter 2 has also been 15.1 revised, and we’ve added return on advertising and return on selling discussions in later chapters. ■
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Marketing decisions are coming under increasing scrutiny, and marketing managers must be accountable for the financial implications of their actions. This appendix provides a basic introduction to marketing financial analysis. Such analysis guides marketers in making sound marketing decisions and in assessing the outcomes of those decisions. The appendix is built around a hypothetical manufacturer of high-definition consumer electronics products—HDX-treme. This company is launching a new product, and we will discuss and analyze the various decisions HDX-treme’s marketing managers must make before and after launch. HDX-treme manufactures high-definition televisions for the consumer market. The company has concentrated on televisions but is now entering the accessories market. Specifically, the company is introducing a high-definition optical disc player (DVD) using the Blu-ray format. The appendix is organized into three sections. The first section deals with the pricing considerations and break-even and margin analysis assessments that guide the introduction of HDX-treme’s new-product launch. The second section begins with a discussion of estimating market potential and company sales. It then introduces the marketing budget, as illustrated through a pro forma profit-and-loss statement followed by the actual profit-and-loss statement. Next, the section discusses marketing performance measures, with a focus on helping marketing managers to better defend their decisions from a financial perspective. In the final section, we analyze the financial implications of various marketing tactics, such as increasing advertising expenditures, adding sales representatives to increase distribution, lowering price, or extending the product line. At the end of each section, quantitative exercises provide you with an opportunity to apply the concepts you learned in that section to contexts beyond HDX-treme.
Pricing, Break-Even, and Margin Analysis Pricing Considerations Determining price is one of the most important marketing mix decisions, and marketers have considerable leeway when setting prices. The limiting factors are demand and costs. Demand factors, such as buyer perceived value, set the price ceiling. The company’s costs set the price floor. In between these two factors, marketers must consider competitors’ prices and other factors such as reseller requirements, government regulations, and company objectives. Current competing high-definition DVD products in this relatively new product category were introduced in 2006 and sell at retail prices between $500 and $1,200. HDX-treme plans to introduce its new product at a lower price in order to expand the market and to gain market share rapidly. We first consider HDX-treme’s pricing decision from a cost perspective. Then, we consider consumer value, the competitive environment, and reseller requirements.
Determining Costs Fixed costs Costs that do not vary with production or sales level.
Recall from Chapter 10 that there are different types of costs. Fixed costs do not vary with production or sales level and include costs such as rent, interest, depreciation, and clerical and management salaries. Regardless of the level of output, the company must pay these costs. Whereas total fixed costs remain constant as output increases, the fixed cost per unit (or average fixed cost) will decrease as output increases because the total fixed costs are spread across
Part 3 Designing a Customer-Driven Marketing Strategy and Marketing Mix
Welcome to the ever-busier intersection of Madison & Vine, where the advertising industry meets the entertainment industry. In today’s cluttered advertising environment, Madison Avenue knows that it must find new ways to engage adweary consumers with more compelling messages. The answer? Entertainment! And who knows more about entertainment than the folks at Hollywood & Vine? The term “Madison & Vine” has come to represent the merging of advertising and entertainment. It takes one of two primary forms: advertainment or branded entertainment. The aim of advertainment is to make ads themselves so entertaining, or so useful, that people want to watch them. It’s advertising by invitation rather than by intrusion. There’s no chance that you’d watch ads on purpose, you say? Think again. For example, the Super Bowl has become an annual advertainment showcase. Tens of millions of people tune in to the Super Bowl each year, as much to watch the entertaining ads as to see the game. And rather than bemoaning TiVo and other DVR systems, many advertisers are now using them as a new medium for showing useful or entertaining ads that consumers actually volunteer to watch. For example, TiVo recently launched Product Watch, a service offering special on-demand ads to subscribers from companies such as Kraft Foods, Ford, Lending Tree, and Pioneer Electronics. Longer than traditional 30-second spots, these ads allow consumers to research products before buying them or simply to learn something new. Kraft, for instance, offered 20 different cooking videos creating meals using its products. And Pioneer sponsored a four-minute video ad on the ins and outs of buying a plasma-screen high-definition television. Interestingly, a recent study found that DVR users aren’t necessarily skipping all the ads. According to the study, 55 percent of DVR users take their finger off the fast-forward button to watch a commercial that is entertaining or relevant, sometimes even watching it more than once. “If advertising is really entertaining, you don’t zap it,” notes an industry observer. “You might even go out of your way to see it.” Beyond making their regular ads more entertaining, advertisers are also creating new advertising forms that look less like ads and more like short films or shows. For example, as part of a $100 million campaign to introduce its Sunsilk line of hair care products in the United States, Unilever is producing a series of two-minute short programs that resemble sitcom episodes more than ads. The series, titled “Sunsilk Presents Max and Katie,” will run on the TBS cable network. The miniepisodes present a humorous look at the hectic life of a 20-something woman—not coincidentally, the Sunsilk target audience. In all, Unilever will produce 85 miniepisodes of “Max and Katie,” with 65 intended for TBS and the rest to be available online, on cell phones, through e-mail, and at displays in stores. The woman at whom Sunsilk will be aimed “has grown up being marketed to her
A-11 Execution style The approach, style, tone, words, and format used for executing an advertising message.
Welcome to Madison & Vine. As this book cover suggests, in today’s cluttered advertising environment, Madison Avenue must find new ways to engage ad-weary consumers with more compelling messages. The answer? Entertainment! whole life,” says a Unilever marketing manager. “She’s open to advertising, if it’s entertaining to her.” Similarly, Procter & Gamble produced a series of 90-second advertising sitcoms called “At the Poocherellas,” shown on Nick at Night, featuring a family of dogs and promoting its Febreze brand. Each miniepisode includes the expected commercial break, which lasts
MESSAGE EXECUTION The advertiser now must turn the big idea into an actual ad execution that will capture the target market’s attention and interest. The creative team must find the best approach, style, tone, words, and format for executing the message. Any message can be presented in different execution styles, such as the following: ■
Slice of life: This style shows one or more “typical” people using the product in a normal setting. For example, two mothers at a picnic discuss the nutritional benefits of Jif peanut butter.
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Chapter 9 contains a new section on managing new-product development, covering new customer-driven, team-based, holistic new-product development approaches.
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Chapter 5 (Consumer Behavior) provides a new discussion on “online social networks” that tells how marketers are tapping digital online networks such as YouTube, MySpace, and others to build stronger relationships between their brands and customers.
The twelfth edition also includes new and expanded material on a wide range of other topics, including managing customer relationships and CRM, brand strategy and positioning, SWOT analysis, data mining and data networks, ethnographic consumer research, marketing and diversity, generational marketing, buzz marketing, services marketing, supplier satisfaction and partnering, environmental sustainability, cause-related marketing, socially responsible marketing, global marketing strategies, and much, much more. Countless new examples have been added within the running text. All tables, examples, and references throughout the text have been thoroughly updated. The twelfth edition of Principles of Marketing contains mostly new photos and advertisem*nts that illustrate key points and make the text more effective and appealing. All new or revised company cases and many new video cases help to bring the real world directly into the classroom. The text even has a new look, with freshly designed figures. We don’t think you’ll find a fresher, more current, or more approachable text anywhere.
Real Value through Real Marketing Principles of Marketing features in-depth, real-world examples and stories that show concepts in action and reveal the drama of modern marketing. In the twelfth edition, every chapter-opening vignette and Real Marketing highlight has been updated or replaced to provide fresh and relevant insights into real marketing practices. Learn how: ■
NASCAR creates avidly loyal fans by selling not just stock car racing but a high-octane, totally involving experience
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Best Buy builds the right relationships with the right customers by going out of its way to attract and keep profitable “angel” customers while exorcizing unprofitable “demons”
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Nike’s “Just do it!” marketing strategy has matured as this venerable market leader has moved from maverick to mainstream
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Harrah’s, the world’s largest casino operator, maintains a vast customer database and uses CRM to manage day-to-day customer relationships and build customer loyalty
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Dunkin’ Donuts targets the “Dunkin’ Tribe”—not the Starbucks snob but the average Joe ■
Tiny nicher Bike Friday creates customer evangelists— delighted customers who can’t wait to tell others about the company
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Apple Computer founder Steve Jobs used dazzling customer- driven innovation to first start the company and then to remake it again 20 years later
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Staples held back its nowfamiliar “Staples: That was easy” repositioning campaign for more than a year. First, it had to live the slogan.
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Ryanair—Europe’s original, largest, and most profitable low-fares airline—appears to have found a radical new pricing solution: Fly free!
Part 3: Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix
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Customer-Driven Marketing Strategy Creating Value for Target Customers
Previewing the Concepts So far, you’ve learned what marketing is ast year, Dunkin’ Donuts paid dozens of faithful customers in Phoenix, and about the importance of understandChicago, and Charlotte, North Carolina, $100 a week to buy coffee at ing consumers and the marketplace enviStarbucks instead. At the same time, the no-frills coffee chain paid Starbucks ronment. With that as background, you’re customers to make the opposite switch. When it later debriefed the two groups, Dunkin’ now ready to delve deeper into marketing says it found them so polarized that company researchers dubbed them “tribes”— strategy and tactics. This chapter looks each of whom loathed the very things that made the other tribe loyal to their coffee further into key customer-driven marketshop. Dunkin’ fans viewed Starbucks as pretentious and trendy, whereas Starbucks loying strategy decisions—how to divide up alists saw Dunkin’ as plain and unoriginal. “I don’t get it,” one Dunkin’ regular told markets into meaningful customer groups researchers after visiting Starbucks. “If I want to sit on a couch, I stay at home.” (segmentation), choose which customer William Rosenberg opened the first Dunkin’ Donuts in Quincy, Massachusetts, in groups to serve (targeting), create market 1950. Residents flocked to his store each morning for the coffee and fresh doughofferings that best serve target customers nuts. Rosenberg started franchising the Dunkin’ Donuts name, and the chain grew (differentiation), and position the offerings rapidly throughout the Midwest and Southeast. By the early 1990s, however, in the minds of consumers (positioning). Dunkin’ was losing breakfast sales to morning sandwiches at McDonald’s and Then, the chapters that follow explore Burger King. Starbucks Staples: and other high-end cafes began Positioning Madesprouting up, bringing more the tactical marketing tools—the Four competition. Sales slid as the company clung to its strategy of selling sugary doughPs—by which marketers bring these stratenuts by the dozen. These days, Staples really is riding the easy button. But gies to life. In the mid-1990s, however, shifted its focus from doughnuts to coffee in ago, things weren’t so easyDunkin’ for the officeAs an opening example of segmenta-only five years supply superstore—or its customers. The ratio of customer comthefor hope that promoting a more frequently consumed item would drive store traffic. tion, targeting, differentiation,plaints and posito compliments was running an abysmal eight to one at The coffee push worked—coffee now makes up 62 percent of sales. And Dunkin’s tioning at work, let’s look at Dunkin’ Staples stores. The company’s slogan—“Yeah, we’ve got that”—had are growing a double-digit clip, out withofprofits up 35 percent over the past two become U.S. laughable.sales Customers griped at that items were often Donuts. Dunkin’, a largely Eastern years. Based on this recent and said staff was unhelpful to boot.success, Dunkin’ now has ambitious plans to expand coffee chain, has ambitiousstock plans to the sales After weeks of into focusa groups interviews, Shira Goodman, nationaland coffee powerhouse, on a par with Starbucks, the nation’s largest cofexpand into a national powerhouse, on a Staples’ executive VP marketing, hadnext a revelation. “Customers fee for chain. Over the three years, Dunkin’ plans to remake its nearly 5,000 U.S. par with Starbucks. But Dunkin’ wantedisan no easier shopping experience,” she says. That simple revestores and to grow to triple that number in less than 15 years. lation in one of the most successful marketing camStarbucks. In fact, it doesn’t want to has be.resulted It Dunkin’ Starbucks.“Staples: In fact,That it doesn’t want to be. To succeed, it must in recent history,But built around is thenot now-familiar targets a very different kind ofpaigns customer have its own clear vision of justtook which it wants to serve (what segments was easy” tagline. But Staples’ positioning turnaround a lotcustomers more with a very different value proposition. than simply bombarding customers with how a new slogan. Before it or value proposition). Dunkin’ and and targeting ) and (what positioning Grab yourself some coffee and read could on. promise customers a simplified shopping experience, Staples
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Starbucks target very different customers, who want very different things from their
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had to actually deliver one. First, it had to live the slogan. favorite coffee shop.allStarbucks is strongly positioned as a sort of high-brow “third When it launched in 1986, Staples but invented the officethemedium-size home and businesses, office—featuring couches, eclectic music, wireless supply superstore. place”—outside Targeting small and it aimed to sell everything for the office under roof. But by the midInternet access, and one art-splashed walls. Dunkin’ has a decidedly more low-brow, 1990s, the marketplace was crowded retailers such as Office “everyman” kind ofwith positioning. Depot, not to mention Target, Wal-Mart, and a slew of other online With its makeover, Dunkin’ plans to move upscale—a bit but not too far—to and offline sellers. Partly as a result of that competition, Staples’ itself as in a quick same-store sales fellrebrand for the first time 2001. but appealing alternative to specialty coffee shops and fastCustomer research conducted by Goodman andstore her in team food chains. A prototype Dunkin’ Euclid, Ohio, outside Cleveland, features revealed that although shoppers expected Staples and its competitors to have everything in stock, they placed little importance on price. Instead, customers overwhelmingly requested a simple, straightforward shopping experience. “They wanted knowledgeable and helpful associates and hassle-free shopping,” Goodman says. The “Staples: That was easy” tagline was the simple—yet inspired— outgrowth of that realization. The slogan, however, was kept under wraps until the company could give its stores a major makeover. Staples removed from its inventory some 800 superfluous items, such as Britney Spears backpacks, that had little use in the corporate world. Office chairs, which had been displayed in the rafters, were moved to the floor so customers could try The “Staples: That was easy” marketing campaign has played a major them out. Staples also added larger signs and retrained sales associ- role in repositioning Staples. But marketing promises count for little if ates to walk shoppers to the correct aisle. Because customers revealed not backed by the reality of the customer experience. that the availability of ink was one of their biggest concerns, the company introduced an in-stock guarantee on printer cartridges. Even communications were simplified—a four-paragraph letter sent to prospective customers was cut to two sentences. Only when all of the customer-experience pieces were in place did Staples begin communicating its new positioning to customers. It took about a year to get the stores up to snuff, Goodman says, but “once we felt that the experience was significantly easier, we changed the tagline.” For starters, the company hired a new ad agency, McCannErickson Worldwide, which had also created MasterCard’s nine-yearold “Priceless” campaign. A group of McCann copywriters and art directors held a marathon brainstorming session to find ways to illustrate the concept of “easy.” As the creative session dragged on, the group’s creative director mentioned how nice it would be if she could just push a button to come up with a great ad, so they could go to lunch. The Easy Button was born. “It took an amorphous concept and made it tangible,” Goodman says.
The Easy Button soon birthed a string of humorous and popular television commercials, which premiered in January 2005 and also aired during the Super Bowl a month later. In one spot, called “The Wall,” an emperor uses the button to erect a giant barrier as marauders approach; another shows an office worker causing printer cartridges to rain down from above. Online, Staples created a downloadable Easy Button toolbar, which took shoppers directly from their desktops to Staples.com, and billboards reminded commuters that an Easy Button would be helpful in snarled traffic. As a result of the advertising onslaught, customers began asking about buying real Easy Buttons, so Staples again took the cue. It began selling $5 three-inch red plastic buttons that when pushed say “That was easy.” Staples promised to donate $1 million in button profits to charity each year, and by mid-2006, it had sold its millionth button. By selling the Easy Button as a sort of modern-day stress ball, Staples has turned its customers into advertisers. Homegrown movies starring the button have appeared on video-sharing site
rounded granite-style coffee bars, where workers make espresso drinks face-to-face with customers. Open-air pastry cases brim with yogurt parfaits and fresh fruit, and a carefully orchestrated pop-music soundtrack is piped throughout. Yet Dunkin’ built itself on serving simple fare to working-class customers. Inching upscale without alienating that base will prove tricky. There will be no couches in the new stores. And Dunkin’ renamed a new hot sandwich a “stuffed melt” after customers complained that calling it a “panini” was too fancy. “We’re walking that [fine] line,” says Regina Lewis, the chain’s vice president of consumer insights. “The thing about the Dunkin’ tribe is, they see through the hype.” Dunkin’s research showed that although loyal Dunkin’ customers want nicer stores, they were bewildered and turned off by the atmosphere at Starbucks. They groused that crowds of laptop users made it difficult to find a seat. They didn’t like Starbucks’ “tall,” “grande,” and “venti” lingo for small, medium, and large coffees. And they couldn’t understand why anyone would pay as much as $4 for a cup of coffee. “It was almost as though they were a group of Martians talking about a group of Earthlings,” says an executive from Dunkin’s ad agency. One customer told researchers that lingering in a Starbucks felt like “celebrating Christmas with people you don’t know.” The Starbucks customers that Dunkin’ paid to switch were equally uneasy in Dunkin’ shops. “The Starbucks people couldn’t bear that they weren’t special anymore,” says the ad executive.
Objectives After studying this chapter, you should be able to 1. define the four major steps in designing a customer-driven market strategy: market segmentation, market targeting, differentiation, and positioning 2. list and discuss the major bases for segmenting consumer and business markets 3. explain how companies identify attractive market segments and choose a market targeting strategy 4. discuss how companies position their products for maximum competitive advantage in the marketplace
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The NBA has become one of today’s hottest global brands, jamming down one international slam dunk after another
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Dove—with its Campaign for Real Beauty campaign featuring candid and confident images of real women of all types—is on a bold mission to create a broader and healthier view of beauty
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These and countless other examples and illustrations throughout each chapter reinforce key concepts and bring marketing to life.
Valuable Learning Aids A wealth of chapter-opening, within-chapter, and end-of-chapter learning devices help students to learn, link, and apply major concepts: ■
Previewing the Concepts. A section at the beginning of each chapter briefly previews chapter concepts, links them with previous chapter concepts, outlines chapter learning objectives, and introduces the chapter-opening vignette.
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Chapter-opening marketing stories. Each chapter begins with an engaging, deeply developed marketing story that introduces the chapter material and sparks student interest.
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Real Marketing highlights. Each chapter contains two highlight features that provide an in-depth look at real marketing practices of large and small companies.
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Reviewing the Concepts. A summary at the end of each chapter reviews major chapter concepts and chapter objectives.
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Reviewing the Key Terms. Key terms are highlighted within the text, clearly defined in the margins of the pages in which they first appear, and listed at the end of each chapter.
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Discussing the Concepts and Applying the Concepts. Each chapter contains a set of discussion questions and application exercises covering major chapter concepts.
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Focus on Technology. Application exercises at the end of each chapter provide discussion on important and emerging marketing technologies in this digital age.
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Focus on Ethics. Situation descriptions and questions highlight important issues in marketing ethics at the end of each chapter.
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Preface ■ Company Case
Saturn: An Image Makeover
From the beginning, Saturn set out to break through the Things are about to change at Saturn. The General Motors brand had only three iterations of the same compact car for GM bureaucracy and become “A different kind of car. A difthe entire decade of the 1990s. But Saturn will soon intro- ferent kind of company.” As the single-most defining charduce an all-new lineup of vehicles that includes a mid- acteristic of the new company, Saturn proclaimed that its sized sport sedan, an eight-passenger crossover vehicle, a sole focus would be people: customers, employees, and two-seat roadster, a new compact, and a hybrid SUV. communities. Saturn put significant resources into cusHaving anticipated the brand’s renaissance for years, Saturn tomer research and product development. The first Saturn made “fromg scratch,” without any allegiance to executives, employees, and customers are beside them-g cars were g the GM parts bin or suppliers. The goal was to produce not selves with glee. But with all this change, industry observers are wonder- only a high-quality vehicle, but one known for safety and ing whether Saturn will be able to maintain the very charac- innovative features that would “wow” the customer. Saturn’s focus on employees began with an unpreceteristics that have distinguished the brand since its incep- Harley-Davidson tion. Given that Saturn established itself based on a very dented contract with United Auto Workers (UAW). The conFew brands engender such intense loyalty as that found in the hearts of Web site, customers can book a trip to Milwaukee to visit the pocket. It established pronarrow line of compact vehicles, many believe that the tract was so simple, it fit in a shirtHarley’s Harley-Davidson owners. Why? Because the company’s marketers spend Harley factory in the company’s hometown or turn a Las Vegas vacation emphasis given to move from targeting one segment of customers to targeting gressive work rules, with special a great deal of time thinking about customers. They want to know who into “anof authentic Harley-Davidson empowerment. At adventure.” multiple segments will be challenging. Will a newly posi- benefits, work teams, and the concept their customers are, how they think and feel, and why they buy a Harley. After viewing featuring Harley-Davidson, answer the followbased the onvideo carefully tioned Saturn still meet the needs of one of the most loyal the retail end, Saturn selected dealers That attention to detail has helped build Harley-Davidson into a $5 billion ing questions about marketing strategy. crafted criteria. It paid service personnel and sales associcadres of customers in the automotive world? company with more than 900,000 Harley Owners Group (HOG) members ates a salary rather than commission. This would helpthat cre-are included in Harley-Davidson’s busi1. List several products and 1,200 dealerships worldwide. ate an environment that would reverse the common A NEW KIND OF CAR COMPANY ness portfolio. Analyzecusthe portfolio using the Boston Consulting Harley sells much more than motorcycles. The company sells a feelIn 1980, GM recognized its inferiority to the Japanese big tomer perception of the dealer as a nemesis. Group growth-share matrix. ing of independence, individualism, and freedom. To support that Finally, in addition to customer employee three (Honda, Toyota, and Datsun) with respect to compact 2. and Which strategiesrelations, in the product/market expansion grid is Harleylifestyle, Harley-Davidson offers clothes and accessories both for riders Human resources vehicles. The Japanese had a lower cost structure, yet built Saturn focused on social responsibility. Davidson using to grow sales and profits? and those who simply like to associate with the brand. Harley further better cars. In an effort to offer a more competitive economy policies gave equal opportunities to women, ethnic minoriextends the brand experience by offering travel adventures. Through 3. List some of the members of Harley’s value-delivery network. car, GM actually turned to the enemy. It entered into a joint ties, and people with disabilities. Saturn designed environventure with Toyota to build small cars. Soon, a Toyota mentally responsible manufacturing processes, even going plant in Northern California was turning out Corollas on beyond legal requirements. The company also gave heavy one assembly line while making very similar Chevy Novas philanthropic support to various causes. All of these actions on aTelevision second. isMeanwhile, in ascreen—the long-termmobile effortphones to make earned number awards recognizing its environhitting the small thatbetter more than 1. Saturn Explain awhy youngerofGen Yers might be more likely to adapt new small GM gave the green light to Group 99, secretive mentallymobile and socially responsibleasactions. 80cars, percent of adults now carry. Networks are anow producing phone technologies compared to other demographic task“mobisodes,” force thattwo-minute resulted episodes in formation the Saturn produced of exclusively for mobile groups. Corporation in 1985. (case continues) phones. Services such as Verizon’s Vcast let you watch TV or stream con-
Video Case
Focus on Technology
tent for a monthly fee. Who will subscribe to this? Certainly the younger segment of the Generation Y demographic—the growing 57 percent of U.S. teens, ages 13 to 17 years, who now own mobile phones. Although this is below the percentage of all adults owning mobile phones, this group displays the most intense connectivity to their phones and the most interest in new features.
2. What other macroenvironmental and microenvironmental forces might affect the growth of mobile TV? 3. How can other marketers use mobile marketing to communicate with and promote to consumers?
Focus on Ethics In February, 2005, R.J. Reynolds began a promotion that included directmail pieces to young adults on their birthdays. The campaign, entitled “Drinks on Us,” included a birthday greeting as well as a set of drink coasters that included recipes for many drinks. The drink recipes, which were for mixed drinks of high alcohol content, included many distiller brands such as Jack Daniels, Southern Comfort, and Finlandia Vodka. With the recipe on one side of the coaster, the flip side included a tag line such as “Go ’til Daybreak, and Make Sure You’re Sittin.” Shortly after its release, the promotion came under attack from several attorney generals,
public advocacy groups, and the alcohol distillers themselves. The attorney generals and advocacy groups said the promotion endorsed heavy drinking. The distillers were angry because their brands were used without permission. In addition, the distillers argued that the promotion violates the alcohol industry advertising code, which prohibits marketing that encourages excessive drinking. 1. What prominent environmental forces come into play in this situation? 2. Is this promotion wrong? Should R.J. Reynolds stop the promotion?
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Company Cases. All new or revised company cases for class or written discussion are provided at the end of each chapter. These cases challenge students to apply marketing principles to real companies in real situations. ■
Video Shorts. Short vignettes and discussion questions appear at the end of every chapter, to be used with the set of 4- to 7minute videos that accompany this edition.
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Marketing Plan appendix. Appendix 1 contains a sample marketing plan that helps students to apply important marketing planning concepts.
Marketing by the Numbers appendix. A new Appendix 2 introduces students to the marketing financial analysis that helps to guide, assess, and support marketing decisions.
More than ever before, the twelfth edition of Principles of Marketing creates value for you—it gives you all you need to know about marketing in an effective and enjoyable totallearning package!
A Valuable Supplements Package A successful marketing course requires more than a well-written book. Today’s classroom requires a dedicated teacher and a fully integrated teaching system. A total package of teaching and learning supplements extends this edition’s emphasis on creating value for both the student and instructor. The following aids support Principles of Marketing.
Supplements for Instructors The following supplements are available to adopting instructors.
Instructor’s Manual with Video Case Notes (ISBN: 0-13-239003-5) The instructor’s handbook for this text provides suggestions for using features and elements of the text. This Instructor’s Manual includes a chapter overview, objectives, a detailed lecture outline (incorporating key terms, text art, chapter objectives, and references to various pedagogical elements), and support for end-of-chapter material. Also included within each chapter is a section that offers barriers to effective learning, student projects/assignments, as well as an outside example, all of which provide a springboard for innovative learning experiences in the classroom. Video Case Notes, offering a brief summary of each segment, along with answers to the case questions in the text, as well as teaching ideas on how to present the material in class are also offered in the Instructor’s Manual. Visit the Instructor’s Resource Center Online (www.prenhall.com/irc) for these addtional elements: ■
“Professors on the Go!” serves to bring key material upfront in the manual, where an instructor who is short on time can take a quick look and find key points and assignments to incorporate into the lecture, without having to page through all the material provided for each chapter.
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Annotated Instructor’s Notes, which serve as a quick reference for the entire supplements package. Suggestions for using materials from the Instructor’s Manual, PowerPoint slides, Test Item File, Video Library, and online material are offered for each section within every chapter.
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More Quantitative Exercises, based on the concepts covered in Appendix 2: Marketing by the Numbers. An additional set of exercises are offered here, not found in the textbook. Suggested answers are provided as well.
Test Item File (ISBN: 0-13-239004-3) Featuring more than 3,000 questions, 175 questions per chapter, this Test Item File has been written specifically for the twelfth edition. Each chapter consists of multiple-choice, true/false,
chapter
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Previewing the Concepts In the previous three chapters, you learned about communicating customer value through integrated marketing communication (IMC) and about four specific elements of the marketing communications mix—advertising, publicity, personal selling, and sales promotion. In this chapter, we’ll look at the final IMC element, direct marketing, and at its fastestgrowing form, online marketing. Actually, direct marketing can be viewed as more than just a communications tool. In many ways it constitutes an overall marketing approach—a blend of communication and distribution channels all rolled into one. As you read on, remember that although this chapter examines direct marketing as a separate tool, it must be carefully integrated with other elements of the promotion mix. To set the stage, let’s first look at Dell, the world’s largest direct marketer of computer systems and the number-one PC maker worldwide. Ask anyone at Dell and they’ll tell you that the company owes its incredible success to what it calls the Dell Direct Model, a model that starts with direct customer relationships and ends with the Dell customer experience. Says one analyst, “There’s no better way to make, sell, and deliver PCs than the way Dell does it, and nobody executes [the direct] model better than Dell.”
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Direct and Online Marketing Building Direct Customer Relationships hen 19-year-old Michael Dell began selling personal computers out of his college dorm room in 1984, competitors and industry insiders scoffed at the concept of direct computer marketing. Yet young Michael proved the skeptics wrong—way wrong. In little more than two decades, he has turned his dorm-room mail-order business into the burgeoning, $56 billion Dell computer empire. Dell is now the world’s largest direct marketer of computer systems and the number-one PC maker worldwide. In the United States, Dell is number-one in desktop PC sales, number-one in laptops, number-one in servers, and number-two (and gaining) in printers. In fact, Dell flat out dominates the U.S. PC market, with a 33.5 percent market share, compared with number-two HP’s 19.4 percent and number-three Gateway’s 6.1 percent. Dell has produced a ten-year average annual return to investors of 39 percent, best among all Fortune 100 companies. Investors have enjoyed explosive share gains of more than 28,000 percent since Dell went public fewer than 20 years ago. What’s the secret to Dell’s stunning success? Anyone at Dell can tell you without hesitation: It’s the company’s radically different business model—the direct model. “We have a tremendously clear business model,” says Michael Dell, the company’s 41-year-old founder and chairman. “There’s no confusion about what the value proposition is, what the company offers, and why it’s great for customers.” An industry analyst agrees: “There’s no better way to make, sell, and deliver PCs than the way Dell does it, and nobody executes [the direct] model better than Dell.” Dell’s direct-marketing approach delivers greater customer value through an unbeatable combination of product customization, low prices, fast delivery, and award-winning customer service. A customer can talk by phone with a Dell representative at 1-800-Buy-Dell or log onto www.dell.com on Monday morning; order a fully customized, state-of-the-art PC to suit his or her special needs; and have the machine delivered to his or her doorstep or desktop by Wednesday—all at a price that’s well below competitors’ prices for a comparably performing PC. Dell backs its products with high-quality service and support. As a result, Dell consistently ranks among the industry leaders in product reliability and service, and its customers are routinely among the industry’s most satisfied. Dell customers get exactly the machines they need. Michael Dell’s initial idea was to serve individual buyers by letting them customize machines with the special features they wanted at low prices. However, this one-to-one approach also appeals strongly to corporate buyers, because Dell can so easily preconfigure each computer
W
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to precise requirements. Dell routinely preloads machines with a company’s own software and even undertakes tedious tasks such as pasting inventory tags onto each machine so that computers can be delivered directly to a given employee’s desk. As a result, more than 85 percent of Dell’s sales come from business, government, and educational buyers. The direct model results in more efficient selling and lower costs, which translate into lower prices for customers. “Nobody, but nobody, makes [and markets] computer hardware more efficiently than Dell,” says another analyst. “No unnecessary costs: This is an all-but-sacred mandate of the famous Dell direct business model.” Because Dell builds machines to order, it carries barely any inventory— less than three days’ worth by some accounts. Dealing one-to-one with customers helps the company react immediately to shifts in demand, so Dell doesn’t get stuck with PCs no one wants. Finally, by selling directly, Dell has no dealers to pay. As a result, on average, Dell’s costs are 12 percent lower than those of its leading PC competitor. Dell knows that time is money, and the company is obsessed with “speed.” According to one account, Dell squeezes “time out of every step in the process— from the moment an order is taken to collecting the cash. [By selling direct, manufacturing to order, and] tapping credit cards and electronic payment, Dell converts the average sale to cash in less than 24 hours.” By contrast, competitors selling through dealers might take 35 days or longer.
Objectives After studying this chapter, you should be able to 1. define direct marketing and discuss its benefits to customers and companies 2. identify and discuss the major forms of direct marketing 3. explain how companies have responded to the Internet and other powerful new technologies with online marketing strategies 4. discuss how companies go about conducting online marketing to profitably deliver more value to customers 5. overview the public policy and ethical issues presented by direct marketing
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix Such blazing speed results in more satisfied customers and still lower costs. For example, customers are often delighted to find their new computers arriving within as few as 36 hours of placing an order. And because Dell doesn’t order parts until an order is booked, it can take advantage of ever-falling component costs. On average, its parts are 60 days newer than those in competing machines, and, hence, 60 days farther down the price curve. This gives Dell a 6 percent profit advantage from parts costs alone. As you might imagine, competitors are no longer scoffing at Michael Dell’s vision of the future. In fact, competing and noncompeting companies alike are studying the Dell direct model closely. “Somehow Dell has been able to take flexibility and speed and build it into their DNA. It’s almost like drinking water,” says the CEO of another Fortune 500 company, who visited recently to absorb some of the Dell magic to apply to his own company. “I’m trying to drink as much water here as I can.” Still, as Dell grows larger and as the once-torrid growth in the sales of PCs slows, the Dell direct model is facing challenges. After years of rocketing revenue and profit numbers, Dell’s recent growth has slowed. Although Dell still dominates in selling PCs, servers, and peripherals to business markets, it appears to be stumbling in its attempts to sell an expanding assortment of high-tech consumer electronics products to final buyers. Some analysts suggest that Dell’s vaunted direct model may not work as well for selling LCD TVs, handhelds, MP3 players, digital cameras, and other personal digital devices—products that consumers want to see and experience first-hand before buying. In fact, Dell plans to add retail stores to help bolster the consumer side of its business. Slowing growth has led some analysts to ask, “Is the much-feared Dell Way running out of gas?” No way, says Dell. There’s no question, the company admits, that Dell isn’t the high-flying growth company it once was—you can’t expect a $56-billion-a-year giant to grow like a full-throttle start-up. But Dell continues to dominate its PC markets, and other companies would kill for Dell’s “disappointing” growth numbers—sales last year grew 13.6 percent, and profits were up 17.4 percent. “We still have an outrageous track record,” says Dell CEO Kevin Rollins. “Our [direct] model still works very well,” Michael Dell agrees. “We wouldn’t trade ours for anyone else’s!” he says. “In the past ten years our sales are up about 15 times, earnings and the stock price are up about 20 times. Not too shabby!” It’s hard to argue with success, and Michael Dell has been very successful. By following his hunches, at the tender age of 41 he has built one of the world’s hottest companies. In the process, he’s become one of the world’s richest men, amassing a personal fortune of more than $17 billion.1
Direct marketing Direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships.
Many of the marketing and promotion tools that we’ve examined in previous chapters were developed in the context of mass marketing: targeting broad markets with standardized messages and offers distributed through intermediaries. Today, however, with the trend toward more narrowly targeted marketing, many companies are adopting direct marketing, either as a primary marketing approach or as a supplement to other approaches. In this section, we explore the exploding world of direct marketing. Direct marketing consists of direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships. Direct marketers communicate directly with customers, often on a one-to-one, interactive basis. Using detailed databases, they tailor their marketing offers and communications to the needs of narrowly defined segments or even individual buyers. Beyond brand and relationship building, direct marketers usually seek a direct, immediate, and measurable consumer response. For example, as we learned in the chapter-opening story, Dell interacts directly with customers, by telephone or through its Web site, to design built-to-order systems that meet customers’ individual needs. Buyers order directly from Dell, and Dell quickly and efficiently delivers the new computers to their homes or offices.
The New Direct-Marketing Model Early direct marketers—catalog companies, direct mailers, and telemarketers—gathered customer names and sold goods mainly by mail and telephone. Today, however, fired by rapid advances in database technologies and new marketing media—especially the Internet—direct
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marketing has undergone a dramatic transformation. According to the head of the Direct Marketing Association, “In recent years, the dramatic growth of the Internet and the increasing sophistication of database technologies have [created] an extraordinary expansion of direct marketing and a seismic shift in what it is, how it’s used, and who uses it.”2 In previous chapters, we’ve discussed direct marketing as direct distribution—as marketing channels that contain no intermediaries. We also include direct marketing as one element of the promotion mix—as an approach for communicating directly with consumers. In actuality, direct marketing is both these things. Most companies still use direct marketing as a supplementary channel or medium for marketing their goods and messages. Thus, Lexus markets mostly through mass-media advertising and its high-quality dealer network but also supplements these channels with direct marketing. Its direct marketing includes promotional CDs and other materials mailed directly to prospective buyers and a Web page (www.lexus.com) that provides consumers with information about various models, competitive comparisons, financing, and dealer locations. Similarly, most department stores sell the majority of their merchandise off their store shelves but also sell through direct mail and online catalogs. However, for many companies today, direct marketing is more than just a supplementary channel or medium. For these companies, direct marketing—especially in its most recent transformation, online marketing—constitutes a complete model for doing business. More than just another marketing channel or advertising medium, this new direct model is rapidly changing the way companies think about building relationships with customers. Rather than using direct marketing and the Internet only as supplemental approaches, firms employing the direct model use it as the only approach. Companies such as Dell, Amazon.com, eBay, and GEICO have built their entire approach to the marketplace around direct marketing.
Growth and Benefits of Direct Marketing Direct marketing has become the fastest-growing form of marketing. According to the Direct Marketing Association, U.S. companies spent $161 billion on direct marketing last year, accounting for whopping 48 percent of total U.S. advertising expenditures. These expenditures generated an estimated $1.85 trillion in direct marketing sales, or about 7 percent of total sales in the U.S. economy. And direct marketing-driven sales are growing rapidly. The DMA estimates that direct marketing sales will grow 6.4 percent annually through 2009, compared with a projected 4.8 percent annual growth for total U.S. sales.3 ■ The new direct marketing model: Companies such as GEICO have built their entire approach to the marketplace around direct marketing: just visit geico.com or call 1-800947-auto.
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix Direct marketing continues to become more Web oriented, and Internet marketing is claiming a fast-growing share of direct marketing spending and sales. The Internet now accounts for only about 16 percent of direct marketing-driven sales. However, the DMA predicts that over the next five years Internet marketing expenditures will grow at a blistering 18 percent a year, three times faster than expenditures in other direct marketing media. Internet-driven sales will grow by 12.6 percent. Whether employed as a complete business model or as a supplement to a broader integrated marketing mix, direct marketing brings many benefits to both buyers and sellers.
Benefits to Buyers For buyers, direct marketing is convenient, easy, and private. Direct marketers never close their doors, and customers don’t have to battle traffic, find parking spaces, and trek through stores to find products. From the comfort of their homes or offices, they can browse catalogs or company Web sites at any time of the day or night. Business buyers can learn about products and services without tying up time with salespeople. Direct marketing gives buyers ready access to a wealth of products. For example, unrestrained by physical boundaries, direct marketers can offer an almost unlimited selection to consumers almost anywhere in the world. For example, by making computers to order and selling directly, Dell can offer buyers thousands of self-designed PC configurations, many times the number offered by competitors who sell preconfigured PCs through retail stores. And just compare the huge selections offered by many Web merchants to the more meager assortments of their brick-and-mortar counterparts. For instance, log onto Bulbs.com, “the Web’s no. 1 light bulb superstore,” and you’ll have instant access to every imaginable kind of light bulb or lamp—incandescent bulbs, fluorescent bulbs, projection bulbs, surgical bulbs, automotive bulbs—you name it. No physical store could offer handy access to such a vast selection. Direct marketing channels also give buyers access to a wealth of comparative information about companies, products, and competitors. Good catalogs or Web sites often provide more information in more useful forms than even the most helpful retail salesperson can. For example, the Amazon.com site offers more information than most of us can digest, ranging from top-10 product lists, extensive product descriptions, and expert and user product reviews to recommendations based on customers’ previous purchases. And Sears catalogs offer a treasure trove of information about the store’s merchandise and services. In fact, you probably wouldn’t think it strange to see a Sears salesperson referring to a catalog in the store while trying to advise a customer on a specific product or offer. Finally, direct marketing is interactive and immediate—buyers can interact with sellers by phone or on the seller’s Web site to create exactly the configuration of information, products, or services they desire, and then order them on the spot. Moreover, direct marketing gives consumers a greater measure of control. Consumers decide which catalogs they will browse and which Web sites they will visit.
Benefits to Sellers For sellers, direct marketing is a powerful tool for building customer relationships. Using database marketing, today’s marketers can target small groups or individual consumers and promote their offers through personalized communications. Because of the one-to-one nature of direct marketing, companies can interact with customers by phone or online, learn more about their needs, and tailor products and services to specific customer tastes. In turn, customers can ask questions and volunteer feedback. Direct marketing also offers sellers a low-cost, efficient, speedy alternative for reaching their markets. Direct marketing has grown rapidly in business-to-business marketing, partly in response to the ever-increasing costs of marketing through the sales force. When personal sales calls cost an average of more than $400 per contact, they should be made only when necessary and to high-potential customers and prospects. Lower-cost-per-contact media—such as telemarketing, direct mail, and company Web sites—often prove more cost effective. Similarly, online direct marketing results in lower costs, improved efficiencies, and speedier handling of channel and logistics functions, such as order processing, inventory handling, and delivery. Direct marketers such as Amazon.com or Dell also avoid the expense of maintaining a store and the related costs of rent, insurance, and utilities, passing the savings along to customers. Direct marketing can also offer greater flexibility. It allows marketers to make ongoing adjustments to its prices and programs, or to make immediate and timely announcements and
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offers. For example, Southwest Airlines’ DING! application takes advantage of the flexibility and immediacy of the Web to share low-fare offers directly with customers:4 When Jim Jacobs hears a “ding” coming from his desktop computer, he thinks about discount air fares like the $122 ticket he recently bought for a flight from Tampa to Baltimore on Southwest Airlines. Several times a day, Southwest sends Jacobs and hundreds of thousands of other computer users discounts through an application called DING! “If I move quickly,” says Jacobs, a corporate telecommunications salesman who lives in Tampa, “I can usually save a lot of money.” The fare to Baltimore underbid the airline’s own Web site by $36, he says. DING! lets Southwest bypass the reservations system and pass bargain fares directly to interested customers. Eventually, DING! may even allow Southwest to customize fare offers based on each customer’s unique characteristics and travel preferences. For now, DING! gets a Southwest icon on the customer’s desktop and lets the airline build relationships with customers by helping them to save money. Following its DING! launch in early 2005, Southwest experienced its two biggest online sales days ever. In the first 13 months, two million customers downloaded DING! and the program produced more than $80 mil■ Southwest Airlines “DING!” application takes advantage of flexibility and lion worth of fares. immediacy of the Web to share low-fare offers directly with customers. Finally, direct marketing gives sellers access to buyers that they could not reach through other channels. Smaller firms can mail catalogs to customers outside their local markets and post 1-800 telephone numbers to handle orders and inquiries. Internet marketing is a truly global medium that allows buyers and sellers to click from one country to another in seconds. A Web surfer from Paris or Istanbul can access an online L.L. Bean catalog as easily as someone living in Freeport, Maine, the direct retailer’s hometown. Even small marketers find that they have ready access to global markets.
Customer Databases and Direct Marketing Customer database An organized collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic, and behavioral data.
Effective direct marketing begins with a good customer database. A customer database is an organized collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic, and behavioral data. A good customer database can be a potent relationship-building tool. The database gives companies “a snapshot of how customers look and behave.” Says one expert, “A company is no better than what it knows [about its customers].”5 Many companies confuse a customer database with a customer mailing list. A customer mailing list is simply a set of names, addresses, and telephone numbers. A customer database contains much more information. In consumer marketing, the customer database might contain a customer’s demographics (age, income, family members, birthdays), psychographics (activities, interests, and opinions), and buying behavior (buying preferences and the recency, frequency, and monetary value—RFM—of past purchases). In business-to-business marketing, the customer profile might contain the products and services the customer has bought; past volumes and prices; key contacts (and their ages, birthdays, hobbies, and favorite foods); competing suppliers; status of current contracts; estimated customer spending for the next few years; and assessments of competitive strengths and weaknesses in selling and servicing the account.
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix Some of these databases are huge. For example, casino operator Harrah’s Entertainment has built a customer database containing 30 terabytes worth of customer information, roughly three times the number of printed characters in the Library of Congress. Internet portal Yahoo! records every click made by every visitor, adding some 400 billion bytes of data per day to its database—the equivalent of 800,000 books. And Wal-Mart captures data on every item, for every customer, for every store, every day. Its database contains more than 570 terabytes of data—that’s 570 trillion bytes, far greater than the storage horsepower of 100,000 personal computers.6 Companies use their databases in many ways. They use databases to locate good potential customers and to generate sales leads. They can mine their databases to learn about customers in detail, and then fine-tune their market offerings and communications to the special preferences and behaviors of target segments or individuals. In all, a company’s database can be an important tool for building stronger long-term customer relationships. For example, financial services provider USAA uses its database to find ways to serve the long-term needs of customers, regardless of immediate sales impact, creating an incredibly loyal customer base: USAA provides financial services to U.S. military personnel and their families, largely through direct marketing via the telephone and Internet. It maintains a customer database built from customer purchasing histories and from information collected directly from customers. To keep the database fresh, the organization regularly surveys its more than 5.6 million customers worldwide to learn such things as whether they have children (and if so, how old they are), if they have moved recently, and when they plan to retire. USAA uses the database to tailor direct marketing offers to the specific needs of individual customers. For example, for customers looking toward retirement, it sends information on estate planning. If the family has college-age children, USAA sends those children information on how to manage their credit cards. If the family has younger children, it sends booklets on things such as financing a child’s education. One delighted reporter, a USAA customer, recounts how USAA even helped him teach his 16-year-old-daughter to drive. Just before her birthday, but before she received her driver’s license, USAA mailed a “package of materials, backed by research, to help me teach my daughter how to drive, help her practice, and help us find ways to agree on what constitutes safe driving later on, when she gets her license.” What’s more, marvels the reporter, “USAA didn’t try to sell me a thing. My take-away: that USAA is investing in me for the long term, that it defines profitability not just by what it sells today.” Through such skillful use of its database, USAA serves each customer uniquely, resulting in high levels of customer loyalty and sales growth. The average customer household owns almost five USAA products, and the $12 billion company retains 97 percent of its customers.7 Like many other marketing tools, database marketing requires a special investment. Companies must invest in computer hardware, database software, analytical programs, communication links, and skilled personnel. The database system must be user-friendly and available to various marketing groups, including those in product and brand management, new-product development, advertising and promotion, direct mail, telemarketing, Web marketing, field sales, order fulfillment, and customer service. However, a well-managed database should lead to sales and customer-relationship gains that will more than cover its costs.
Forms of Direct Marketing
Direct-mail marketing Direct marketing by sending an offer, announcement, reminder, or other item to a person at a particular address.
The major forms of direct marketing—as shown in Figure 17.1—include personal selling, direct-mail marketing, catalog marketing, telephone marketing, direct-response television marketing, kiosk marketing, new digital direct marketing technologies, and online marketing. We examined personal selling in depth in Chapter 16. Here, we examine the other direct-marketing forms.
Direct-Mail Marketing Direct-mail marketing involves sending an offer, announcement, reminder, or other item to a person at a particular address. Using highly selective mailing lists, direct marketers send out
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FIGURE 17.1 Forms of direct marketing Face-to-face selling Direct-mail marketing
Online marketing
New digital technologies
Customers and prospects
Kiosk marketing
Catalog marketing
Telemarketing Direct-response television marketing
Catalog marketing Direct marketing through print, video, or electronic catalogs that are mailed to select customers, made available in stores, or presented online.
millions of mail pieces each year—letters, catalogues, ads, brochures, samples, CDs and DVDs, and other “salespeople with wings.” Direct mail is by far the largest direct marketing medium. The DMA reports that direct mail (including both catalog and non-catalog mail) drives fully one-third of all U.S. direct marketing sales.8 Direct mail is well suited to direct, one-to-one communication. It permits high targetmarket selectivity, can be personalized, is flexible, and allows easy measurement of results. Although direct mail costs more than mass media such as television or magazines per thousand people reached, the people it reaches are much better prospects. Direct mail has proved successful in promoting all kinds of products, from books, music, DVDs, and magazine subscriptions to insurance, gift items, clothing, gourmet foods, and industrial products. Charities also use direct mail heavily to raise billions of dollars each year. The direct-mail industry constantly seeks new methods and approaches. For example, CDs and DVDs are now among the fastest-growing direct-mail media. One study showed that including a CD or DVD in a marketing offer generates responses between 50 to 600 percent greater than traditional direct mail.9 New forms of delivery have also become popular, such as fax mail, voice mail, and e-mail. Fax mail and voice mail are subject to the same do-not-call restrictions as telemarketing, so their use has been limited in recent years. However, e-mail is booming as a direct marketing tool. Today’s e-mail messages have moved far beyond the drab text-only messages of old. The new breed of e-mail ad uses animation, interactive links, streaming video, and personalized audio messages to reach out and grab attention. E-mail and other new forms deliver direct mail at incredible speeds compared to the post office’s “snail mail” pace. Yet, much like mail delivered through traditional channels, they may be resented as “junk mail” or SPAM if sent to people who have no interest in them. For this reason, smart marketers are targeting their direct mail carefully so as not waste their money and recipients’ time. They are designing permission-based programs, sending e-mail ads only to those who want to receive them. We will discuss e-mail marketing in more detail later in the chapter.
Catalog Marketing Advances in technology, along with the move toward personalized, one-to-one marketing have resulted in exciting changes in catalog marketing. Catalog Age magazine used to define a catalog as “a printed, bound piece of at least eight pages, selling multiple products, and
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix offering a direct ordering mechanism.” Today, only a few years later, this definition is sadly out of date. With the stampede to the Internet, more and more catalogs are going digital. A variety of Web-only catalogers have emerged, and most print catalogers have added Web-based catalogs to their marketing mixes. For example, click on the Shop by Catalog link at www.llbean.com and you can flip through the latest L.L. Bean catalog page by page online. One study found that consumers now make 36 percent of their catalog purchases online. However, although the Internet has provided a new avenue for catalog sales, all you have to do is to check your mailbox to know that printed catalogs remain the primary medium. Research shows that print catalogs generate many of those online orders. Customers who receive print catalogs are more likely to buy online, and they spend 16 percent more than customers who did not receive catalogs.10 Catalog marketing has grown explosively during the past 25 years. Annual catalog sales amounted to about $133 billion last year and are expected to grow to top $158 billion by 2009.11 Some large general-merchandise retailers—such as J.C. Penney and Spiegel—sell a full line of merchandise through catalogs. In recent years, these giants have been challenged by thousands of specialty catalogs that serve highly specialized market niches. According to one study, some 10,000 companies now produce 14,000 unique catalog titles in the United States.12 Consumers can buy just about anything from a catalog. Sharper Image catalogs hawk everything from $300 robot vacuum cleaners to $4,500 see-through kayaks. Each year Lillian Vernon sends out 22 editions of its 6 catalogs with total circulation of 101 million copies to its 20-million-person database, selling more than 6,000 different items, ranging from shoes to decorative lawn birds and monogrammed oven mitts.13 Specialty department stores, such as Neiman Marcus, Bloomingdale’s, and Saks Fifth Avenue, use catalogs to cultivate uppermiddle-class markets for high-priced, often exotic, merchandise. Catalogs can be an effective sales and relationship builder. A recent study conducted by Frank About Women, a marketing-to-women communications company, found that a majority of women who receive catalogs are actively engaged with them. Eighty-nine percent of the participants revealed that they do more than just browse through the catalogs they receive in the mail. They circle or “tab” the items that they want, fold over the corners of pages, and tear pages out. Some 69 percent save their catalogs to look through again. More than just a buying tool, many women view catalogs as a source of entertainment and inspiration. Women claim to love perusing catalogs almost like reading a woman’s magazine, looking for ideas for everything
■ More and more catalogs are going digital. For example, click on the Shop by Catalog link at www.llbean.com and you can flip through the latest L.L. Bean catalog page by page online.
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from decorating, to fashion, to that extra special gift. More than one-third of women surveyed greet their catalogs with enthusiasm, stating they are the first things they look at when they get their mail. Seventy-five percent of women find catalog browsing really enjoyable, fun, and relaxing, with 74 percent agreeing that they get excited when a new catalog arrives.14 Web-based catalogs present a number of benefits versus printed catalogs. They save on production, printing, and mailing costs. Whereas print-catalog space is limited, online catalogs can offer an almost unlimited amount of merchandise. Web catalogs also allow real-time merchandising: Products and features can be added or removed as needed, and prices can be adjusted instantly to match demand. Finally, online catalogs can be spiced up with interactive entertainment and promotional features, such as games, contests, and daily specials. Along with the benefits, however, Web-based catalogs also present challenges. Whereas a print catalog is intrusive and creates its own attention, Web catalogs are passive and must be marketed. Attracting new customers is much more difficult for a Web catalog than for a print catalog. Thus, even catalogers who are sold on the Web are not likely to abandon their print catalogs.
Telephone Marketing Telephone marketing
Telephone marketing involves using the telephone to sell directly to consumers and business customers. Telephone marketing now accounts for 22 percent of all direct marketingdriven sales. We’re all familiar with telephone marketing directed toward consumers, but business-to-business marketers also use telephone marketing extensively, accounting for more than 55 percent of all telephone marketing sales. Marketers use outbound telephone marketing to sell directly to consumers and businesses. Inbound toll-free 800 numbers are used to receive orders from television and print ads, direct mail, or catalogs. The use of 800 numbers has taken off in recent years as more and more companies have begun using them, and as current users have added new features such as toll-free fax numbers. To accommodate this rapid growth, new toll-free area codes, such as 888, 877, and 866, have been added. Properly designed and targeted telemarketing provides many benefits, including purchasing convenience and increased product and service information. However, the explosion in unsolicited outbound telephone marketing over the years annoyed many consumers, who objected to the almost daily “junk phone calls” that pull them away from the dinner table or fill the answering machine. In 2003, U.S. lawmakers responded with a National Do-Not-Call Registry, managed by the Federal Trade Commission. The legislation bans most telemarketing calls to registered phone numbers (although people can still receive calls from nonprofit groups, politicians, and companies with which they have recently done business). Delighted consumers have responded enthusiastically. To date, they have registered more than 110 million phone numbers at www.donotcall.com or by calling 888382-1222. Businesses that break do-not-call laws can be fined up to $11,000 per violation. As a result, reports an FTC spokesperson, the program “has been exceptionally successful.”15 Do-not-call legislation has hurt the telemarketing industry, but not all that much. Two major forms of telemarketing—inbound consumer telemarketing and outbound business-to■ Marketers use inbound toll-free 800 numbers to receive orders from television business telemarketing—remain strong and and print ads, direct mail, or catalogs. Here, the Carolina Cookie Company urges, growing. Telemarketing also remains a major “Don’t wait another day. Call now to place an order or request a catalog.” Using the telephone to sell directly to customers.
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix fundraising tool for nonprofits groups. However, many telemarketers are shifting to alternative methods for capturing new customers and sales, from direct mail, direct-response TV, and live-chat Web technology to sweepstakes that prompt customers to call in. For example, ServiceMaster’s TruGreen lawn-care service used to generate about 90 percent of its sales through telemarketing. It now uses more direct mail, as well have having employees go door-to-door in neighborhoods where it already has customers. The new approach appears to be working even better than the old cold-calling one. The company’s sales were up last year, and less than 50 percent of sales came from telemarketing. “We were nervous, but were thrilled with what we’ve accomplished,” says ServiceMaster’s chief executive.16 In fact, do-not-call appears to be helping most direct marketers more than it’s hurting them. Many of these marketers are shifting their call-center activity from making cold calls on often resentful customers to managing existing customer relationships. They are developing “opt-in” calling systems, in which they provide useful information and offers to customers who have invited the company to contact them by phone or e-mail. These “sales tactics have [produced] results as good—or even better—than telemarketing,” declares one analyst. “The opt-in model is proving [more] valuable for marketers [than] the old invasive one.”17
Direct-Response Television Marketing Direct-response television marketing Direct marketing via television, including directresponse television advertising (or infomercials) and home shopping channels.
Direct-response television marketing takes one of two major forms. The first is directresponse television advertising (DRTV). Direct marketers air television spots, often 60 or 120 seconds long, which persuasively describe a product and give customers a toll-free number or Web site for ordering. Television viewers also often encounter full 30-minute or longer advertising programs, or infomercials, for a single product. Some successful direct-response ads run for years and become classics. For example, Dial Media’s ads for Ginsu knives ran for seven years and sold almost three million sets of knives, worth more than $40 million in sales; its Armourcote cookware ads generated more than twice that much. Bowflex has grossed more than $1.3 billion in infomercial sales. And over the past 40 years, infomercial czar Ron Popeil’s company, Ronco, has sold billions of dollars worth of TV-marketed gadgets, including the original Veg-O-Matic, the Pocket Fisherman, Mr. Microphone, “Hair in a Can,” the Giant Food Dehydrator and Beef Jerky Machine, and the Showtime Rotisserie & BBQ.18 For years, infomercials have been associated with somewhat questionable pitches for juicers and other kitchen gadgets, get-rich-quick schemes, and nifty ways to stay in shape without working very hard at it. In recent years, however, a number of large companies— from Procter & Gamble, Dell, Sears, Disney, Bose, and Revlon to IBM, GM, Land Rover, Anheuser-Busch, and even AARP and the U.S. Navy—have begun using infomercials to sell their wares, refer customers to retailers, send out product information, recruit members, or attract buyers to their Web sites (see Real Marketing 17.1). For example, P&G has used DRTV to market more than a dozen brands, including Dryel, Mr. Clean, CoverGirl, Iams pet food, and Old Spice. An estimated 20 percent of all new infomercials now come to you courtesy of Fortune 1000 companies.19 Direct-response TV commercials are usually cheaper to make and the media purchase is less costly. Moreover, unlike most media campaigns, direct-response ads always include a 1-800 number or Web address, making it easier for marketers to track the impact of their pitches. For these reasons, DRTV is growing more quickly than traditional broadcast and cable advertising. Some DRTV experts even predict that in five or ten years, as marketers seek greater returns on their advertising investments, all television advertising will be some form of direct-response advertising. “In a business environment where marketers are obsessed with return on investment,” notes one such expert, “direct response is tailor-made—[marketers can] track phone calls and Web-site hits generated by the ads. [They can] use DRTV to build brand awareness while simultaneously generating leads and sales.”20 Home shopping channels, another form of direct-response television marketing, are television programs or entire channels dedicated to selling goods and services. Some home shopping channels, such as the Quality Value Channel (QVC), Home Shopping Network (HSN), and ShopNBC, broadcast 24 hours a day. Program hosts chat with viewers by phone and offer products ranging from jewelry, lamps, collectible dolls, and clothing to power tools and consumer electronics. Viewers call a toll-free number or go online to order goods. With widespread distribution on cable and satellite television, the top three shopping networks combined now reach 248 million homes worldwide.
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Infomercials: But Wait, There’s More!
It’s late at night and you can’t get to sleep. So you grab the TV remote, surf channels, and chance upon a fast-talking announcer, breathlessly pitching some new must-have kitchen gadget. A grinning blonde coannouncer fawns over the gadget’s every feature, and the studio audience roars its approval. After putting the gadget through its paces, the announcer asks, “How much would you expect to pay? Three hundred dollars? Two hundred? Well, think again! This amazing gadget can be yours for just four easy payments of $19.95, plus shipping and handling!” “Oooooh!” the audience screams. “But wait! There’s more,” declares the announcer. “If you act now, you will also receive an additional gadget, absolutely free. That’s two for the price of one.” With operators standing by, you don’t have a minute to lose. Sound familiar? We’ve all seen countless infomercials like this, hawking everything from kitchen gadgets, cleaning compounds, and fitness solutions to psychic advice and get-rich-quick schemes. Traditionally, such pitches have had a kind of fly-by-night feel about them. And in the cold light of day, such a purchase may not seem like such a good deal after all. Such is the reputation of directresponse TV advertising. Yet, behind the hype is a powerful approach to marketing that is becoming more mainstream every day. Ron Popeil pioneered direct-response product sales. Whether you realize it or not, you’ve probably been exposed to dozens of Popeil’s inventions over the years, and his direct-marketing model has become the standard for the infomercial industry. His company, Ronco, has brought us such classics as the Veg-o-Matic, the Electric Food Dehydrator, the Showtime Rotisserie Oven, the GLH Formula Hair System, the Automatic 5-Minute Pasta and Sausage Maker, the Popeil Pocket Fisherman, the Inside the Egg Shell Electric Egg Scrambler, and the Dial-O-Matic Food Slicer. The use of infomercials has grown explosively in recent years. Why? Because they can produce spectacular results. Although only one in 60 infomercials turns a profit, “successful pitches can generate annual sales of as much as $50 million,” notes one analyst. “And breakout hits become gold mines: Ron Popeil has sold $1 billion worth of Ronco rotisserie ovens, and the Tae-Bo Workout infomercial. . . netted $300 million in its first year. Other benefits include viewer recall that can be three times higher than for traditional 30-second spots and phenomenal brand awareness: Ninetytwo percent of consumers have heard of the Nautilus Bowflex home fitness system—about the same number of folks that recognize the Nike brand.” Says the head of an infomercial advertising agency, “It’s the power of the half-hour.” Moreover, the retail store revenue from a successful infomercial can be many times the actual infomercial sales. For example, more than 85 percent of George Foreman’s Mean Lean Grilling Machine sales came from retail locations. Mass retailers have embraced such direct-response staples as Foreman’s grill, OxiClean, and Orange Glo. Some, such as drug-chain heavyweight Walgreens, devote entire front-of-store sections to such goods. Whereas it used to take years to get retail distribution for “As seen on TV” products, many now make it to store shelves within a month of going on television. Such infomercial success hasn’t gone unnoticed among the big hitters in corporate America. Direct-response television marketing is rapidly becoming a mainstay weapon in the marketing arsenals of even the most reputable companies. Marketing heavyweights such as Dell, Procter & Gamble, Disney, Time-Life, General Motors, Apple,
17.1
Ronco and Ron Popeil, with his Veg-o-Matics, food dehydrators, and electric egg scramblers, paved the way for a host of mainstream marketers who now use direct-response ads.
Motorola, and Sears now use direct-response TV to peddle specific products and promotions and to draw new customers into their other direct-to-consumer channels. For example, Procter & Gamble used a series of infomercials to help propel the Swiffer WetJet past rival Clorox’s ReadyMop when other marketing efforts alone failed to do the trick. And P&G launched its Swiffer Dusters product with a campaign that included direct-response ads and a tie-in to the DVD release of the Jennifer Lopez film Maid in Manhattan. Consumers contacting the 1-800 number got coupons for both the new Swiffer Duster and the DVD. Today’s infomercials have evolved with the times—most now include highly professional pitches and Web sites to go along with the ever-present toll-free phone number. They also employ a new breed of spokesperson. Once a refuge for Hollywood has-beens such as Suzanne Somers, who squeezed away on her thigh master to blearyeyed insomniacs, infomercials now are now enlisting A-list celebrities. One of the nation’s largest infomercial companies, GunthyRenker, pays top dollar for a stable of stars to pitch its Proactiv acne treatment. It paid Sean (P. Diddy) Combs $3 million for a four-hour shoot. In four months, the Combs Proactiv infomercial ran an average of more than 10 times on each of 1,400 local TV stations. Other Proactiv ads have featured Jessica Simpson (paid $2.5 million), Vanessa Williams ($2.5 million), Alicia Keys ($3 million), and Britney Spears ($1 million). In all, the ads produced some $650 million in Proactiv sales last year. Interest in direct-response has now expanded beyond the usual fitness, personal-care, and home-care fare. For instance, submarine-
(continues)
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(continued) sandwich giant Quiznos has turned to late-night infomercials to sell franchises. Trailing only Subway and Starbucks in the number of franchises opened annually, Quiznos created a successful 30-minute spot in which current franchise owners discussed the benefits of owning a Quiznos restaurant and encouraged interested people to attend informational meetings at local hotels. Ice cream chain Carvel also uses infomercials to reach potential franchisees. The results are measurable: “We can push a button to see what commercial ran, how many responses it got, how much revenue it generated if it was selling something, and what the net [return on investment] was,” says an executive of the direct-response firm that created the campaign. The results are also impressive: “We got easily four times the normal response than with standard media,” says a Carvel marketer. So, direct-response TV ads are no longer just the province of Ron Popeil and his Veg-o-Matics, food dehydrators, and electric egg scramblers. Although Popeil and his imitators paved the way, their success now has mainstream marketers tuning in to direct-response
ads. In fact, last year marketers spent $21.5 billion on directresponse television advertising, reaping more than $150 billion in revenues in return. What does the future hold for the direct-response TV industry? Wait, there’s more! Sources: Thomas Mucha, “Stronger Sales in Just 28 Minutes,” Business 2.0, June 2005, pp. 56–60; Jack Neff, “Direct Response Getting Respect,” Advertising Age, January 20, 2003, p. 4; Kristi Arellano, “Quiznos’ Success Not without Problems,” Knight Ridder Tribune Business News, June 19, 2005, p. 1; Peter Latterman, “So Long Suzanne Somers,” Forbes, July 4, 2005, p. 60; Victor Grillo, Jr., “Calling All Brands,” Mediaweek, July 11, 2005, p. 14; Gregg Cebrzynski, “Carvel Joins ‘Slicers and Dicers’ with Direct-Response Ads,” Nation’s Restaurant News, February 13, 2006, p. 14; Jack Neff, “What Procter & Gamble Learned from Veg-O-Matic,” Advertising Age, April 10, 2006, pp. 1, 65; and Direct Marketing Association, “The DMA 2006 Statistical Fact Book,” June 2006, pp. 249–250.
Despite their lowbrow images, home shopping channels have evolved into highly sophisticated, very successful marketing operations. Consider QVC: Wired magazine once described QVC as a place appealing to “trailer-park housewives frantically phoning for another ceramic clown.” But look past QVC’s reputation and you’ll find it is one of the world’s most successful and innovative retailers. Last year, the company rang up $5.7 billion in sales and $760 million in operating profit, making it nearly as big and roughly twice as profitable as Amazon.com. Although QVC sells no advertising, it’s the third-largest U.S. broadcaster in terms of revenue (behind NBC and ABC), and its sales and profits are larger than those of all other TV-based retailers combined. Remarkably, thanks to shrewd coordination with TV programming that drives buyers online, the company’s Web site, QVC.com, is now the nation’s sixth-largest general merchandise Internet retailer. Moreover, QVC isn’t just a place where littleknown marketers hawk trinkets and trash at bare-bones prices. Prominent manufacturers such as Estee Lauder, Nextel, and Tourneau now sell through QVC. The network’s $80 million single-day sales record happened on Dec. 2, 2001, when Dell sold $65 million worth of PCs in 24 hours. (One month later, Michael Dell went on QVC, doing $48,000 in sales every minute he chatted on air.) Even high-fashion designers such as John Bartlett and Marc Bauer now sell lines on QVC. QVC has honed the art and science of TV retailing. Its producers react in real time, adjusting offers, camera angles, lighting, and dialogue to maximize sales and profits. QVC has become the gold standard of “retailtainment”—the blending of retailing and entertainment. QVC folks call it the “backyard fence” sell—the feeling ■ QVC is more than just a place where little-known sellers hawk trinkets and trash that the merchants are neighbors visitat bare-bones prices. Behind the cameras, it’s a sophisticated marketer with sales ing from next door. But according to and profits larger than all other TV-based retailers combined.
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QVC’s president for U.S. commerce, “we aren’t really in the business of selling.” Instead, QVC uses products to build relationships with customers.21
Kiosk Marketing As consumers become more and more comfortable with computer and digital technologies, many companies are placing information and ordering machines—called kiosks (in contrast to vending machines, which dispense actual products)—in stores, airports, and other locations. Kiosks are popping up everywhere these days, from self-service hotel and airline check-in devices to in-store ordering kiosks that let you order merchandise not carried in the store. In-store Kodak, Fuji, and HP kiosks let customers transfer pictures from memory sticks, mobile phones, and other digital storage devices, edit them, and make high-quality color prints. Kiosks in Hilton hotel lobbies let guests view their reservations, get room keys, view prearrival messages, check in and out, and even change seat assignments and print boarding passes for flights on any of 18 airlines. Outdoor equipment retailer REI has at least four Webenabled kiosks in each of its 63 stores that provide customers with product information and let them place orders online. Kiosks in Target stores link to articles from Consumer Reports magazine, and Mazda dealers let customers use kiosks to research car and truck values through Kelly Blue Book.22 Business marketers also use kiosks. For example, Dow Plastics places kiosks at trade shows to collect sales leads and to provide information on its 700 products. The kiosk system reads customer data from encoded registration badges and produces technical data sheets that can be printed at the kiosk or faxed or mailed to the customer. The system has resulted in a 400 percent increase in qualified sales leads.23
New Digital Direct Marketing Technologies Today, thanks to a wealth of new digital technologies, direct marketers can reach and interact with consumers just about anywhere, at anytime, about almost anything. Here, we look into several exciting new digital direct marketing technologies: mobile phone marketing, podcasts and vodcasts, and interactive TV (ITV).
Mobile Phone Marketing With almost 200 million Americans now subscribing to wireless services, many marketers view mobile phones as the next big direct marketing medium. According to one expert, “the cell phone, which makes on-the-go conversing so convenient, is morphing into a content device, a kind of digital Swiss Army knife with the capability of filling its owner’s every spare minute with games, music, live and on-demand TV, Web browsing, and, oh yes, advertising.”24 A recent survey found that 89 percent of major brands will be marketed via mobile phones by 2008. More than half of those brands will likely spend up to 25 percent of their marketing budgets on mobile phone marketing.25 Marketers of all kinds are now integrating mobile phones into their direct marketing. Cell phone promotions include everything from ring-tone give-aways, mobile games, and adsupported content to text-in contests and sweepstakes. For example, McDonald’s recently put a promotion code on 20 million Big Mac packages in a joint sweepstakes contest with the House of Blues, urging participants to enter to win prizes and to text in from concerts. Some 40 percent of contest entries came via text messaging, resulting in a 3 percent sales gain for McDonald’s. More importantly, 24 percent of those entering via cell phones opted in to receive future promotions and messages.26 Perhaps nowhere is mobile phone marketing more advanced that in Japan. Here’s a glimpse of what the future might hold for cell phone marketing in the United States and other countries. In Japan, life revolves around cell phones, and marketers know it. Take Nami, a 37year-old graphic designer in Tokyo who regularly uses her phone to send and receive e-mails on the go. Her 11-year-old daughter enjoys downloading wallpaper and animated trailers featuring Disney characters, and Nami’s boyfriend relies on his phone’s global positioning system to navigate Tokyo’s labyrinthine of streets. The family can also use cell phones to buy a can of co*ke from high-tech vending
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machines, receive e-coupons from neighborhood stores, and even have their fortunes told. Digital coupons are taking off, as are GPS-based promotions used by retailers to target people near their stores. Mobile-ad spending in Japan is expected to hit $680 million by 2009, up from just $158 million last year. Japanese direct marketers are experimenting with new ways to use the mobile devices for brand building. Nestlé, for example, is trying out a new technology called Quick Response (QR) codes, which can be scanned like digital bar codes. QR codes on print and outdoor ads can be read by cell phone cameras, which redirect the user’s phone to a designated mobile URL site. Nestlé used QR codes in a campaign to launch a canned drink ■ Mobile phone marketing: To launch its Nescafé Shake canned drink in Japan, called Nescafé Shake. It promoted Nestlé used Quick Response codes, which can be scanned like UPC codes by a cell Shake with two 15-minute short films phone, to direct consumers to marketing pitches for the new product. that humorously communicated a sense of fun around the act of “shaking” with a story about a slacker kid who winds up with a dog’s wagging tail on his behind. A QR code on promotional materials led cell phone users to a mobile site where they could download the film as well as its original music as songs or ring tones. In the first three weeks after Nestlé’s “Nonta’s Tail” film debuted, 120,000 people visited the mobile site and another 550,000 watched the film on the Internet.27
Podcasts and Vodcasts Podcasting and vodcasting are the latest on-the-go, on-demand technologies. The name podcast derives from Apple’s now-everywhere iPod. With podcasting, consumers can download audio files (podcasts) or video files (vodcasts) via the Internet to an iPod or other handheld device and then listen to or view them whenever and wherever they wish. They can search for podcast topics through sites such as iTunes or through podcast networks such as PodTrac, Podbridge, or PodShow. These days, you can download podcasts or vodcasts on an exploding array of topics, everything from your favorite National Public Radio show, a recent sit-com episode, or current sports features to the latest music video or Go-Daddy commercial. One recent study predicts that the U.S. podcast audience will reach 50 million by 2010, up from 5 million in 2005. More than 20 percent of today’s podcast listeners make more than $100,000 a year.28 As a result, this new medium is drawing much attention from marketers. Many are now integrating podcasts and vodcasts into their direct marketing programs in the form of ad-supported podcasts, downloadable ads and informational features, and other promotions. For example, Volvo sponsors podcasts on Autoblog and Absolut vodka buys ads on PodShow programs. Kraft Foods offers up hundreds of recipes using the iPod’s text function and Nestlé Purina publishes podcasts on animal training and behavioral issues. The Walt Disney World Resort offers weekly podcasts on a mix of topics, including behind-the-scenes tours, interviews, upcoming events, and news about new attractions.29 Honda recently offered a vodcast as part of a new ad campaign for its Honda Civic. The vodcast consists of a two-minute, “This is what a Honda feels like” ad, in which human voices replicate the sounds that passengers hear in a Honda Civic. The vodcast also includes behind-the-scenes footage of the making of the ad. According to a Honda marketing executive, this dynamic new medium “is enabling people to experience what a Honda feels like from one of their most personal and closest touch points—their iPod.”30
Interactive TV (ITV) Interactive TV (ITV) lets viewers interact with television programming and advertising using their remote controls. In the past, ITV has been slow to catch on. However, satellite broad-
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casting systems such as DirecTV and Echostar are now offering ITV capabilities, and the technology appears poised to take off as a direct marketing medium. Interactive TV gives marketers an opportunity to reach targeted audiences in an interactive, more involving way. For example, BMW recently ran interactive ads on Echostar that allowed viewers to request catalogs and several screens worth of other information using their remotes. The number of requests exceeded BMW’s expectations tenfold. Similarly, Sony uses ITV to interact with TiVo users:31 Sony is running ads for its Bravia flat-panel TVs that let viewers, if they have TiVo, choose among different endings, whether they’re watching live TV or a recorded program. Five seconds into the commercial, two on-screen choices appear—one aimed at men and one at women. A menu of “male” endings revolves around picture quality and size, and the “female” options focus on the TV’s aesthetics. Sony hopes that the interactive and entertaining ad will keep viewers involved. It’s even hoping that by offering 12 possible endings for its ad, viewers will be curious enough to watch them all. “If you provide viewers with a worthwhile experience, they’ll absolutely stay engaged,” says an executive from the ad agency that created the Bravia campaign. More broadly, TiVo plans to roll out what may sound like the ultimate in gall: ads on demand. It’s not so crazy. Consumers about to spend big money on cars, travel, new kitchens, and the like have shown plenty of interest in watching video about the stuff they plan to buy. TiVo wants to offer that content more conveniently and on viewers’ terms. TiVo’s budding broadband link to the Net, which, among other things, connects a viewer’s TiVo screen with their Yahoo! homepage, is seen as just the beginning of full-blown convergence between interactive TV and the Internet. Mobile phone marketing, podcasts and vodcasts, and interactive TV offer exciting direct marketing opportunities. But marketers must be careful to use these new direct marketing approaches wisely. As with other direct marketing forms, marketers who use them risk backlash from consumers who may resent such marketing as an invasion of their privacy. Marketers must target their direct marketing offers carefully, bringing real value to customers rather than making unwanted intrusions into their lives.
Online Marketing Online marketing Company efforts to market products and services and build customer relationships over the Internet.
As noted earlier, online marketing is the fastest-growing form of direct marketing. Recent technological advances have created a digital age. Widespread use of the Internet and other powerful new technologies are having a dramatic impact on both buyers and the marketers who serve them. In this section, we examine how marketing strategy and practice are changing to take advantage of today’s Internet technologies.
Marketing and the Internet Internet A vast public web of computer networks that connects users of all types all around the world to each other and to an amazingly large “information repository.”
Much of the world’s business today is carried out over digital networks that connect people and companies. The Internet, a vast public web of computer networks, connects users of all types all around the world to each other and to an amazingly large information repository. Internet usage continues to grow steadily. Last year, Internet household penetration in the United States reached 64 percent, with more than 205 million people now using the Internet at home or at work. The average U.S. Internet user spends some 31 hours a month surfing the Web at home, plus another 78 hours a month at work. Worldwide, some 470 million people now have Internet access.32 The Internet has given marketers a whole new way to create value for customers and build customer relationships. The Web has fundamentally changed customers’ notions of convenience, speed, price, product information, and service. The amazing success of early click-only companies—the so-called dot-coms such as Amazon.com, eBay, Expedia, and hundreds of others—caused existing brick-and-mortar manufacturers and retailers to reexamine how they served their markets. Now, almost all of these traditional companies have set up their own online sales and communications channels, becoming click-and-mortar competitors. It’s hard to find a company today that doesn’t have a substantial Web presence.
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FIGURE 17.2
Targeted to consumers
Targeted to businesses
Initiated by business
B2C (business to consumer)
B2B (business to business)
Initiated by consumer
C2C (consumer to consumer)
C2B (consumer to business)
Online domains
Online Marketing Domains The four major online marketing domains are shown in Figure 17.2. They include B2C (business to consumer), B2B (business to business), C2C (consumer to consumer), and C2B (consumer to business).
Business to Consumer (B2C) Business-to-consumer (B2C) online marketing Selling goods and services online to final consumers.
The popular press has paid the most attention to business-to-consumer (B2C) online marketing—selling goods and services online to final consumers. Today’s consumers can buy almost anything online—from clothing, kitchen gadgets, and airline tickets to computers and cars. Online consumer buying continues to grow at a healthy rate. Some 65 percent of American online users now use the Internet to shop. Last year, U.S. consumers spent an estimated $95 billion online, and consumer Internet spending is expected to reach $144 billion by 2010.33 Perhaps more importantly, the Internet now influences 27 percent of total retail sales— sales transacted online plus those carried out offline but encouraged by online research. By 2010, the Internet will influence a staggering 50 percent of total retail sales.34 Thus, smart marketers are employing integrated multichannel strategies that use the Web to drive sales to other marketing channels. As more and more people find their way onto the Web, the population of online consumers is becoming more mainstream and diverse. The Web now offers marketers a palette of different kinds of consumers seeking different kinds of online experiences. However, Internet consumers still differ from traditional offline consumers in their approaches to buying and in their responses to marketing. In the Internet exchange process, customer initiate and control the contact. Traditional marketing targets a somewhat passive audience. In contrast, online marketing targets people who actively select which Web sites they will visit and what marketing information they will receive about which products and under what conditions. Thus, the new world of online marketing requires new marketing approaches. People now go online to order a wide range of goods—clothing from Gap or L.L. Bean, books or electronics from Amazon.com, furniture from Ethan Allen, major appliances from Sears, flowers from Calyx & Corolla, or even home mortgages from Quicken Loans.35
■ B2C Web sites: People now go online to order a wide range of goods and services, even home mortgages.
At Quicken Loans (www.quickenloans. com), prospective borrowers receive a high-tech, high-touch, one-stop mortgage shopping experience. At the site, customers can research a wide variety of home-financing and refinancing options, apply for a mortgage, and receive quick loan approval—all without leaving the comfort and security of their homes. The site provides useful interactive tools that help borrowers decide how much house they can afford, whether to rent or buy, whether to refinance a current mortgage, the economics of fixing up their current homes rather than moving, and much more. Customers can receive advice by phone or by chatting online with one of 2,700
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mortgage experts and sign up for later e-mail rate updates. Quicken Loans closed more than $12 billion in mortgage loans last year.
Business to Business (B2B) Business-to-business (B2B) online marketing Using B2B Web sites, e-mail, online product catalogs, online trading networks, and other online resources to reach new business customers, serve current customers more effectively, and obtain buying efficiencies and better prices.
Although the popular press has given the most attention to B2C Web sites, business-tobusiness (B2B) online marketing is also flourishing. B2B marketers use B2B Web sites, e-mail, online product catalogs, online trading networks, and other online resources to reach new business customers, serve current customers more effectively, and obtain buying efficiencies and better prices. Most major B2B marketers now offer product information, customer purchasing, and customer support services online. For example, corporate buyers can visit Sun Microsystems’ Web site (www.sun.com), select detailed descriptions of Sun’s products and solutions, request sales and service information, and interact with staff members. Some major companies conduct almost all of their business on the Web. Networking equipment and software maker Cisco Systems takes more than 80 percent of its orders over the Internet. Beyond simply selling their products and services online, companies can use the Internet to build stronger relationships with important business customers. For example, Dell has set up customized Web sites for more than 113,000 business and institutional customers worldwide. These individualized Premier Dell.com sites help business customers to more efficiently manage all phases of their Dell computer buying and ownership. Each customer’s Premier Dell.com Web site can include a customized online computer store, purchasing and asset management reports and tools, system-specific technical information, links to useful information throughout Dell’s extensive Web site, and more. The site makes all the information a customer needs in order to do business with Dell available in one place, 24 hours a day, 7 days a week.36
Consumer to Consumer (C2C) Consumer-to-consumer (C2C) online marketing Online exchanges of goods and information between final consumers.
Much consumer-to-consumer (C2C) online marketing and communication occurs on the Web between interested parties over a wide range of products and subjects. In some cases, the Internet provides an excellent means by which consumers can buy or exchange goods or information directly with one another. For example, eBay, Amazon.com Auctions, Overstock.com, and other auction sites offer popular marketspaces for displaying and selling almost anything, from art and antiques, coins and stamps, and jewelry to computers and consumer electronics. EBay’s C2C online trading community of more than 181 million registered users worldwide (greater than the combined populations of France, Spain, and Britain!) transacted some $40 billion in trades last year. On any given day, the company’s Web site lists more than 16 million items up for auction in more than 45,000 categories. Such C2C sites give people access to much larger audiences than the local flea market or newspaper classifieds (which, by the way, are now also going online). Interestingly, based on its huge success in the C2C market, eBay has now attracted a large number of B2C sellers, ranging from small businesses peddling their regular wares to large businesses liquidating excess inventory at auction.37 In other cases, C2C involves interchanges of information through Internet forums that appeal to specific special-interest groups. Such activities may be organized for commercial or noncommercial purposes. An example is Web logs, or blogs, online journals where people post their thoughts, usually on a narrowly defined topic. Blogs can be about anything, from politics or baseball to haiku, car repair, or the latest television series. Today’s blogosphere consists of more than 10 million blogs, with 40,000 new ones popping up every day. About 16 percent of all American adults now read blogs, and 1 in every 17 Americans has created a blog of his or her own.38 Many marketers are now tapping into blogs as a medium for reaching carefully targeted consumers. One way is to advertise on an existing blog or to influence content there. For example, before GE announced a major energy-efficient technology initiative last year, GE executives met with major environmental bloggers to build support. Microsoft reaches out to bloggers to promote its Xbox game systems and other new products. And in an effort to improve its often-battered image, Wal-Mart now works directly with bloggers, feeding them nuggets of positive news, suggesting topics for posting, and even inviting them to visit company headquarters. “Bloggers who agreed to receive the e-mail messages said they were eager to hear Wal-Mart’s side of the story, which they. . . felt had been drowned out by critics,” say an analyst. The bloggers also “were tantalized by the promise of exclusive news that might attract more visitors to their Web sites.”39
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix Other companies set up their own blogs. For example, Coca-Cola set up a blog to add an online community element to its sponsorship of the 2006 Winter Olympics. It enlisted a halfdozen college students from around the world to blog about their trips to the games. co*ke paid to fly and accommodate students from China, Germany, Italy, Canada, and Australia, each of whom agreed to post conversations about the positive side of the games. Similarly, before the games began, VisaUSA launched a site where it urged Olympic hopefuls to blog about the games. The blog site allowed for posting photos and comments, podcasting, and video blogging.40 As a marketing tool, blogs offer some advantages. They can offer a fresh, original, personal, and cheap way to reach today’s fragmented audiences. However, the blogosphere is cluttered and difficult to control. “Blogs may help companies bond with consumers in exciting new ways, but they won’t help them control the relationship,” says a blog expert. Such Web journals remain largely a C2C medium. “That isn’t to suggest companies can’t influence the relationship or leverage blogs to engage in a meaningful relationship,” says the expert, “but the consumer will remain in control.”41 In all, C2C means that online buyers don’t just consume product information—increasingly, they create it. They join Internet interest groups to share information, with the result that “word of Web” is joining “word of mouth” as an important buying influence.
Consumer to Business (C2B) Consumer-to-business (C2B) online marketing Online exchanges in which consumers search out sellers, learn about their offers, and initiate purchases, sometimes even driving transaction terms.
The final online marketing domain is consumer-to-business (C2B) online marketing. Thanks to the Internet, today’s consumers are finding it easier to communicate with companies. Most companies now invite prospects and customers to send in suggestions and questions via company Web sites. Beyond this, rather than waiting for an invitation, consumers can search out sellers on the Web, learn about their offers, initiate purchases, and give feedback. Using the Web, consumers can even drive transactions with businesses, rather than the other way around. For example, using Priceline.com, would-be buyers can bid for airline tickets, hotel rooms, rental cars, cruises, and vacation packages, leaving the sellers to decide whether to accept their offers. Consumers can also use Web sites such as PlanetFeedback.com to ask questions, offer suggestions, lodge complaints, or deliver compliments to companies. The site provides letter templates for consumers to use based on their moods and reasons for contacting the company. The site then forwards the letters to the customer service manager at each company and helps to obtain a response. “About 80 percent of the companies respond to complaints, some within an hour,” says a PlanetFeedback.com spokesperson.42
Types of Online Marketers Companies of all types are now marketing online. In this section, we first discuss the different types of online marketers shown in Figure 17.3. Then, we examine how companies go about conducting online marketing.
Click-Only versus Click-andMortar Marketers
■ C2B e-commerce: Consumers can use Web sites such as PlanetFeedback.com to ask questions, offer suggestions, lodge complaints, or deliver compliments to companies.
The Internet gave birth to a new species of marketers—the click-only dot-coms—which operate only online without any brick-and-mortar market presence. In addition, most traditional brick-and-mortar companies have now added online marketing operations, transforming themselves into click-and-mortar competitors.
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FIGURE 17.3 Types of online marketers
Brick-and-mortar store channels
Seller
497
Consumers
Brick-and-mortar (brick-only) marketers
Online marketing channels
Seller
Consumers
Click-only marketers
Brick-and-mortar store channels Seller
Consumers
Online marketing channels Click-and-mortar marketers
Click-Only Companies Click-only companies The so-called dot-coms, which operate only online without any brick-and-mortar market presence.
Click-only companies come in many shapes and sizes. They include e-tailers, dot-coms that sell products and services directly to final buyers via the Internet. Examples include Amazon.com, Expedia, and Wine.com. The click-only group also includes search engines and portals, such as Yahoo!, Google, and MSN, which began as search engines and later added services such as news, weather, stock reports, entertainment, and storefronts, hoping to become the first port of entry to the Internet. Shopping or price comparison sites, such as Froogle.com, Yahoo! Shopping, and Bizrate.com, give instant product and price comparisons from thousands of vendors. Internets service providers (ISPs) such as AOL and Earthlink are click-only companies that provide Internet and e-mail connections for a fee. Transaction sites, such as eBay, take commissions for transactions conducted on their sites. Finally, various content sites, such as New York Times on the Web (www.nytimes.com), ESPN.com, and Encyclopaedia Britannica Online, provide financial, news, research, and other information. The hype surrounding such click-only Web businesses reached astronomical levels during the “dot-com gold rush” of the late 1990s, when avid investors drove dot-com stock prices to dizzying heights. However, the investing frenzy collapsed in the year 2000, and many highflying, overvalued dot-coms came crashing back to Earth. Even some of the strongest and most attractive e-tailers—eToys.com, Pets.com, Furniture.com, Garden.com—filed for bankruptcy. Now on firmer footing, many click-only dot-coms are surviving and even prospering in today’s marketspace.
Click-and-Mortar Companies Click-and-mortar companies Traditional brick-and-mortar companies that have added online marketing to their operations.
As the Internet grew, established brick-and-mortar companies realized that, to compete effectively with online competitors, they had to go online themselves. Thus, many one-time brickand-mortar companies are now prospering as click-and-mortar companies. For example, Office Depot’s more than 1,000 office-supply superstores rack up annual sales of $13.5 billion in more than 23 countries. But you might be surprised to learn that Office Depot’s fastest recent growth has come not from its traditional “brick-and-mortar” channels, but from the Internet. Office Depot’s online sales have soared in recent years, now accounting for 27 percent of total sales. Selling on the Web lets Office Depot build deeper, more personalized relationships with customers large and small. “Contract customers”—the 80,000 or so larger businesses that have negotiated relationships with Office Depot—enjoy customized online ordering that includes company-specific product lists and pricing. For
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example, GE or Procter & Gamble can create lists of approved office products at discount prices, and then let company departments or even individuals do their own purchasing. This reduces ordering costs, cuts through the red tape, and speeds up the ordering process for customers. At the same time, it encourages companies to use Office Depot as a sole source for office supplies. Even the smallest companies find 24-hour-a-day online ordering easier and more efficient. More importantly, Office Depot’s Web operations don’t steal from store sales. Instead, the OfficeDepot.com site actually builds store traffic by helping customers find a local store and check ■ Click-and-mortar marketing: No click-only or brick-only seller can match the call, stock. In return, the local store proclick, or visit convenience and support afforded by Office Depot’s “4 easy ways to shop.” motes the Web site through in-store kiosks. If customers don’t find what they need on the shelves, they can quickly order it via the Web from the kiosk. Thus, Office Depot now offers a full range of contact points and delivery modes— online, by phone or fax, and in the store. No click-only or brick-only seller can match the call, click, or visit convenience and support afforded by Office Depot’s click-andmortar model.43 Many click-and-mortar companies are now having more online success than their clickonly competitors. In fact, in a recent ranking of the top 50 online retail sites, only 15 were click-only retailers, whereas the others were multichannel retailers.44 What gives the clickand-mortar companies an advantage? Established companies such as Best Buy, Blockbuster, Fidelity, and Office Depot have known and trusted brand names and greater financial resources. They have large customer bases, deeper industry knowledge and experience, and good relationships with key suppliers. By combining online marketing and established brick-and-mortar operations, the clickand-mortar retailers can also offer customers more options. For example, consumers can choose the convenience and assortment of 24-hour-a-day online shopping, the more personal and hands-on experience of in-store shopping, or both. Customers can buy merchandise online, and then easily return unwanted goods to a nearby store. For example, those wanting to do business with Fidelity Investments can call a Fidelity agent on the phone, go online to the company’s Web site, or visit the local Fidelity branch office. This lets Fidelity issue a powerful invitation in its advertising: “Call, click, or visit Fidelity Investments.”
Setting Up an Online Marketing Presence Clearly, all companies need to consider moving online. Companies can conduct online marketing in any of the four ways shown in Figure 17.4: creating a Web site, placing ads and promotions online, setting up or participating in Web communities, or using e-mail.
FIGURE 17.4
Creating a Web site
Setting up for online marketing
Creating Web communities
Placing ads or promotions online
Conducting online marketing
Using e-mail
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Creating a Web Site For most companies, the first step in conducting online marketing is to create a Web site. However, beyond simply creating a Web site, marketers must design an attractive site and find ways to get consumers to visit the site, stay around, and come back often.
TYPES OF WEB SITES Web sites vary greatly in purpose and content. The most basic type is a Corporate Web site A Web site designed to build customer goodwill and to supplement other sales channels, rather than to sell the company’s products directly.
Marketing Web site A Web site that engages consumers in interactions that will move them closer to a direct purchase or other marketing outcome.
corporate Web site. These sites are designed to build customer goodwill and to supplement other sales channels, rather than to sell the company’s products directly. They typically offer a rich variety of information and other features in an effort to answer customer questions, build closer customer relationships, and generate excitement about the company. For example, although you can buy ice cream and other items at the gift shop at Ben & Jerry’s Web site (benjerry.com), the site’s primary purpose is to enhance customer relationships. At the site, you can learn all about Ben & Jerry’s company philosophy, products, and locations. Or you can visit the Fun Stuff area and send a free e-card to a friend, subscribe to the Chunk Mail newsletter, or while away time playing Scooper Challenge or Virtual Checkers. Other companies create a marketing Web site. These sites engage consumers in an interaction that will move them closer to a direct purchase or other marketing outcome. For example, visitors to SonyStyle.com can search through dozens of categories of Sony products, learn more about specific items, and read expert product reviews. They can check out the latest hot deals, place orders online, and pay by credit card, all with a few mouse clicks. MINI USA operates a marketing Web site at www.miniusa.com. Once a potential customer clicks in, the carmaker wastes no time trying to turn the inquiry into a sale, and then into a longterm relationship. The site offers a garage full of useful information and interactive selling features, including detailed and fun descriptions of current MINI models, tools for designing your very own MINI, information on dealer locations and services, and even tools for tracking your new MINI from factory to delivery.
■ The MINI marketing Web site does more than just provide information or sell cars; it keeps customers engaged, from designing their very own MINI to tracking it from factory to delivery.
Before Angela DiFabio bought her MINI Cooper last September, she spent untold hours on the company’s Web site, playing with dozens of possibilities before coming up with the perfect combination: a chili-pepper-red exterior, white racing stripes on the hood, and a “custom rally badge bar” on the grill. When DiFabio placed her order with her dealer, the same build-yourown tool—and all the price and product details it provided—left her feeling like she was getting a fair deal. “He even used the site to order my car,” she says. While she waited for her MINI to arrive, DiFabio logged on to MINI’s Web site every day, this time using its “Where’s My Baby?” tracking tool to follow her car, like an expensive FedEx package, from the factory in Britain to its delivery. The Web site does more than just provide information or sell products or services. It makes an impact on the customer experience: It’s fun, it’s individual, it makes users feel like part of the clan.45
DESIGNING EFFECTIVE WEB SITES Creating a Web site is one thing; getting people to visit the site is another. To attract visitors, companies aggressively promote their Web sites in offline print and broadcast advertising and through ads and links on other sites. But today’s Web users are quick to abandon any Web site that doesn’t measure up. The key is to create enough value and excitement to get consumers who come to the site to stick around and come back again. This means that companies must constantly update their sites to keep them current, fresh, and useful.
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix For some types of products, attracting visitors is easy. Consumers buying new cars, computers, or financial services will be open to information and marketing initiatives from sellers. Marketers of lower-involvement products, however, may face a difficult challenge in attracting Web site visitors. If you’re in the market for a computer and you see a banner ad that says, “The top ten PCs under $800,” you’ll likely click on the banner. But what kind of ad would get you to visit a site like dentalfloss.com? A key challenge is designing a Web site that is attractive on first view and interesting enough to encourage repeat visits. Many marketers create colorful, graphically sophisticated Web sites that combine text, sound, and animation to capture and hold attention (for examples, see www.looneytunes.com or www.nike.com). To attract new visitors and to encourage revisits, suggests one expert, online marketers should pay close attention to the seven Cs of effective Web site design:46 ■
Context: the site’s layout and design
■
Content: the text, pictures, sound, and video that the Web site contains
■
Community: the ways that the site enables user-to-user communication
■
Customization: the site’s ability to tailor itself to different users or to allow users to personalize the site
■
Communication: the ways the site enables site-to-user, user-to-site, or two-way communication
■ Effective Web sites: Applying the 7Cs of effective Web site design, is this a good site (see www.altoids.com)?
■
Connection: the degree that the site is linked to other sites
■
Commerce: the site’s capabilities to enable commercial transactions
And to keep customers coming back to the site, companies need to embrace yet another “C”— constant change. At the very least, a Web site should be easy to use, professional looking, and physically attractive. Ultimately, however, Web sites must also be useful. When it comes to Web surfing and shopping, most people prefer substance over style and function over flash. Thus, effective Web sites contain deep and useful information, interactive tools that help buyers find and evaluate products of interest, links to other related sites, changing promotional offers, and entertaining features that lend relevant excitement.
Placing Ads and Promotions Online Online advertising Advertising that appears while consumers are surfing the Web, including display ads (banners, interstitials, popups), search-related ads, online classifieds, and other forms.
As consumers spend more and more time on the Internet, many companies are shifting more of their marketing dollars to online advertising to build their brands or to attract visitors to their Web sites. Online advertising is becoming a major medium. Last year, U.S. companies spent more than $12.5 billion on online advertising, up 30 percent over the previous year. Online ad spending will jump to more than $22 billion by 2009, representing about 11 percent of all direct marketing ad spending and rivaling the amounts spent on cable/satellite TV and radio.47 Here, we discuss forms of online advertising and promotion and their future.
FORMS OF ONLINE ADVERTISING The major forms of online advertising include display ads, search-related ads, and online classifieds. Online display ads might appear anywhere on an Internet user’s screen. The most common form is banners, banner-shaped ads found at the top, bottom, left, right, or center of a Web page. For instance, a Web surfer looking up airline schedules or fares might encounter a flashing banner that screams, “Rent a car from Alamo and get up to two days free!” Clicking on the ad takes consumers to the Alamo Web site, where they can redeem the promotion. Interstitials are online display ads that appear between screen changes on a Web site, especially while a new screen is loading. For example, visit www.marketwatch.com and you’ll probably see a 10-second ad for Visa, Verizon, or another sponsor before the homepage loads. Pop-ups are online ads that appear suddenly in a new window in front of the window being viewed. Such ads can multiply out of control, creating a major annoyance. As a result,
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Internet services and Web browser providers have developed applications that let users block most pop-ups. But not to worry. Many advertisers have now developed pop-unders, new windows that evade pop-up blockers by appearing behind the page you’re viewing. With the increase in broadband Internet access in American homes, many companies are developing exciting new rich media display ads, which incorporate animation, video, sound, and interactivity. Rich media ads attract and hold consumer attention better than traditional banner ads. They employ techniques such as float, fly, and snapback—animations that jump out and sail over the Web page before retreating to their original space. But many rich media ads do more than create a little bit of jumping animation. For example, to attract would-be commodity traders to its Web site, the Chicago Board of Trade runs a small rich media banner ad that explodes into a small site when the user’s mouse rolls over it. The mouse-over site features free streaming quotes, sample research, and a virtual trading account, all of which would never fit into a traditional static ad.48 Another hot growth area for online advertising is search-related ads (or contextual advertising), in which text-based ads and links appear alongside search engine results on sites such as Google and Yahoo!. For example, search Google for “HDTV” and you’ll see inconspicuous ads for ten or more advertisers, ranging from Circuit City, Best Buy, and Amazon.com to Dish Network and Nextag.com. Nearly all of Google’s $6.1 billion in revenues come from ad sales. An advertiser buys search terms from the search site and pays only if consumers click through to its site. Search-related ads account for some 41 percent of all online advertising expenditures, more than any other category of online advertising.49 Search ads can be an effective way to link consumers to other forms of online promotion. For example, Honda used key word searches to lure Web surfers to a site promoting its Element truck: The current Element campaign features the vehicle “talking” to sundry animals—a platypus, a possum, a burro, and a crab—in cartoony spots. Honda bought those keyword terms and uses search ads as invitations to “see the platypus in its Element.” That link leads consumers to elementandfriends.com, which features Element ads and a related game. Honda also bought variants of “funny video” and “funny commercials,” search terms that have demographic profiles compatible with likely Element buyers. In many cases, the search terms cost just 10 cents or 15 cents per click and drew about 40 percent of the Element’s Web site traffic. “It seemed a little quirky, but the more you thought about it, the more it seemed to resonate well with the campaign,” says Honda’s senior manager of marketing. For its Ridgeline truck, which was advertised during the Super Bowl, Honda bought a “few thousand” search terms somehow related to the Super Bowl (as in “Super Bowl ad”). Those terms generated ■ Search-related ads account for some 41 percent of all online advertising more than 3.5 million online impresexpenditures: Honda used key word searches to lure Web surfers to a site promoting sions from just Yahoo! and Google on its Element truck. The site features the vehicle “talking” to sundry animals—a the day after the Super Bowl alone.50 platypus, a possum, a burro, and a crab—in cartoony spots.
OTHER FORMS OF ONLINE PROMOTION Other forms of online promotions include content sponsorships, alliances and affiliate programs, and viral advertising. Using content sponsorships, companies gain name exposure on the Internet by sponsoring special content on various Web sites, such as news or financial information or special-interest topics. For example, Scotts, the lawn-and-garden products company, sponsors the Local Forecast section on WeatherChannel.com; and David Sunflower Seeds sponsors the ESPN Fantasy Baseball site at ESPN.com. Sponsorships are best placed in carefully targeted sites where they can offer relevant information or service to the audience. Internet companies can also develop alliances and affiliate programs, in which they work with other companies, online and offline, to “promote each other.” Amazon.com has more than
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix 900,000 affiliates who post Amazon.com banners on their Web sites. And Yahoo!, whose ad revenue makes up 84 percent of its total worldwide revenue, has become a fertile ground for alliances with movie studios and TV production companies: In one episode of The Apprentice, teams created and marketed a new flavor of Ciao Bella Ice Cream. Although Ciao Bella had previously sold its ice creams in only 18 stores in the New York and San Francisco, Yahoo! convinced the manufacturer to place the new product in 760 stores around the country. An endof-episode promotion urged viewers to visit Yahoo!’s local online search engine to look for the store nearest them. The product sold out by 5 P.M. the next day. And thanks to Yahoo!’s registration database, it was able to provide Ciao Bella with the demographic characteristics of respondents.51
Viral marketing The Internet version of wordof-mouth marketing—Web sites, e-mail messages, or other marketing events that are so infectious that customers will want to pass them along to friends.
Web communities Web sites upon which members can congregate online and exchange views on issues of common interest.
Finally, online marketers use viral marketing, the Internet version of word-of-mouth marketing. Viral marketing involves creating a Web site, e-mail message, or other marketing event that is so infectious that customers will want to pass it along to their friends. Because customers pass the message or promotion along to others, viral marketing can be very inexpensive. And when the information comes from a friend, the recipient is much more likely to open and read it. Consider Burger King’s now-classic Subservient Chicken viral campaign: The Web site, www.subservientchicken.com, features a dingy living room, where the subservient chicken—someone in a giant chicken suit and a garter belt—hangs out in front of his Web cam and awaits your bidding. Type in commands, and the chicken does exactly what you ask. It will flap its wings, roll over, or jump up and down. It will also moon the viewer, dance the Electric Slide, or die. (Suggestions for lewd acts are met with a “naughty naughty” shake of the wing.) In other words, you can have your way with the chicken. Get it? Have it your way! The site promotes Burger King’s TenderCrisp chicken and ties it into Burger King’s successful “Have It Your Way” marketing campaign. “As viral marketing goes, subservientchicken.com is a colossal success,” says an advertising expert. “There is great overlap between Web regulars and Burger King’s core audience.” If nothing more, the site gets consumers to interact with the brand. And it gets them buzzing about Burger King’s edgy new positioning. Burger King has never advertised the site. When it was first created, the developer at Crispin Porter ⫹ Bogusky (CP⫹B), the ad agency that created the site, e-mailed the URL to several other CP⫹B people, asking them to send the link out to friends to test. From that single e-mail, without a peep of promotion, the Subservient Chicken site ended the day with 1 million total hits. It received 46 million hits in only the first week following its launch, 385 million in the first nine months. Says one Burger King ad director, the award-winning site helped “sell a lot, a lot, a lot of chicken sandwiches.”52
THE FUTURE OF ONLINE ADVERTISING Although online advertising still accounts for only a minor portion of the total advertising and marketing expenditures of most companies, it is growing rapidly. Online advertising serves a useful purpose, especially as a supplement to other marketing efforts. As a result, it is playing an increasingly important role in the marketing mixes of many advertisers. For example, although Procter & Gamble spends only a small portion of its ad media budget online, it views the Web as an important medium. According to a P&G marketer, online marketing is “a permission-based way to offer consumers more information about a product than can be shared in a typical 30-second spot. It opens a two-way exchange where we can better educate consumers about our products.”53
Creating or Participating in Web Communities
■ Viral marketing: Burger King’s colossally successful Subservient Chicken site gets consumers interacting with the brand and buzzing about its edgy new positioning.
The popularity of blogs and other Web forums has resulted in a rash of commercially sponsored Web sites called Web communities, which take advantage of the C2C properties of the Internet. Such sites allow members to congregate online and exchange views on issues of common interest. They are the cyberspace equivalent to a Starbucks coffeehouse, a place where everybody knows your e-mail address. For example, iVillage.com is a Web community in which women can exchange views and obtain information, support, and solutions on families, food, fitness, relationships, relaxation, home and garden, news and issues, or just about any other topic.
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The site draws more than 25 million unique visitors each quarter, putting it in a league with magazines such as Cosmopolitan, Glamour, and Vogue. Another example is MyFamily.com, which aspires to be the largest and most active online community in the world for families. It provides free, private family Web sites upon which family members can connect online to hold family discussions, share family news, create online family photo albums, maintain a calendar of family events, jointly build family trees, and buy gifts for family members quickly and easily.54 Visitors to these Internet neighborhoods develop a strong sense of community. Such communities are attractive to advertisers because they draw frequent, lengthy visits from consumers with common interests and well-defined demographics. For example, iVillage.com provides an ideal environment for the Web ads of companies such as Procter & Gamble, Kimberly-Clark, Nabisco, Avon, Clairol, Hallmark, and others who target women consumers. And MyFamily.com hosts The Shops@MyFamily, in which such companies as Disney, Kodak, Hallmark, HewlettPackard, and Microsoft advertise and sell their familyoriented products.
Using E-Mail E-mail has exploded onto the scene as an important online marketing tool. A recent study of ad, brand, and marketing managers found that nearly half of all the B2B and B2C companies surveyed use e-mail marketing to reach customers. Companies currently spend about $1.1 billion a year on e-mail marketing, up from just $164 million in 1999. And this spending will grow by ■ Web communities: iVillage.com, a Web community for women, provides an estimated 20 percent annually through 2009. Total an ideal environment for Web ads of companies such as Procter & Gamble, annual e-mail volume in the United States is expected Kimberly Clark, Avon, Hallmark, and others. to rise to almost 2.7 trillion messages in 2007.55 To compete effectively in this ever-more-cluttered e-mail environment, marketers are designing “enriched” e-mail messages—animated, interactive, and personalized messages full of streaming audio and video. Then, they are targeting these attention-grabbers more carefully to those who want them and will act upon them. Consider Nintendo, a natural for e-mail-based marketing: Young computer-savvy gaming fans actually look forward to Nintendo’s monthly email newsletter for gaming tips and for announcements of exciting new games. When the company launched its Star Fox Adventure game, it created an intensive e-mail campaign in the weeks before and after the product launch. The campaign included a variety of messages targeting potential customers. “Each message has a different look and feel, and . . . that builds excitement for Nintendo,” notes an executive working on the account. The response? More than a third of all recipients opened the e-mails. And they did more than just glance at the messages: Click-through rates averaged more than 10 percent. Nearly two-thirds of those opening the message watched its 30-second streaming video in its entirety. Nintendo also gathered insightful customer data from the 20 percent of people who completed an embedded survey. Although the company feared that the barrage of messages might create “list fatigue” and irritate customers, the campaign received very few negative responses. The unsubscribe rate was under 1 percent.56
Spam Unsolicited, unwanted commercial e-mail messages.
As with other types of online marketing, companies must be careful that they don’t cause resentment among Internet users who are already overloaded with “junk e-mail.” The explosion of spam—unsolicited, unwanted commercial e-mail messages that clog up our e-mail boxes—has produced consumer frustration and anger. According to one research company, spam accounts for as much as 84 percent of total inbound e-mail.57 E-mail marketers
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E-Mail Marketing: The Hot Marketing Medium? Or Pestering Millions for Profit?
E-mail is one hot marketing medium. In mindboggling numbers, e-mail ads are popping onto our computer screens and filling up our e-mail boxes. And they’re no longer just the quiet, plain-text messages of old. The new breed of in-your-face e-mail ad is designed to command your attention— loaded with glitzy features such as animation, interactive links, color photos, streaming video, and personalized audio messages. But there’s a dark side to the exploding use of e-mail marketing. The biggest problem? Spam—the deluge of unsolicited, unwanted commercial messages that now clutter up our e-mail boxes and our lives. Various studies show that spam now accounts for an inboxclogging 60 to 83 percent of e-mails sent daily throughout the world, up from only 7 percent in 2002. One recent study found that the average consumer received 3,253 spam messages last year. Despite these dismal statistics, when used properly, e-mail can be the ultimate direct marketing medium. Blue-chip marketers such as Amazon.com, Dell, L.L.Bean, Office Depot, and others use it regularly, and with great success. E-mail lets these marketers send highly targeted, tightly personalized, relationship-building messages to consumers who actually want to receive them, at a cost of only a few cents per contact. E-mail ads really can command attention and get customers to act. According to one estimate, well-designed e-mail campaigns sent to internal customer lists typically achieve 10 to 20 percent click-through rates. That’s pretty good when compared with the 1 to 2 percent average response rates for traditional direct mail and the less than 1 percent response to traditional banner ads. However, although carefully designed e-mails may be effective, and may even be welcomed by selected consumers, critics argue that most commercial e-mail messages amount to little more than annoying “junk mail” to the rest of us. Too many bulk e-mailers blast out lowest-common-denominator mailings to anyone with an e-mail address. There is no customization—no relationship building. Everyone gets the same hyperventilated messages. Moreover, too often, the spam comes from shady sources and pitches objectionable products—everything from Viagra and body-enhancement products to p*rnography and questionable investments. And the messages are often sent from less-than-reputable marketers. At least in part, it’s e-mail economics that are to blame for our overflowing inboxes. Sending e-mail is so easy and so inexpensive
17.2
that almost anyone can afford to do it, even at paltry response rates. “In the field of direct marketing, it doesn’t get much cheaper than spam,” says one analyst. “One needs only a credit card (to buy lists of e-mail addresses), a computer, and an Internet connection. Otherwise, it costs nothing to send bulk e-mail, even masses of it.” For example, Touch Media Group once pumped out eight million emails a day. That makes the company sound like a big-city direct marketing behemoth. But in reality, it began as a home-based business run by a 44-year-old mother, Laura Betterly, in Dunedin, Florida, dubbed the Spam Queen by the Wall Street Journal. Betterly regularly dispatched messages to half a million or more strangers with a single click on the “send” icon. She found that she could make a profit on even very low responses. For example, if only 65 of the half million recipients responded, Betterly’s company made $40. In all, Betterly cleared more than $200,000 a year in income from her small business. The problem, of course, is that it was far easier for Betterly to hit the “send” button on an e-mail to a million and a half strangers than it was for the beleaguered recipients to hit the delete key on all those messages. One analyst calculated that the recipient cost of Betterly’s e-mails far exceeded the $40 in revenue that it produced for her. Assume that the average time getting rid of the junk was two seconds, and that the average recipient values his or her time at the mean wage paid in the United States, which is around $14 per hour, or $0.0039 per second. This implies a total cost, incurred by uninterested recipients, of 500,000 times two seconds times $0.0039 per second, which gives $3,900. And such dollar calculations don’t begin to account for the shear frustration of having to deal with all those many junk messages. The impact of spam on consumers and businesses is alarming. One recent study places the average time spent at work each day deleting spam at 2.8 minutes. This loss in productivity equals $21.6 billion per year based on average U.S. wages. In response to such costs and frustrations, Internet service providers and Web-browser producers have created sophisticated spam filters. For example, AOL now blocks some 1.5 billion spam messages a day, more than half a trillion a year, from reaching the e-mail boxes of AOL subscribers. It’s blocking eight out of every ten attempted e-mails as spam. The government is also stepping in. In
walk a fine line between adding value for consumers and being intrusive (see Real Marketing 17.2). To avoid irritating consumers by sending unwanted marketing e-mail, companies should ask customers for permission to e-mail marketing pitches. They should also tell recipients how to “opt in” or “opt out” of e-mail promotions at any time. This approach, known as permission-based marketing, has become a standard model for e-mail marketing.
The Promise and Challenges of Online Marketing Online marketing continues to offer both great promise and many challenges for the future. Its most ardent apostles still envision a time when the Internet and online marketing will replace magazines, newspapers, and even stores as sources for information and buying. Most marketers, however, hold a more realistic view. To be sure, online marketing will become a successful business model for some companies, Internet firms such as Amazon.com, eBay, and Google, and direct-marketing companies such as Dell. Michael Dell’s goal is one day “to have all customers conduct all transactions on the Internet, glob-
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2003, Congress passed the CAN-SPAM Act (the Controlling the Assault of Non-Solicited p*rnography and Marketing Act), which attempts to clean up the e-mail industry by banning deceptive subject lines, requiring a real return address, and giving consumers a way to “opt out.” Such actions have helped somewhat. The number of spam messages received last year dropped by 17 percent over the previous year. However, most of us still get a barrage of e-mail come-ons each day. Most legitimate e-mail marketers welcome such controls. Left unchecked, they reason, spam will make legitimate e-mail marketing less effective, or even impossible. But the industry worries that solutions such as spam filters and the CAN-SPAM Act often filter out the good emails with the bad, dampening the rich potential of e-mail for companies that want to use it as a valid marketing tool. In fact, according to one study, as much as 20 percent of legitimate bulk In response to the spam epidemic, Internet service providers such as AOL have created commercial e-mail—which includes online statesophisticated spam filters. ments and receipts as well as mail that users sign up to receive—gets caught in spam filters. So, what’s a marketer to do? Permission-based e-mail is the best keting and spam. Companies that cross the line will quickly learn that solution. Companies can send e-mails only to customers who “opt “opting out” is only a click away for disgruntled consumers. in”—those who grant permission in advance. They can let consumers specify what types of messages they’d like to receive. Sources: Quotes and other information from Jennifer Drumluk and Joe Financial services firms such as Charles Schwab use configurable Tyler, “Cracking the E-Mail Marketing Code,” Association Management, e-mail systems that let customers choose what they want to get. March 2005, pp. 52–56; Matt Haig and Mylene Mangalindan, “Spam Others, such as Yahoo! or Amazon.com, include long lists of opt-in Queen: For Bulk E-Mailer, Pestering Millions Offers Path to Profit,” Wall boxes for different categories of marketing material. Amazon.com tar- Street Journal, November 13, 2002, p. A1; Jennifer Wolcott, “You Call It gets opt-in customers with a limited number of helpful “we thought Spam, They Call It a Living,” Christian Science Monitor, March 22, 2004, you’d like to know” messages based on their expressed preferences p. 12; “AOL Top-10 List Reveals Spammers Are Getting More and previous purchases. Few customers object and many actually Sophisticated,” Wireless News, December 29, 2005, p. 1; Enid Burns, welcome such promotional messages. “The Deadly Duo: Spam and Viruses,” March 2006, accessed at Permission-based marketing ensures that e-mails are sent only to www.clickz.com; and Jessica E. Vascellaro, “Spam Filters Wild; Spate of customers who want them. Still, marketers must be careful not to Incidents at Verizon, AOL Point to Growing Problem of Blocking abuse the privilege. There’s a fine line between legitimate e-mail mar- Legitimate E-Mail,” Wall Street Journal, May 3, 2006, p. D1.
ally.” However, for most companies, online marketing will remain just one important approach to the marketplace that works alongside other approaches in a fully integrated marketing mix. Despite the many challenges, companies large and small are quickly integrating online marketing into their marketing strategies and mixes. As it continues to grow, online marketing will prove to be a powerful direct marketing tool for building customer relationships, improving sales, communicating company and product information, and delivering products and services more efficiently and effectively.
Integrated Direct Marketing Too often, a company’s different direct-marketing efforts are not well integrated with one another or with other elements of its marketing and promotion mixes. For example, a firm’s media advertising may be handled by the advertising department working with a traditional
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Integrated direct marketing Direct-marketing campaigns that use multiple vehicles and multiple stages to improve response rates and profits.
advertising agency. Meanwhile, its direct-mail and catalog business may be handled by directmarketing specialists, whereas its Web site is developed and operated by an outside Internet firm. Even within a given direct-marketing campaign, too many companies use only a “one-shot” effort to reach and sell a prospect or a single vehicle in multiple stages to trigger purchases. A more powerful approach is integrated direct marketing, which involves using carefully coordinated multiple-media, multiple-stage campaigns. Such campaigns can greatly improve response. Whereas a direct-mail piece alone might generate a 2 percent response, adding a Web site and toll-free phone number might raise the response rate by 50 percent. Then, a welldesigned outbound e-mail campaign might lift response by an additional 500 percent. Suddenly, a 2 percent response has grown to 15 percent or more by adding interactive marketing channels to a regular mailing. Integrating direct marketing channels with each other and with other media has become a top priority for marketers. For example, consider the integrated direct marketing efforts of professional services firm Ernst & Young: Ernst & Young is taking a decidedly integrated approach with its online, e-mail, and other direct marketing. It integrates its e-mail efforts with other media, including direct mail, and tightly weaves both into interactive elements on the company’s site. For example, a promotion for an annual conference it hosted in October for energy executives began much earlier in the year with a “save the date” e-mail to clients and prospects. That was followed up by a rich media e-mail. “We created these flash movies that we e-mailed them, and the call to action was embedded there,” says an Ernst & Young marketing executive. “There was a link built in that brought them to the Web site to find out details about the conference.” Next, to reinforce the online messages, the company sent out direct-mail invitations, which included a registration form as well as the Web address for those who chose to register online. To ensure that Ernst & Young’s direct marketing messages are well integrated, representatives from each marketing discipline meet on a regular basis. “We all sit around the table and talk about what we’ve done, what’s in process, and what we’re planning,” says the marketing executive. “The results rely on ‘the whole thing.’ Otherwise, it’s like making a cake without putting in the flour.”58
Public Policy Issues in Direct Marketing Direct marketers and their customers usually enjoy mutually rewarding relationships. Occasionally, however, a darker side emerges. The aggressive and sometimes shady tactics of a few direct marketers can bother or harm consumers, giving the entire industry a black eye. Abuses range from simple excesses that irritate consumers to instances of unfair practices or even outright deception and fraud. The direct marketing industry has also faced growing invasion-of-privacy concerns, and online marketers must deal with Internet security issues.
Irritation, Unfairness, Deception, and Fraud Direct-marketing excesses sometimes annoy or offend consumers. Most of us dislike directresponse TV commercials that are too loud, too long, and too insistent. Our mailboxes fill up with unwanted junk mail, our e-mail boxes fill up with unwanted spam, and our computer screens fill up with unwanted pop-up or pop-under ads. Beyond irritating consumers, some direct marketers have been accused of taking unfair advantage of impulsive or less-sophisticated buyers. TV shopping channels and program-long “infomercials” targeting television-addicted shoppers seem to be the worst culprits. They feature smooth-talking hosts, elaborately staged demonstrations, claims of drastic price reductions, “while they last” time limitations, and unequaled ease of purchase to inflame buyers who have low sales resistance. Worse yet, so-called heat merchants design mailers and write copy intended to mislead buyers. Even well-known direct mailers have been accused of deceiving consumers. A few years back, sweepstakes promoter Publishers Clearing House paid $52 million to settle accusations that its high-pressure mailings confused or misled consumers, especially the elderly, into believing that they had won prizes or would win if they bought the company’s magazines.59 Fraudulent schemes, such as investment scams or phony collections for charity, have also multiplied in recent years. Internet fraud, including identity theft and financial scams, has become
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a serious problem. Internet-related complaints accounted for 46 percent of the 431,000 fraud complaints received by the FTC last year, resulting in monetary losses of more than $335 million. And last year alone, the Federal Internet Crime Complaint Center (IC3) received almost 232,000 complaints related to Internet fraud, a whopping 368 percent increase from 2002.60 One common form of Internet fraud is phishing, a type of identity theft that uses deceptive e-mails and fraudulent Web sites to fool users into divulging their personal data. According to one survey, half of all Internet users have received a phishing e-mail. Although many consumers are now aware of such schemes, phishing can be extremely costly to those caught in the Net. It also damages the brand identities of legitimate online marketers who have worked to build user confidence in Web and e-mail transactions.61 Many consumers also worry about online security. They fear that unscrupulous snoopers will eavesdrop on their online transactions or intercept their credit card numbers and make unauthorized purchases. In a recent survey, six out of ten online shoppers were concerned enough about online security that they considered reducing the amount of their online holiday shopping.62 Such concerns are costly for direct-marketing companies. A recent study indicated that almost 30 percent of North American consumers who have been online but haven’t made a purchase cited concerns about credit card fraud and other factors as holding them back. Another study predicts that annual online sales could be as much as 25 percent higher if consumers’ security concerns were adequately addressed.63 Another Internet marketing concern is that of access by vulnerable or unauthorized groups. For example, marketers of adult-oriented materials have found it difficult to restrict access by minors. In a more specific example, a while back, sellers using eBay found themselves the victims of a 14-year-old boy who’d bid on and purchased more than $3 million worth of high-priced antiques and rare artworks on the site. eBay has a strict policy against bidding by anyone under age 18 but works largely on the honor system. Unfortunately, this honor system did little to prevent the teenager from taking a cyberspace joyride.64
Invasion of Privacy Invasion of privacy is perhaps the toughest public policy issue now confronting the directmarketing industry. Consumers often benefit from database marketing—they receive more offers that are closely matched to their interests. However, many critics worry that marketers may know too much about consumers’ lives and that they may use this knowledge to take unfair advantage of consumers. At some point, they claim, the extensive use of databases intrudes on consumer privacy. These days, it seems that almost every time consumers enter a sweepstakes, apply for a credit card, visit a Web site, or order products by mail, telephone, or the Internet, their names enter some company’s already bulging database. Using sophisticated computer technologies, direct marketers can use these databases to “microtarget” their selling efforts. Online privacy causes special concerns. Most online marketers have become skilled at collecting and analyzing detailed consumer information. Some consumers and policy makers worry that the ready availability of information may leave consumers open to abuse if companies make unauthorized use of the information in marketing their products or exchanging databases with other companies. For example, they ask, should AT&T be allowed to sell marketers the names of customers who frequently call the 800 numbers of catalog companies? Should a company such as American Express be allowed to make data on its millions of cardholders worldwide available to merchants who accept AmEx cards? Is it right for credit bureaus to compile and sell lists of people who have recently applied for credit cards—people who are considered prime direct-marketing targets because of their spending behavior? Or is it right for states to sell the names and addresses of driver’s license holders, along with height, weight, and gender information, allowing apparel retailers to target tall or overweight people with special clothing offers? In their drives to build databases, companies sometimes get carried away. For example, Microsoft caused substantial privacy concerns when one version of its Windows software used a “Registration Wizard” that snooped into users’ computers. When users went online to register, without their knowledge, Microsoft “read” the configurations of their PCs to learn about the major software products they were running. Users protested loudly and Microsoft abandoned the practice. These days, it’s not only the large companies that can access such private information. The explosion of information technology has put these capabilities into the hands almost any business. For example, one bar owner discovered the power of information technology after he acquired a simple, inexpensive device to check IDs.
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About 10,000 people a week go to The Rack, a bar in Boston. . . . One by one, they hand over their driver’s licenses to a doorman, who swipes them through a sleek black machine. If a license is valid and its holder is over 21, a red light blinks and the patron is waved through. But most of the customers are not aware that it also pulls up the name, address, birth date, and other personal details from a data strip on the back of the license. Even height, eye color, and sometimes Social Security number are registered. “You swipe the license, and all of a sudden someone’s whole life as we know it pops up in front of you,” said Paul Barclay, the bar’s owner. “It’s almost voyeuristic.” ■ Privacy: The explosion of information technology has put sometimes frightening Mr. Barclay soon found that he could capabilities into the hands of almost any business. One bar owner discovered the power build a database of personal informaof information technology after he acquired a simple, inexpensive device to check IDs. tion, providing an intimate perspective on his clientele that can be useful in marketing. Now, for any given night or hour, he can break down his clientele by sex, age, zip code, or other characteristics. If he wanted to, he could find out how many blond women named Karen over 5 feet 2 inches came in over a weekend, or how many of his customers have the middle initial M. More practically, he can build mailing lists based on all that data—and keep track of who comes back.65
A Need for Action All of this calls for strong actions by marketers to curb privacy abuses before legislators step in to do it for them. For example, in response to online privacy and security concerns, the federal government has considered numerous legislative actions to regulate how Web operators obtain and use consumer information. State governments are also stepping in. In 2003, California enacted the California Online Privacy Protection Act (OPPA), under which any online business that collects personally identifiable information from California residents must take steps such as posting its privacy policy and notifying consumers about what data will be gathered and how it will be used.66 Of special concern are the privacy rights of children. In 1998, the Federal Trade Commission surveyed 212 Web sites directed toward children. It found that 89 percent of the sites collected personal information from children. However, 46 percent of them did not include any disclosure of their collection and use of such information. As a result, Congress passed the Children’s Online Privacy Protection Act (COPPA), which requires Web site operators targeting children to post privacy policies on their sites. They must also notify parents about the information they’re gathering and obtain parental consent before collecting personal information from children under the age of 13. Under this act, Interstate Bakeries was recently required to rework its Planet Twinkie Web site after the Children’s Advertising Review Unit found that the site allowed children under 13 to submit their full name and phone number without parental consent.67 Many companies have responded to consumer privacy and security concerns with actions of their own. Still others are taking an industrywide approach. For example, TRUSTe, a nonprofit self-regulatory organization, works with many large corporate sponsors, including Microsoft, AT&T, and Intuit, to audit companies’ privacy and security measures and help consumers navigate the Web safely. According to the company’s Web site, “TRUSTe believes that an environment of mutual trust and openness will help make and keep the Internet a free, comfortable, and richly diverse community for everyone.” To reassure consumers, the company lends it “trustmark” stamp of approval to Web sites that meet its privacy and security standards.68 The direct-marketing industry as a whole is also addressing public policy issues. For example, in an effort to build consumer confidence in shopping direct, the Direct Marketing Association (DMA)—the largest association for businesses practicing direct, database, and interactive marketing, with more than 4,800 member companies—launched a “Privacy
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Promise to American Consumers.” The Privacy Promise requires that all DMA members adhere to a carefully developed set of consumer privacy rules. Members must agree to notify customers when any personal information is rented, sold, or exchanged with others. They must also honor consumer requests to “opt out” of receiving further solicitations or having their contact information transferred to other marketers. Finally, they must abide by the DMA’s Preference Service by removing the names of consumers who wish not to receive mail, telephone, or e-mail offers.69 Direct marketers know that, left untended, such problems will lead to increasingly negative consumer attitudes, lower response rates, and calls for more restrictive state and federal legislation. “Privacy and customer permission have become the cornerstones of customer trust, [and] trust has become the cornerstone to a continuing relationship,” says one expert. Companies must “become the custodians of customer trust and protect the privacy of their customers.”70 Most direct marketers want the same things that consumers want: honest and welldesigned marketing offers targeted only toward consumers who will appreciate and respond to them. Direct marketing is just too expensive to waste on consumers who don’t want it.
Reviewing the Concepts Let’s revisit this chapter’s key concepts. This chapter is the last of four chapters covering the final marketing mix element—promotion. The previous chapters dealt with advertising, publicity, sales promotion, and personal selling. This one investigates direct and online marketing. 1. Define direct marketing and discuss its benefits to customers and companies. Direct marketing consists of direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships. Using detailed databases, direct marketers tailor their offers and communications to the needs of narrowly defined segments or even individual buyers. For buyers, direct marketing is convenient, easy to use, and private. It gives buyers ready access to a wealth of products and information, at home and around the globe. Direct marketing is also immediate and interactive, allowing buyers to create exactly the configuration of information, products, or services they desire, then order them on the spot. For sellers, direct marketing is a powerful tool for building customer relationships. Using database marketing, today’s marketers can target small groups or individual consumers, tailor offers to individual needs, and promote these offers through personalized communications. It also offers them a low-cost, efficient alternative for reaching their markets. As a result of these advantages to both buyers and sellers, direct marketing has become the fastestgrowing form of marketing. 2. Identify and discuss the major forms of direct marketing. The main forms of direct marketing include personal selling, directmail marketing, catalog marketing, telephone marketing, directresponse television marketing, kiosk marketing, and online marketing. We discussed personal selling in the previous chapter. Direct-mail marketing, the largest form of direct marketing, consists of the company sending an offer, announcement, reminder, or other item to a person at a specific address. Recently, new forms of “mail delivery” have become popular, such as e-mail marketing. Some marketers rely on catalog marketing—selling through catalogs mailed to a select list of customers, made available in stores, or accessed on the Web. Telephone marketing consists of using the telephone to sell directly to consumers. Direct-response television marketing has two forms: direct-response advertising (or infomercials) and home shopping channels. Kiosks are information and ordering machines that direct marketers place in stores, airports, and other locations. In recent years, a number of new digital direct marketing
technologies have emerged, including mobile phone marketing, podcasts and vodcasts, and interactive TV. Online marketing involves online channels that digitally link sellers with consumers. 3. Explain how companies have responded to the Internet and other powerful new technologies with online marketing. Online marketing is the fastest-growing form of direct marketing. The Internet enables consumers and companies to access and share huge amounts of information with just a few mouse clicks. In turn, the Internet has given marketers a whole new way to create value for customers and build customer relationships. It’s hard to find a company today that doesn’t have a substantial Web marketing presence. Online consumer buying continues to grow at a healthy rate. Some 65 percent of American online users now use the Internet to shop. Perhaps more importantly, by 2010, the Internet will influence a staggering 50 percent of total retail sales. Thus, smart marketers are employing integrated multichannel strategies that use the Web to drive sales to other marketing channels. 4. Discuss how companies go about conducting online marketing to profitably deliver more value to customers. Companies of all types are now engaged in online marketing. The Internet gave birth to the click-only dot-coms, which operate only online. In addition, many traditional brick-and-mortar companies have now added online marketing operations, transforming themselves into click-and-mortar competitors. Many click-and-mortar companies are now having more online success than their click-only competitors. Companies can conduct online marketing in any of the four ways: creating a Web site, placing ads and promotions online, setting up or participating in Web communities, or using online e-mail. The first step typically is to set up a Web site. Beyond simply setting up a site, however, companies must make their sites engaging, easy to use, and useful in order to attract visitors, hold them, and bring them back again. Online marketers can use various forms of online advertising to build their Internet brands or to attract visitors to their Web sites. Beyond online advertising, other forms of online promotion include online display advertising, search-related advertising, content sponsorships, alliances and affiliate programs, and viral marketing, the Internet version of wordof-mouth marketing. Online marketers can also participate in Web communities, which take advantage of the C2C properties of the Web. Finally, e-mail marketing has become a fast-growing tool for both B2C and B2B marketers. Whatever direct marketing tools they use, marketers must work hard to integrate them into a cohesive marketing effort.
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uct features and channel commitments, prices can be changed quickly. At the same time, pricing is the number-one problem facing many marketing executives, and many companies do not handle pricing well. One frequent problem is that companies are too quick to reduce prices in order to get a sale rather than convincing buyers that their product’s greater value is worth a higher price. Other common mistakes include pricing that is too cost oriented rather than customer-value oriented, and pricing that does not take the rest of the marketing mix into account. Some managers view pricing as a big headache, preferring instead to focus on the other marketing mix elements. However, smart managers treat pricing as a key strategic tool for creating and capturing customer value. Prices have a direct impact on a firm’s bottom line. According to one expert, “a 1 percent price improvement generates a 12.5 percent profit improvement for most organizations.”5 More importantly, as a part of a company’s overall value proposition, price plays a key role in creating customer value and building customer relationships. “Instead of running away from pricing,” says the expert, “savvy marketers are embracing it.”
Factors to Consider When Setting Prices The price the company charges will fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit. Figure 10.1 summarizes the major considerations in setting price. Customer perceptions of the product’s value set the ceiling for prices. If customers perceive that the price is greater than the product’s value, they will not buy the product. Product costs set the floor for prices. If the company prices the product below its costs, company profits will suffer. In setting its price between these two extremes, the company must consider a number of other internal and external factors, including its overall marketing strategy and mix, the nature of the market and demand, and competitors’ strategies and prices. In the end, the customer will decide whether a product’s price is right. Pricing decisions, like other marketing mix decisions, must start with customer value. When customers buy a product, they exchange something of value (the price) in order to get something of value (the benefits of having or using the product). Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures this value.
Value-Based Pricing Value-based pricing Setting prices based on buyers’ perceptions of value rather than on the seller’s cost.
Good pricing begins with a complete understanding of the value that a product or service creates for customers. Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with the other marketing mix variables before the marketing program is set. Figure 10.2 compares value-based pricing with cost-based pricing. Cost-based pricing is product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product’s value at that price justifies its purchase. If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits. Value-based pricing reverses this process. The company sets its target price based on customer perceptions of the product value. The targeted value and price then drive
FIGURE 10.1 Considerations in setting price
Customer perceptions of value Price ceiling No demand above this price
Other internal and external considerations Marketing strategy, objectives, and mix Nature of the market and demand Competitors’ strategies and prices
Product costs
Price floor No profits below this price
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FIGURE 10.2 Value-based pricing versus cost-based pricing Source: Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of Pricing, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2002), p. 4. Reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.
Cost-based pricing
Product
Cost
Price
Value
Customers
Cost
Product
Value-based pricing
Customers
Value
Price
decisions about product design and what costs can be incurred. As a result, pricing begins with analyzing consumer needs and value perceptions, and price is set to match consumers’ perceived value. It’s important to remember that “good value” is not the same as “low price.” For example, prices for a Hermes Birkin Bag start at $6,000—a less expensive handbag might carry as much, but some consumers place great value on the intangibles they receive from a one-of-a kind handmade bag that has a year-long waiting list. Similarly, some car buyers consider the luxurious Bentley Continental GT automobile a real value, even at an eye-popping price of $150,000: Stay with me here, because I’m about to [tell you why] a certain automobile costing $150,000 is not actually expensive, but is in fact a tremendous value. Every Bentley GT is built by hand, an Old World bit of automaking requiring 160 hours per vehicle. Craftsmen spend 18 hours simply stitching the perfectly joined leather of the GT’s steering wheel, almost as long as it takes to assemble an entire VW Golf. The results are impressive: Dash and doors are mirrored with walnut veneer, floor pedals are carved from aluminum, window and seat toggles are cut from actual metal rather than plastic, and every air vent is perfectly chromed. . . . The sum of all this is a fitted cabin that approximates that of a $300,000 vehicle, matched to an engine the equal of a $200,000 automobile, within a car that has brilliantly incorporated . . . technological sophistication. As I said, the GT is a bargain. [Just ask anyone on the lengthy waiting list.] The waiting time to bring home your very own GT is currently half a year.6
■ Value-based pricing: “Good value” is not the same as “low price.” Some car buyers consider the luxurious Bentley Continental GT automobile a real value, even at an eye-popping price of $150,000.
A company using value-based pricing must find out what value buyers assign to different competitive offers. However, companies often find it hard to measure the value customers will attach to its product. For example, calculating the cost of ingredients in a meal at a fancy restaurant is relatively easy. But assigning a value to other satisfactions such as taste, environment, relaxation, conversation, and status is very hard. And these values will vary both for different consumers and different situations. Still, consumers will use these perceived values to evaluate a product’s price, so the company must
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work to measure them. Sometimes, companies ask consumers how much they would pay for a basic product and for each benefit added to the offer. Or a company might conduct experiments to test the perceived value of different product offers. According to an old Russian proverb, there are two fools in every market—one who asks too much and one who asks too little. If the seller charges more than the buyers’ perceived value, the company’s sales will suffer. If the seller charges less, its products sell very well. But they produce less revenue than they would if they were priced at the level of perceived value. We now examine two types of value-based pricing: good-value pricing and value-added pricing.
Good-Value Pricing During the past decade, marketers have noted a fundamental shift in consumer attitudes toward price and quality. Many companies have changed their pricing approaches to bring them into line with changing economic conditions and consumer price perceptions. More Good-value pricing and more, marketers have adopted good-value pricing strategies—offering just the right comOffering just the right bination of quality and good service at a fair price. combination of quality and In many cases, this has involved introducing less-expensive versions of established, good service at a fair price. brand name products. Fast-food restaurants such as Taco Bell and McDonald’s offer “value menus.” Armani offers the less-expensive, more casual Armani Exchange fashion line. Procter & Gamble created Charmin Basic—it is “slightly less ‘squeezably soft’ but it’s a lot less pricey than Procter & Gamble’s other toilet paper.” It’s “Soft. Strong. Sensible.”7 In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. An important type of good-value pricing at the retail level is everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts. In contrast, high-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. In recent years, high-low pricing has given way to EDLP in retail settings ranging from Saturn car dealerships to Giant Eagle supermarkets to furniture store Room & Board. The king of EDLP is Wal-Mart, which practi■ Good-value pricing: Procter & Gamble’s Charmin Basic is still “squeezably soft” cally defined the concept. Except for a few sale but it’s a lot less pricey than P&G’s other toilet paper. It’s “the quality toilet items every month, Wal-Mart promises everyday tissue at the price you’ll love.” low prices on everything it sells. In contrast, Kmart’s recent attempts to match Wal-Mart’s EDLP strategy failed. To offer everyday low prices, a company must first have everyday low costs. However, because Kmart’s costs are much higher than Wal-Mart’s, it could not make money at the lower prices and quickly abandoned the attempt.8
Value-Added Pricing
Value-added pricing Attaching value-added features and services to differentiate a company’s offers and to support charging higher prices.
In many business-to-business marketing situations, the challenge is to build the company’s pricing power—its power to escape price competition and to justify higher prices and margins without losing market share. To retain pricing power, a firm must retain or build the value of its market offering. This is especially true for suppliers of commodity products, which are characterized by little differentiation and intense price competition. If companies “rely on price to capture and retain business, they reduce whatever they’re selling to a commodity,” says an analyst. “Once that happens, there is no customer loyalty.”9 To increase their pricing power, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher prices (see Real Marketing 10.1). “Even in today’s economic environment, it’s not about price,” says a pricing expert. “It’s about keeping customers loyal by providing service they can’t find anywhere else.”10
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Chapter 5
Opinion leader Person within a reference group who, because of special skills, knowledge, personality, or other characteristics, exerts social influence on others.
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serve as direct (face-to-face) or indirect points of comparison or reference in forming a person’s attitudes or behavior. People often are influenced by reference groups to which they do not belong. For example, an aspirational group is one to which the individual wishes to belong, as when a young girl soccer player hopes to someday emulate Mia Hamm and play on the U.S. women’s Olympic soccer team. Marketers try to identify the reference groups of their target markets. Reference groups expose a person to new behaviors and lifestyles, influence the person’s attitudes and selfconcept, and create pressures to conform that may affect the person’s product and brand choices. The importance of group influence varies across products and brands. It tends to be strongest when the product is visible to others whom the buyer respects. Manufacturers of products and brands subjected to strong group influence must figure out how to reach opinion leaders—people within a reference group who, because of special skills, knowledge, personality, or other characteristics, exert social influence on others. Some experts call this 10 percent of Americans the influentials or leading adopters. These consumers “drive trends, influence mass opinion and, most importantly, sell a great many products,” says one expert. They often use their big circle of acquaintances to “spread their knowledge on what’s good and what’s bad.”15 Marketers often try to identify opinion leaders for their products and direct marketing efforts toward them. They use buzz marketing by enlisting or even creating opinion leaders to spread the word about their brands. For example, Tremor and Vocalpoint, separate marketing arms of Procter & Gamble, have enlisted armies of buzzers to create word of mouth, not just for P&G products but for those of other client companies as well (see Real Marketing 5.1). In the past few years, a new type of social interaction has exploded onto the scene— online social networking—carried out over Internet media ranging from blogs to social networking sites such as MySpace.com and Facebook.com. This new form of high-tech buzz has big implications for marketers. Personal connections—forged through words, pictures, video, and audio posted just for the [heck] of it—are the life of the new Web, bringing together the estimated 60 million bloggers, [an unbelievable] 72 million MySpace.com users, and millions more on single-use social networks where people share one category of stuff, like Flickr (photos), Del.icio.us (links), Digg (news stories), Wikipedia (encyclopedia articles), and YouTube (video). . . . It’s hard to overstate the coming impact of these new network technologies on business: They hatch trends and build immense waves of interest in specific products. They serve [up] giant, targeted audiences to advertisers. They edge out old media with the loving labor of amateurs. They effortlessly provide hyperdetailed data to marketers. If your customers are satisfied, networks can help build fanatical loyalty; if not, they’ll amplify every complaint until you do something about it. [The new social networking technologies] provide an authentic, peer-to-peer channel of communication that is far more credible than any corporate flackery.16 Marketers are working to harness the power of these new social networks to promote their products and build closer customer relationships. For example, when Volkswagen set up a MySpace.com site for Helga, the German-accented, dominatrix-type blonde who appears in its controversial Volkswagen GTI ads, tens of thousands of fans signed up as “friends.”17 And companies regularly post ads or custom videos on video-sharing sites such as YouTube. When Adidas recently reintroduced its adicolor shoe, a customizable white-on-white sneaker with a set of seven color markers, it signed on seven top creative directors to develop innovative videos designed especially for downloading to iPods and other
■ Social networking: Adidas harnessed the power of social networks to reintroduce its customizable adicolor shoe. It developed innovative downloadable videos that celebrate color and personal expression—here in pink—and then released them through e-mail and social networking sites like YouTube.
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Real Marketing
Tremor and Vocalpoint: What’s the Latest Buzz?
5.1
Gina Lavagna is the ideal pitch gal. After receiving information about Sony’s latest compact digital music player and six $10-off coupons, she rushed four of her teen chums to a mall near her home to show them the cool new device, which sells for $99 and up. “I’ve probably told 20 people about it,” she says, adding, “At least 10 are extremely interested in getting one.” Her parents got her one for Christmas. Procter & Gamble couldn’t ask for a better salesperson than Donna Wetherell. The gregarious Columbus, Ohio, mom works at a customer service call center unaffiliated with P&G, where she knows some 300 coworkers by name. Lately, Wetherell has spent so much time at work talking about P&G products and handing out discount coupons that her colleagues have given her a nickname. “I am called the coupon lady,” Wetherell says.
Multiply Gina Lavanga by 250,000 teens, and Donna Wetherell by 600,000 moms, and you’ll get a notion of the size and impact of P&G’s huge and carefully cultivated stealth marketing force. Gina and Donna aren’t just any consumers. They’re members of P&G’s Tremor and Vocalpoint word-of-mouth marketing arms—natural-born buzzers on a mission to spread the word about P&G and other companies’ brands among their peers. It all started five years ago when P&G created Tremor, a word-ofmouth network to reach teens. Teens are maddeningly difficult to reach through traditional channels—more than other consumer groups, they tend to ignore mass-media messages or even to resent them. Tremor taps the power of peer-to-peer personal endorsem*nts that cut through the advertising clutter. Tremorites deliver the word in school cafeterias, at sleepovers, by cell phone, and by e-mail. Initially focused only on P&G brands, Tremor’s forces were soon being tapped to talk up other companies’ brands. More than 80 percent of Tremor’s campaigns are now for non-P&G brands, such as Coca-Cola, Toyota, Kraft, and shoe company Vans. Tremor has been so successful that P&G has built a massive new network—Vocalpoint—focusing on moms. The moms market is a much bigger and more affluent target than teens, and a market that’s more relevant to most P&G products. Initially, Vocalpoint has focused on moms with school-age kids, women who interact more with other moms. To fill their enormous ranks, Tremor and Vocalpoint recruit online for what they call “connectors”—people with vast networks of friends and a gift for gab. For example, whereas average teens have only about 30 names on their instant messaging buddy lists, Tremorites average 150 to 200 names. Vocalpoint moms have five to six times the average number of friends and acquaintances. These connectors are carefully screened—only about 10 percent of those
who apply are accepted. In addition to connectedness, the company is looking for natural talkers with large doses of inquisitiveness and persuasiveness. Except for educating Tremorites and Vocalpointers about products and supplying them samples and coupons, the company doesn’t coach the teens and moms. The connectors themselves choose whether or not to pitch the product to friends and what to say. For example, when Gina Lavagna learned from Tremor about Clairol Herbal Essences Fruit Fusions Shampoo and Noxzema face wash, it was her own idea to invite her pals over so they could try it. Tremorites and Vocalpointers also do the work without pay. What’s in it for them? For one thing, they receive a steady flow of coupons and samples. But more than that, says CEO Knox, the company promises two things. First, it “provides you with cool new ideas before your friends have them,” with the thrill of being an insider. Second, it gives them a voice. “They’re filled with great ideas, and they don’t think anybody listens to them,” says Knox. “It’s an empowering proposition [just to be heard].” Buzz marketing is one of today’s hottest new marketing practices. Still, jumping onto the buzz bandwagon carries some risks. For example, because Tremor and Vocalpoint connectors aren’t coached or controlled, word of mouth can quickly backfire. If the teens and moms like what they see, they’ll be quick to share the good news. If not, they might be even quicker to share the bad. Says one word-ofmouth expert, it’s “like playing with fire: It can be a positive force when harnessed for the good, but fires are very destructive when they are out of control. If word of mouth goes against you, you’re sunk.” Moreover, some advocacy groups and others question the ethics, even the legality, of recruiting people to promote products by word of mouth without disclosing that fact. One such group, Commercial Alert, has filed a complaint with the FTC against Tremor and several small buzz marketing agencies. But Tremor insiders ardently defend their own campaigns and buzz marketing in general. “We encourage [connectors] to talk freely, whether positively or negatively. We do not give them a script,” says a company spokeswoman. “We think that’s a very important part of the model,” agrees Knox. “The connectors need to be free to say whatever it is they want to say. It’s [really just] natural human behavior. . . . People like talking to people about things they think help them.” Despite the risks and criticisms, Tremor and Vocalpoint are producing striking results. According to one analyst, most companies see a 10 to 30 percent boost in sales after employing the word-ofmouth networks. Consider these examples: Shamrock Farms of Phoenix launched a new chocolate-maltflavored milk in Phoenix and Tucson. The launch tactics were
handhelds. The directors were given complete creative control to interpret their assigned color as they saw fit. “The directors that we chose we feel have a good deal of underground street cred,” says an Adidas marketing executive. The project was not tied specifically to the product. Rather, the directors were asked to “celebrate color, customization, and personal expression.” The diverse set of short films was then released, one film a week, via e-mail and sites such as YouTube. The films drew more than 2.1 million viewers within three weeks, 20 million within the first two months, and the numbers were growing exponentially with each new release.18
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Chapter 9 New-Product Development and Product Life-Cycle Strategies
Real Marketing
9.1
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Electrolux: Cleaning Up with Customer-Centered, Team-Based New-Product Development
You will never meet Catherine, Anna, Maria, or Monica. But the future success of Swedish home appliances maker Electrolux depends on what these four women think. Catherine, for instance, a type A career woman who is a perfectionist at home, loves the idea of simply sliding her laundry basket into a washing machine, instead of having to lift the clothes from the basket and into the washer. That product idea has been moved onto the fast track for consideration. So, just who are Catherine and the other women? Well, they don’t actually exist. They are composites based on in-depth interviews with some 160,000 consumers from around the globe. To divine the needs of these mythical customers, 53 Electrolux employees—in teams that included designers, engineers, and marketers hailing from various divisions—gathered in Stockholm last November for a weeklong brainstorming session. The Catherine team began by ripping photographs out of a pile of magazines and sticking them onto poster boards. Next to a picture of a woman wearing a sharply tailored suit, they scribbled some of Catherine’s attributes: driven, busy, and a bit overwhelmed. With the help of these characters, Electrolux product developers are searching for the insights they’ll need to dream up the next batch of hot products. It’s a new way of doing things for Electrolux, but then again, a lot is new at the company. When Chief Executive Hans Straberg took the helm in 2002, Electrolux—which sells products under the Electrolux, Eureka, and Frigidaire brands—was the world’s number-two home appliances maker behind Whirlpool. The company faced spiraling costs, and its middle-market products were gradually losing out to cheaper goods from Asia and Eastern Europe. Competition in the United States, where Electrolux gets 40 percent of its sales, was ferocious. The company’s stock was treading water. Straberg had to do something radical, especially in the area of new-product innovation. So he began breaking down barriers between departments and forcing his designers, engineers, and mar-
keters to work together to come up with new products. He also introduced an intense focus on the customer. He set out to become “the leader in our industry in terms of systematic development of new products based on consumer insight.” At the Stockholm brainstorming session, for example, group leader Kim Scott urges everyone “to think of yourselves as Catherine.” The room buzzes with discussion. Ideas are refined, sketches drawn up. The group settles on three concepts: Breeze, a clothes steamer that also removes stains; an Ironing Center, similar to a pants press but for shirts; and Ease, the washing machine that holds a laundry basket inside its drum. Half the group races off to the machine shop to turn out a prototype for Breeze, while the rest stay upstairs to bang out a marketing plan. Over the next hour, designer Lennart Johansson carves and sandpapers a block of peach-colored polyurethane until a contraption that resembles a cross between an electric screwdriver and a handheld vacuum begins to emerge. The designers in the group want the Breeze to be smaller, but engineer Giuseppe Frucco points out that would leave too little space for a charging station for the 1,500-watt unit. For company veterans such as Frucco, who works at Electrolux’s fabric care research and development center in Porcia, Italy, this dynamic groupthink is a refreshing change: “We never used to create new products together,” he says. “The designers would come up with something and then tell us to build it.” The new way saves time and money by avoiding the technical glitches that crop up as a new design moves from the drafting table to the factory floor. The ultimate goal is to come up with new products that consumers will gladly pay a premium for: Gadgets with drop-dead good looks and clever features that ordinary people can understand without having to pore through a thick users’ manual. “Consumers are prepared to pay for good design and good performance,” says CEO Straberg. Few companies have pulled off the range of hot new offerings that Electrolux has. One clear hit is a cordless stick and hand vacuum,
Customer-centered new-product development: Electrolux’s new-product team starts by watching and talking with consumers to understand their problems. Here, they build a bulletin board packed with pictures and postit* detailing consumers struggling with household cleaning chores and possible product solutions. Then the team moves to the lab to create products that solve customer problems. “We were thinking of you when we developed this product,” says Electrolux.
(continues)
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(continued) called Pronto in the United States. Available in an array of metallic hues with a rounded, ergonomic design, this is the Cinderella of vacuums. Too attractive to be locked up in the broom closet, it calls out to be displayed in your kitchen. In Europe, it now commands 50 percent of the market for stick vacs, a coup for a product with fewer than two years on the market. The Pronto is cleaning up in the United States, too. Stacy Silk, a buyer at retail chain Best Buy, says it is one of her hottest sellers, even though it retails for around $100, double the price of comparable models. A recent check at Best Buy’s online site shows that the Pronto is currently out of stock. “The biggest thing is the aesthetics,” Silk says. “That gets people to walk over and look.” Electrolux is crafting such new products even while moving away from many traditional customer research tools. The company relies less heavily on focus groups and now prefers to interview people in their homes where they can be videotaped pushing a vacuum or shoving laundry into the washer. “Consumers think they know what they want, but they often have trouble articulating it,” says Electrolux’s senior vice-president for global design. “But when we watch them, we can ask, ‘Why do you do that?’ We can change the product and solve their problems.” This customer-centered, team-based new-product development approach is producing results. Under the new approach, newproduct launches have almost doubled in quantity, and the proportion of new-product launches that result in outsized unit sales is now running at 50 percent of all introductions, up from around 25 percent
previously. As a result, Electrolux’s sales, profits, and share price are all up sharply. It all boils down to understanding consumers and giving them what they need and want. According to a recent Electrolux annual report: “Thinking of you” sums up our product offering. That is how we create value for our customers—and thereby for our shareholders. All product development and marketing starts with understanding consumer needs, expectations, dreams, and motivation. That’s why we contact tens of thousands of consumers throughout the world every year. . . . The first steps in product development are to ask questions, observe, discuss, and analyze. So we can actually say, “We were thinking of you when we developed this product.” Thanks to such thinking, Electrolux has now grown to become the world’s biggest household appliances company. Catherine and the other women would be pleased. Source: Portions adapted from Ariene Sains and Stanley Reed, “Electrolux Cleans Up,” BusinessWeek, February 27, 2006, pp. 42–43; with quotes and extracts adapted from “Products Developed on the Basis of Consumer Insight,” Acceleration . . . Electrolux Annual Report, April 7, 2006, p. 7; accessed at www.electrolux.com/node60.aspx. Additional information from Caroline Perry, “Electrolux Doubles Spend with New Strategy,” Marketing Week, February 16, 2006, pp. 7–9.
The company can appoint a respected senior person to be the company’s innovation manager. It can set up Web-based idea management software and encourage all company stakeholders—employees, suppliers, distributors, dealers—to become involved in finding and developing new products. It can assign a cross-functional innovation management committee to evaluate proposed new-product ideas and help bring good ideas to market. It can create recognition programs to reward those who contribute the best ideas.28 The innovation management system approach yields two favorable outcomes. First, it helps create an innovation-oriented company culture. It shows that top management supports, encourages, and rewards innovation. Second, it will yield a larger number of newproduct ideas, among which will be found some especially good ones. The good new ideas will be more systematically developed, producing more new-product successes. No longer will good ideas wither for the lack of a sounding board or a senior product advocate. Thus, new-product success requires more than simply thinking up a few good ideas, turning them into products, and finding customers for them. It requires a holistic approach for finding new ways to create valued customer experiences, from generating and screening new-product ideas to creating and rolling out want-satisfying products to customers. More than this, successful new-product development requires a whole-company commitment. At companies known for their new-product prowess—such as Apple, Google, 3M, Procter & Gamble, and GE—the entire culture encourages, supports, and rewards innovation. Consider 3M, which year after year rates among the world’s most innovative companies:29 You see the headline in every 3M ad: “Innovation Working for You.” But at 3M, innovation isn’t just an advertising pitch. Throughout its history, 3M has been one of America’s most innovative companies. The company markets more than 50,000 products, ranging from sandpaper, adhesives, and hundreds of sticky tapes to contact lenses, heart-lung machines, and futuristic synthetic ligaments. Each year 3M invests $1.1 billion in research and launches more than 200 new products. But these
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Appendix 2 MARKETING BY THE NUMBERS Marketing decisions are coming under increasing scrutiny, and marketing managers must be accountable for the financial implications of their actions. This appendix provides a basic introduction to marketing financial analysis. Such analysis guides marketers in making sound marketing decisions and in assessing the outcomes of those decisions. The appendix is built around a hypothetical manufacturer of high-definition consumer electronics products—HDX-treme. This company is launching a new product, and we will discuss and analyze the various decisions HDX-treme’s marketing managers must make before and after launch. HDX-treme manufactures high-definition televisions for the consumer market. The company has concentrated on televisions but is now entering the accessories market. Specifically, the company is introducing a high-definition optical disc player (DVD) using the Blu-ray format. The appendix is organized into three sections. The first section deals with the pricing considerations and break-even and margin analysis assessments that guide the introduction of HDX-treme’s new-product launch. The second section begins with a discussion of estimating market potential and company sales. It then introduces the marketing budget, as illustrated through a pro forma profit-and-loss statement followed by the actual profit-and-loss statement. Next, the section discusses marketing performance measures, with a focus on helping marketing managers to better defend their decisions from a financial perspective. In the final section, we analyze the financial implications of various marketing tactics, such as increasing advertising expenditures, adding sales representatives to increase distribution, lowering price, or extending the product line. At the end of each section, quantitative exercises provide you with an opportunity to apply the concepts you learned in that section to contexts beyond HDX-treme.
Pricing, Break-Even, and Margin Analysis Pricing Considerations Determining price is one of the most important marketing-mix decisions, and marketers have considerable leeway when setting prices. The limiting factors are demand and costs. Demand factors, such as buyer-perceived value, set the price ceiling. The company’s costs set the price floor. In between these two factors, marketers must consider competitors’ prices and other factors such as reseller requirements, government regulations, and company objectives. Current competing high-definition DVD products in this relatively new product category were introduced in 2006 and sell at retail prices between $500 and $1,200. HDX-treme plans to introduce its new product at a lower price in order to expand the market and to gain market share rapidly. We first consider HDX-treme’s pricing decision from a cost perspective. Then, we consider consumer value, the competitive environment, and reseller requirements.
Determining Costs Fixed costs Costs that do not vary with production or sales level.
Recall from Chapter 10 that there are different types of costs. Fixed costs do not vary with production or sales level and include costs such as rent, interest, depreciation, and clerical and management salaries. Regardless of the level of output, the company must pay these costs. Whereas total fixed costs remain constant as output increases, the fixed cost per unit (or average fixed cost) will decrease as output increases because the total fixed costs are spread across
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Variable costs Costs that vary directly with the level of production.
Total costs The sum of the fixed and variable costs for any given level of production.
more units of output. Variable costs vary directly with the level of production and include costs related to the direct production of the product (such as costs of goods sold—COGS) and many of the marketing costs associated with selling it. Although these costs tend to be uniform for each unit produced, they are called variable because their total varies with the number of units produced. Total costs are the sum of the fixed and variable costs for any given level of production. HDX-treme has invested $10 million in refurbishing an existing facility to manufacture the new DVD product. Once production begins, the company estimates that it will incur fixed costs of $20 million per year. The variable cost to produce each DVD player is estimated to be $250 and is expected to remain at that level for the output capacity of the facility.
Setting Price Based on Costs Cost-plus pricing (or markup pricing) Adding a standard markup to the cost of the product.
HDX-treme starts with the cost-based approach to pricing discussed in Chapter 10. Recall that the simplest method, cost-plus pricing (or markup pricing), simply adds a standard markup to the cost of the product. To use this method, however, HDX-treme must specify an expected unit sales so that total unit costs can be determined. Unit variable costs will remain constant regardless of the output, but average unit fixed costs will decrease as output increases. To illustrate this method, suppose HDX-treme has fixed costs of $20 million, variable costs of $250 per unit, and expects unit sales of 1 million units. Thus, the cost per DVD player is given by: Unit cost variable cost
Relevant costs Costs that will occur in the future and that will vary across the alternatives being considered.
Break-even price The price at which total revenue equals total cost and profit is zero.
Note that we do not include the initial investment of $10 million in the total fixed cost figure. It is not considered a fixed cost because it is not a relevant cost. Relevant costs are those that will occur in the future and that will vary across the alternatives being considered. HDX-treme’s investment to refurbish the manufacturing facility was a one-time cost that will not reoccur in the future. Such past costs are sunk costs and should not be considered in future analyses. Also notice that if HDX-treme sells its DVD player for $270, the price is equal to the total cost per unit. This is the break even price—the price at which unit revenue (price) equals unit cost and profit is zero. Suppose HDX-treme does not want to merely break even but rather wants to earn a 25% markup on sales. HDX-treme’s markup price is:1 Markup price
Return on investment (ROI) pricing (or target-return pricing) A cost-based pricing method that determines price based on a specified rate of return on investment.
fixed costs $20,000,000 $250 $270 unit sales 1,000,000
unit cost $270 $360 (1 desired return on sales) 1 .25
This is the price that HDX-treme would sell the DVD player to resellers such as wholesalers or retailers to earn a 25% profit on sales. Another approach HDX-treme could use is called return on investment (ROI) pricing (or target-return pricing). In this case, the company would consider the initial $10 million investment, but only to determine the dollar profit goal. Suppose the company wants a 30% return on its investment. The price necessary to satisfy this requirement can be determined by:2 ROI price unit cost
ROI investment 0.3 $10,000,000 $270 $273 unit sales 1,000,000
That is, if HDX-treme sells its DVD players for $273 each, it will realize a 30% return on its initial investment of $10 million. In these pricing calculations, unit cost is a function of the expected sales, which were estimated to be 1 million units. But what if actual sales were lower? Then the unit cost would be higher because the fixed costs would be spread over fewer units, and the realized percentage markup on sales or ROI would be lower. Alternatively, if sales are higher than the estimated 1 million units, unit cost would be lower than $270, so a lower price would produce the desired markup on sales or ROI. It’s important to note that these cost-based pricing methods are internally focused and do not consider demand, competitors’ prices, or reseller requirements. Because HDX-treme will be selling these DVD players to consumers through wholesalers and retailers offering competing brands, the company must consider markup pricing from this perspective.
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Setting Price Based on External Factors
Markup The difference between a company’s selling price for a product and its cost to manufacture or purchase it.
Whereas costs determine the price floor, HDX-treme also must consider external factors when setting price. HDX-treme does not have the final say concerning the final price to consumers— retailers do. So it must start with its suggested retail price and work back. In doing so, HDXtreme must consider the markups required by resellers that sell the product to consumers. In general, a dollar markup is the difference between a company’s selling price for a product and its cost to manufacture or purchase it. For a retailer, then, the markup is the difference between the price it charges consumers and the cost the retailer must pay for the product. Thus, for any level of reseller: Dollar markup selling price cost Markups are usually expressed as a percentage, and there are two different ways to compute markups—on cost or on selling price: Markup percentage on cost
dollar markup cost
Markup percentage on selling price
Value-based pricing Offering just the right combination of quality and good service at a fair price.
Markup chain The sequence of markups used by firms at each level in a channel.
dollar markup selling price
To apply reseller margin analysis, HDX-treme must first set the suggested retail price and then work back to the price at which it must sell the DVD player to a wholesaler. Suppose retailers expect a 30% margin and wholesalers want a 20% margin based on their respective selling prices. And suppose that HDX-treme sets a manufacturer’s suggested retail price (MSRP) of $599.99 for its high-definition DVD player. Recall that HDX-treme wants to expand the market by pricing low and generating market share quickly. HDX-treme selected the $599.99 MSRP because it is much lower than most competitors’ prices, which can be as high as $1,200. And the company’s research shows that it is below the threshold at which more consumers are willing to purchase the product. By using buyers’ perceptions of value and not the seller’s cost to determine the MSRP, HDXtreme is using value-based pricing. For simplicity, we will use an MSRP of $600 in further analyses. To determine the price HDX-treme will charge wholesalers, we must first subtract the retailer’s margin from the retail price to determine the retailer’s cost ($600 ($600 0.30) $420). The retailer’s cost is the wholesaler’s price, so HDX-treme next subtracts the wholesaler’s margin ($420 ($420 0.20) $336). Thus, the markup chain representing the sequence of markups used by firms at each level in a channel for HDX-treme’s new product is: Suggested retail price: minus retail margin (30%):
$600 $180
Retailer’s cost/wholesaler’s price: minus wholesaler’s margin (20%):
$420 $ 84
Wholesaler’s cost/HDX-treme’s price:
$336
By deducting the markups for each level in the markup chain, HDX-treme arrives at a price for the DVD player to wholesalers of $336.
Break-Even and Margin Analysis The previous analyses derived a value-based price of $336 for HDX-treme’s DVD player. Although this price is higher than the break-even price of $270 and covers costs, that price assumed a demand of 1 million units. But how many units and what level of dollar sales must HDX-treme achieve to break even at the $336 price? And what level of sales must be achieved to realize various profit goals? These questions can be answered through break-even and margin analysis.
Break-even analysis Analysis to determine the unit volume and dollar sales needed to be profitable given a particular price and cost structure.
Determining Break-Even Unit Volume and Dollar Sales Based on an understanding of costs, consumer value, the competitive environment, and reseller requirements, HDX-treme has decided to set its price to wholesalers at $336. At that price, what sales level will be needed for HDX-treme to break even or make a profit? Break-even analysis determines the unit volume and dollar sales needed to be profitable given a particular price and
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Appendix 2 Marketing by the Numbers cost structure. At the break-even point, total revenue equals total costs and profit is zero. Above this point, the company will make a profit; below it, the company will lose money. HDX-treme can calculate break-even volume using the following formula:3 Break-even volume
Unit contribution The amount that each unit contributes to covering fixed costs—the difference between price and variable costs.
fixed costs price unit variable cost
The denominator (price unit variable cost) is called unit contribution (sometimes called contribution margin). It represents the amount that each unit contributes to covering fixed costs. Break-even volume represents the level of output at which all (variable and fixed) costs are covered. In HDX-treme’s case, break-even unit volume is: Break-even volume
fixed cost $20,000,000 232,558.1 units price variable cost $336 $250
Thus, at the given cost and pricing structure, HDX-treme will break even at 232,559 units. To determine the break-even dollar sales, simply multiply unit break-even volume by the selling price: BE sales BEvol price 232,559 units $336 $78,139,824
Contribution margin The unit contribution divided by the selling price.
Another way to calculate dollar break-even sales is to use the percentage contribution margin (hereafter referred to as contribution margin), which is the unit contribution divided by the selling price: Contribution margin
price variable cost $336$250 0.256 or 25.6% price $336
Then, Break-even sales
fixed costs $20,000,000 $78,125,000 contribution margin 0.256
Note that the difference between the two break-even sales calculations is due to rounding. Such break-even analysis helps HDX-treme by showing the unit volume needed to cover costs. If production capacity cannot attain this level of output, then the company should not launch this product. However, the unit break-even volume is well within HDX-treme’s capacity. Of course, the bigger question concerns whether HDX-treme can sell this volume at the $336 price. We’ll address that issue a little later. Understanding contribution margin is useful in other types of analyses as well, particularly if unit prices and unit variable costs are unknown or if a company (say, a retailer) sells many products at different prices and knows the percentage of total sales variable costs represent. Whereas unit contribution is the difference between unit price and unit variable costs, total contribution is the difference between total sales and total variable costs. The overall contribution margin can be calculated by: Contribution margin
total sales total variable costs total sales
Regardless of the actual level of sales, if the company knows what percentage of sales is represented by variable costs, it can calculate contribution margin. For example, HDXtreme’s unit variable cost is $250, or 74% of the selling price ($250 ÷ $336 0.74). That means for every $1 of sales revenue for HDX-treme, $0.74 represents variable costs, and the difference ($0.26) represents contribution to fixed costs. But even if the company doesn’t know its unit price and unit variable cost, it can calculate the contribution margin from total sales and total variable costs or from knowledge of the total cost structure. It can set total sales equal to 100% regardless of the actual absolute amount and determine the contribution margin: Contribution margin
100% 74% 1 0.74 1 0.74 0.26 or 26% 100% 1
Note that this matches the percentage calculated from the unit price and unit variable cost information. This alternative calculation will be very useful later when analyzing various marketing decisions.
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Determining “Breakeven” for Profit Goals Although it is useful to know the break-even point, most companies are more interested in making a profit. Assume HDX-treme would like to realize a $5 million profit in the first year. How many DVD players must it sell at the $336 price to cover fixed costs and produce this profit? To determine this, HDX-treme can simply add the profit figure to fixed costs and again divide by the unit contribution to determine unit sales:4 Unit volume
fixed cost profit goal $20,000,000 $5,000,000 290,697.7 units price variable cost $336 $250
Thus, to earn a $5 million profit, HDX-treme must sell 290,698 units. Multiply by price to determine dollar sales needed to achieve a $5 million profit: Dollar sales 290,698 units $336 $97,674,528 Or use the contribution margin: Sales
fixed cost profit goal $20,000,000 $5,000,000 $97,656,250 contribution margin 0.256
Again, note that the difference between the two break-even sales calculations is due to rounding. As we saw previously, a profit goal can also be stated as a return on investment goal. For example, recall that HDX-treme wants a 30% return on its $10 million investment. Thus, its absolute profit goal is $3 million ($10,000,000 0.30). This profit goal is treated the same way as in the previous example:5 Unit volume
fixed cost profit goal $20,000,000 $3,000,000 267,442 units price variable cost $336 $250
Dollar sales 267,442 units $336 $89,860,512 Or Dollar sales
fixed cost profit goal $20,000,000 $3,000,000 $89,843,750 contribution margin 0.256
Finally, HDX-treme can express its profit goal as a percentage of sales, which we also saw in previous pricing analyses. Assume HDX-treme desires a 25% return on sales. To determine the unit and sales volume necessary to achieve this goal, the calculation is a little different from the previous two examples. In this case, we incorporate the profit goal into the unit contribution as an additional variable cost. Look at it this way: If 25% of each sale must go toward profits, that leaves only 75% of the selling price to cover fixed costs. Thus, the equation becomes:6 Unit volume
fixed cost fixed cost or price variable cost (0.25 price) (0.75 price)variable cost
So, Unit volume
$20,000,000 10,000,000 units (0.75 $336) $250
Dollar sales necessary 10,000,000 units $336 $3,360,000,000 Thus, HDX-treme would need more than $3 billion in sales to realize a 25% return on sales given its current price and cost structure! Could it possibly achieve this level of sales? The major point is this: Although break-even analysis can be useful in determining the level of sales needed to cover costs or to achieve a stated profit goal, it does not tell the company whether it is possible to achieve that level of sales at the specified price. To address this issue, HDX-treme needs to estimate demand for this product. Before moving on, however, let’s stop here and practice applying the concepts covered so far. Now that you have seen pricing and break-even concepts in action as they related to HDXtreme’s new DVD player, here are several exercises for you to apply what you have learned in other contexts.
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Marketing by the Numbers Exercise Set One Now that you’ve studied pricing, break-even, and margin analysis as they relate to HDX-treme’s new-product launch, use the following exercises to apply these concepts in other contexts. 1.1 Sanborn, a manufacturer of electric roof vents, realizes a cost of $55 for every unit it produces. Its total fixed costs equal $2 million. If the company manufactures 500,000 units, compute the following: a. unit cost b. markup price if the company desires a 10% return on sales c. ROI price if the company desires a 25% return on an investment of $1 million 1.2 An interior decorator purchases items to sell in her store. She purchases a lamp for $125 and sells it for $225. Determine the following: a. dollar markup b. markup percentage on cost c. markup percentage on selling price 1.3 A consumer purchases a toaster from a retailer for $60. The retailer’s markup is 20%, and the wholesaler’s markup is 15%, both based on selling price. For what price does the manufacturer sell the product to the wholesaler? 1.4 A vacuum manufacturer has a unit cost of $50 and wishes to achieve a margin of 30% based on selling price. If the manufacturer sells directly to a retailer who then adds a set margin of 40% based on selling price, determine the retail price charged to consumers. 1.5 Advanced Electronics manufactures DVDs and sells them directly to retailers who typically sell them for $20. Retailers take a 40% margin based on the retail selling price. Advanced’s cost information is as follows: DVD package and disc
$2.50/DVD
Royalties
$2.25/DVD
Advertising and promotion
$500,000
Overhead
$200,000
Calculate the following: a. contribution per unit and contribution margin b. break-even volume in DVD units and dollars c. volume in DVD units and dollar sales necessary if Advanced’s profit goal is 20% profit on sales d. net profit if 5 million DVDs are sold
Demand Estimates, the Marketing Budget, and Marketing Performance Measures Market Potential and Sales Estimates
Total market demand The total volume that would be bought by a defined consumer group in a defined geographic area in a defined time period in a defined marketing environment under a defined level and mix of industry marketing effort.
Market potential The upper limit of market demand.
HDX-treme has now calculated the sales needed to break even and to attain various profit goals on its DVD player. However, the company needs more information regarding demand in order to assess the feasibility of attaining the needed sales levels. This information is also needed for production and other decisions. For example, production schedules need to be developed and marketing tactics need to be planned. The total market demand for a product or service is the total volume that would be bought by a defined consumer group in a defined geographic area in a defined time period in a defined marketing environment under a defined level and mix of industry marketing effort. Total market demand is not a fixed number but a function of the stated conditions. For example, next year’s total market demand for high-definition DVD players will depend on how much Samsung, Sony, Pioneer, Toshiba, and other producers spend on marketing their brands. It also depends on many environmental factors, such as government regulations, economic conditions, and the level of consumer confidence in a given market. The upper limit of market demand is called market potential. One general but practical method that HDX-treme might use for estimating total market demand uses three variables: (1) the number of prospective buyers, (2) the quantity purchased
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by an average buyer per year, and (3) the price of an average unit. Using these numbers, HDXtreme can estimate total market demand as follows: Qnqp where Q total market demand n number of buyers in the market q quantity purchased by an average buyer per year p price of an average unit
Chain ratio method Estimating market demand by multiplying a base number by a chain of adjusting percentages.
A variation of this approach is the chain ratio method. This method involves multiplying a base number by a chain of adjusting percentages. For example, HDX-treme’s high-definition DVD player is designed to play high-definition DVD movies on high-definition televisions. Thus, consumers who do not own a high-definition television will not likely purchase this player. Additionally, not all HDTV households will be willing and able to purchase the new high-definition DVD player. HDX-treme can estimate U.S. demand using a chain of calculations like the following: Total number of U.S. households The percentage of U.S. households owning a high-definition television
The percentage of these households willing and able to buy a high-definition DVD player
AC Nielsen, the television ratings company, estimates that there are more than 110 million TV households in the United States.7 The Consumer Electronics Association estimates that 38% of TV households will own HDTVs by the end of 2006.8 However, HDX-treme’s research indicates that only 44.5% of HDTV households possess the discretionary income needed and are willing to buy a high-definition DVD player. Then, the total number of households willing and able to purchase this product is: 110 million households 0.38 0.445 18.6 million households Because HDTVs are relatively new and expensive products, most households have only one of these televisions, and it’s usually the household’s primary television.9 Thus, consumers who buy a high-definition DVD player will likely buy only one per household. Assuming the average retail price across all brands is $750 for this product, the estimate of total market demand is as follows: 18.6 million households 1 DVD player per household $750 $14 billion This simple chain of calculations gives HDX-treme only a rough estimate of potential demand. However, more detailed chains involving additional segments and other qualifying factors would yield more accurate and refined estimates. Still, these are only estimates of market potential. They rely heavily on assumptions regarding adjusting percentages, average quantity, and average price. Thus, HDX-treme must make certain that its assumptions are reasonable and defendable. As can be seen, the overall market potential in dollar sales can vary widely given the average price used. For this reason, HDX-treme will use unit sales potential to determine its sales estimate for next year. Market potential in terms of units is 18.6 million DVD players (18.6 million households 1 DVD player per household). Assuming that HDX-treme wants to attain 2% market share (comparable to its share of the HDTV market) in the first year after launching this product, then it can forecast unit sales at 18.6 million units 0.02 372,000 units. At a selling price of $336 per unit, this translates into sales of $124.99 million (372,000 units $336 per unit). For simplicity, further analyses will use forecasted sales of $125 million. This unit volume estimate is well within HDX-treme’s production capacity and exceeds not only the break-even estimate (232,559 units) calculated earlier, but also the volume necessary to realize a $5 million profit (290,698 units) or a 30% return on investment (267,442 units). However, this forecast falls well short of the volume necessary to realize a 25% return on sales (10 million units!) and may require that HDX-treme revise expectations. To assess expected profits, we must now look at the budgeted expenses for launching this product. To do this, we will construct a pro forma profit-and-loss statement.
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The Profit-and-Loss Statement and Marketing Budget Pro forma (or projected) profit-and-loss statement (or income statement or operating statement) A statement that shows projected revenues less budgeted expenses and estimates the projected net profit for an organization, product, or brand during a specific planning period, typically a year.
All marketing managers must account for the profit impact of their marketing strategies. A major tool for projecting such profit impact is a pro forma (or projected) profit-and-loss statement (also called an income statement or operating statement). A pro forma statement shows projected revenues less budgeted expenses and estimates the projected net profit for an organization, product, or brand during a specific planning period, typically a year. It includes direct product production costs, marketing expenses budgeted to attain a given sales forecast, and overhead expenses assigned to the organization or product. A profit-and-loss statement typically consists of several major components (see Table A2.1): ■
Net sales—gross sales revenue minus returns and allowances (for example, trade, cash, quantity, and promotion allowances). HDX-treme’s net sales for 2006 are estimated to be $125 million, as determined in the previous analysis.
■
Cost of goods sold (sometimes called cost of sales)—the actual cost of the merchandise sold by a manufacturer or reseller. It includes the cost of inventory, purchases, and other costs associated with making the goods. HDX-treme’s cost of goods sold is estimated to be 50% of net sales, or $62.5 million.
■
Gross margin (or gross profit)—the difference between net sales and cost of goods sold. HDX-treme’s gross margin is estimated to be $62.5 million.
■
Operating expenses—the expenses incurred while doing business. These include all other expenses beyond the cost of goods sold that are necessary to conduct business. Operating expenses can be presented in total or broken down in detail. Here, HDX-treme’s estimated operating expenses include marketing expenses and general and administrative expenses. Marketing expenses include sales expenses, promotion expenses, and distribution expenses. The new product will be sold though HDX-treme’s sales force, so the company budgets $5 million for sales salaries. However, because sales representatives earn a 10% commission on sales, HDX-treme must also add a variable component to sales expenses of $12.5 million (10% of $125 million net sales), for a total budgeted sales expense of $17.5 million. HDX-treme sets its advertising and promotion to launch this product at $10 million. However, the company also budgets 4% of sales, or $5 million, for cooperative advertising allowances to retailers who promote HDX-treme’s new product in their advertising. Thus, the total budgeted advertising and promotion expenses are $15 million ($10 million for advertising plus $5 million in co-op allowances). Finally, HDX-treme budgets 10% of net sales, or $12.5 million, for freight and delivery charges. In all, total marketing expenses are estimated to be $17.5 million $15 million $12.5 million $45 million. General and administrative expenses are estimated at $5 million, broken down into $2 million for managerial salaries and expenses for the marketing function and $3 million of indirect overhead allocated to this product by the corporate accountants (such as depreciation, interest, maintenance, and insurance). Total expenses for the year, then, are estimated to be $50 million ($45 million marketing expenses $5 million in general and administrative expenses).
TABLE A2.1 Pro Forma Profit-and-Loss Statement for the 12-Month Period Ended December 31, 2006
% of sales Net Sales Cost of Goods Sold Gross Margin Marketing Expenses Sales expenses Promotion expenses Freight General and Administrative Expenses Managerial salaries and expenses Indirect overhead Net Profit Before Income Tax
$17,500,000 15,000,000 12,500,000 $2,000,000 3,000,000
$125,000,000 62,500,000 $ 62,500,000
100% 50% 50%
45,000,000
36%
5,000,000 $12,500,000
4% 10%
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Net profit before taxes—profit earned after all costs are deducted. HDX-treme’s estimated net profit before taxes is $12.5 million.
In all, as Table A2.1 shows, HDX-treme expects to earn a profit on its new DVD player of $12.5 million in 2006. Also note that the percentage of sales that each component of the profit-and-loss statement represents is given in the right-hand column. These percentages are determined by dividing the cost figure by net sales (that is, marketing expenses represent 36% of net sales determined by $45 million ÷ $125 million). As can be seen, HDX-treme projects a net profit return on sales of 10% in the first year after launching this product.
Marketing Performance Measures Profit-and-loss statement (or income statement or operating statement) A statement that shows actual revenues less expenses and net profit for an organization, product, or brand during a specific planning period, typically a year.
Now let’s fast-forward a year. HDX-treme’s high-definition DVD player has been on the market for one year and management wants to assess its sales and profit performance. One way to assess this performance is to compute performance ratios derived from HDX-treme’s profitand-loss statement. Whereas the pro forma profit-and-loss statement shows projected financial performance, the statement given in Table A2.2 shows HDX-treme’s actual financial performance based on actual sales, cost of goods sold, and expenses during the past year. By comparing the profitand-loss statement from one period to the next, HDX-treme can gauge performance against goals, spot favorable or unfavorable trends, and take appropriate corrective action. The profit-and-loss statement shows that HDX-treme lost $1 million rather than making the $12.5 million profit projected in the pro forma statement. Why? One obvious reason is that net sales fell $25 million short of estimated sales. Lower sales translated into lower variable costs associated with marketing the product. However, both fixed costs and the cost of goods sold as a percentage of sales exceeded expectations. Hence, the product’s contribution margin was 21% rather than the estimated 26%. That is, variable costs represented 79% of sales (55% for cost of goods sold, 10% for sales commissions, 10% for freight, and 4% for coop allowances). Recall that contribution margin can be calculated by subtracting that fraction from one (10.79 0.21). Total fixed costs were $22 million, $2 million more than estimated. Thus, the sales that HDX-treme needed to break even given this cost structure can be calculated as: Break-even sales
Market share Company sales divided by market sales.
fixed costs $22,000,000 $104,761,905 contribution margin 0.21
If HDX-treme had achieved another $5 million in sales, it would have earned a profit. Although HDX-treme’s sales fell short of the forecasted sales, so did overall industry sales for this product. Overall industry sales were only $2.5 billion. That means that HDX-treme’s market share was 4% ($100 million ÷ $2.5 billion 0.04 4%), which was higher than forecasted. Thus, HDX-treme attained a higher-than-expected market share but the overall market sales were not as high as estimated.
TABLE A2.2 Profit-and-Loss Statement for the 12-Month Period Ended December 31, 2006
% of sales Net Sales Cost of Goods Sold Gross Margin Marketing Expenses Sales expenses Promotion expenses Freight General and Administrative Expenses Managerial salaries and expenses Indirect overhead Net Profit Before Income Tax
$15,000,000 14,000,000 10,000,000 $2,000,000 5,000,000
$100,000,000 55,000,000 $ 45,000,000
100% 55% 45%
39,000,000
39%
7,000,000 ($1,000,000)
7% (1%)
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Analytic Ratios Operating ratios The ratios of selected operating statement items to net sales.
Gross margin percentage The percentage of net sales remaining after cost of goods sold—calculated by dividing gross margin by net sales.
The profit-and-loss statement provides the figures needed to compute some crucial operating ratios—the ratios of selected operating statement items to net sales. These ratios let marketers compare the firm’s performance in one year to that in previous years (or with industry standards and competitors’ performance in that year). The most commonly used operating ratios are the gross margin percentage, the net profit percentage, and the operating expense percentage. The inventory turnover rate and return on investment (ROI) are often used to measure managerial effectiveness and efficiency. The gross margin percentage indicates the percentage of net sales remaining after cost of goods sold that can contribute to operating expenses and net profit before taxes. The higher this ratio, the more a firm has left to cover expenses and generate profit. HDX-treme’s gross margin ratio was 45%: Gross margin percentage
Net profit percentage The percentage of each sales dollar going to profit— calculated by dividing net profits by net sales.
Operating expense percentage The portion of net sales going to operating expenses— calculated by dividing total expenses by net sales.
Inventory turnover rate (or stockturn rate for resellers) The number of times an inventory turns over or is sold during a specified time period (often one year)—calculated based on costs, selling price, or units.
gross margin $45,000,000 0.45 = 45% net sales $100,000,000
Note that this percentage is lower than estimated, and this ratio is seen easily in the percentage of sales column in Table A2.2. Stating items in the profit-and-loss statement as a percent of sales allows managers to quickly spot abnormal changes in costs over time. If there was previous history for this product and this ratio was declining, management should examine it more closely to determine why it has decreased (that is, because of a decrease in sales volume or price, an increase in costs, or a combination of these). In HDX-treme’s case, net sales were $25 million lower than estimated, and cost of goods sold was higher than estimated (55% rather than the estimated 50%). The net profit percentage shows the percentage of each sales dollar going to profit. It is calculated by dividing net profits by net sales: Net profit percentage
net profit $1,000,000 0.01 1.0% net sales $100,000,000
This ratio is easily seen in the percent of sales column. HDX-treme’s DVD player generated negative profits in the first year, not a good situation given that before the product launch net profits before taxes were estimated at more than $12 million. Later in this appendix, we will discuss further analyses the marketing manager should conduct to defend the product. The operating expense percentage indicates the portion of net sales going to operating expenses. Operating expenses include marketing and other expenses not directly related to marketing the product, such as indirect overhead assigned to this product. It is calculated by: Operating expense percentage
total expenses $46,000,000 0.46 46% net sales $100,000,000
This ratio can also be quickly determined from the percent of sales column in the profit-andloss statement by adding the percentages for marketing expenses and general and administrative expenses (39% 7%). Thus, 46 cents of every sales dollar went for operations. Although HDX-treme wants this ratio to be as low as possible, and 46% is not an alarming amount, it is of concern if it is increasing over time or if a loss is realized. Another useful ratio is the inventory turnover rate (also called stockturn rate for resellers). The inventory turnover rate is the number of times an inventory turns over or is sold during a specified time period (often one year). This rate tells how quickly a business is moving inventory through the organization. Higher rates indicate that lower investments in inventory are made, thus freeing up funds for other investments. It may be computed on a cost, selling price, or unit basis. The formula based on cost is: Inventory turnover rate
cost of goods sold average inventory at cost
Assuming HDX-treme’s beginning and ending inventories were $30 million and $20 million, respectively, the inventory turnover rate is: Inventory turnover rate
$55,000,000 $55,000,000 2.2 ($30,000,000 $20,000,000)/2 $25,000,000
That is, HDX-treme’s inventory turned over 2.2 times in 2006. Normally, the higher the turnover rate, the higher the management efficiency and company profitability. However, this rate should be compared to industry averages, competitors’ rates, and past performance to
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Return on investment (ROI) A measure of managerial effectiveness and efficiency— net profit before taxes divided by total investment.
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determine if HDX-treme is doing well. A competitor with similar sales but a higher inventory turnover rate will have fewer resources tied up in inventory, allowing it to invest in other areas of the business. Companies frequently use return on investment (ROI) to measure managerial effectiveness and efficiency. For HDX-treme, ROI is the ratio of net profits to total investment required to manufacture the new product. This investment includes capital investments in land, buildings, and equipment (here, the initial $10 million to refurbish the manufacturing facility) plus inventory costs (HDX-treme’s average inventory totaled $25 million), for a total of $35 million. Thus, HDX-treme’s ROI for the DVD player is: Return on investment
net profit before taxes $1,000,000 .0286 2.86% investment $35,000,000
ROI is often used to compare alternatives, and a positive ROI is desired. The alternative with the highest ROI is preferred to other alternatives. HDX-treme needs to be concerned with the ROI realized. One obvious way HDX-treme can increase ROI is to increase net profit by reducing expenses. Another way is to reduce its investment, perhaps by investing less in inventory and turning it over more frequently.
Marketing Profitability Metrics Given the above financial results, you may be thinking that HDX-treme should drop this new product. But what arguments can marketers make for keeping or dropping this product? The obvious arguments for dropping the product are that first-year sales were well below expected levels and the product lost money, resulting in a negative return on investment. So what would happen if HDX-treme did drop this product? Surprisingly, if the company drops the product, the profits for the total organization will decrease by $4 million! How can that be? Marketing managers need to look closely at the numbers in the profit-and-loss statement to determine the net marketing contribution for this product. In HDX-treme’s case, the net marketing contribution for the DVD player is $4 million, and if the company drops this product, that contribution will disappear as well. Let’s look more closely at this concept to illustrate how marketing managers can better assess and defend their marketing strategies and programs.
Net marketing contribution (NMC) A measure of marketing profitability that includes only components of profitability controlled by marketing.
NET MARKETING CONTRIBUTION Net marketing contribution (NMC), along with other marketing metrics derived from it, measures marketing profitability. It includes only components of profitability that are controlled by marketing. Whereas the previous calculation of net profit before taxes from the profit-and-loss statement includes operating expenses not under marketing’s control, NMC does not. Referring back to HDX-treme’s profit-and-loss statement given in Table A2.2, we can calculate net marketing contribution for the DVD player as: NMC net sales cost of goods sold marketing expenses $100 million $55 million $41 million $4 million The marketing expenses include sales expenses ($15 million), promotion expenses ($14 million), freight expenses ($10 million), and the managerial salaries and expenses of the marketing function ($2 million), which total $41 million. Thus, the DVD player actually contributed $4 million to HDX-treme’s profits. It was the $5 million of indirect overhead allocated to this product that caused the negative profit. Further, the amount allocated was $2 million more than estimated in the pro forma profitand-loss statement. Indeed, if only the estimated amount had been allocated, the product would have earned a profit of $1 million rather than losing $1 million. If HDX-treme drops the DVD player product, the $5 million in fixed overhead expenses will not disappear—it will simply have to be allocated elsewhere. However, the $4 million in net marketing contribution will disappear.
Marketing return on sales (or marketing ROS) The percent of net sales attributable to the net marketing contribution— calculated by dividing net marketing contribution by net sales.
MARKETING RETURN ON SALES AND INVESTMENT To get an even deeper understanding of the profit impact of marketing strategy, we’ll now examine two measures of marketing efficiency— marketing return on sales (marketing ROS) and marketing return on investment (marketing ROI).10 Marketing return on sales (or marketing ROS) shows the percent of net sales attributable to the net marketing contribution. For our DVD player, ROS is: Marketing ROS
net marketing contribution $4,000,000 0.04 4% net sales $100,000,000
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Marketing return on investment (or marketing ROI) A measure of the marketing productivity of a marketing investment—calculated by dividing net marketing contribution by marketing expenses.
Thus, out of every $100 of sales, the product returns $4 to HDX-treme’s bottom line. A high marketing ROS is desirable. But to assess whether this is a good level of performance, HDXtreme must compare this figure to previous marketing ROS levels for the product, the ROSs of other products in the company’s portfolio, and the ROSs of competing products. Marketing return on investment (or marketing ROI) measures the marketing productivity of a marketing investment. In HDX-treme’s case, the marketing investment is represented by $41 million of the total expenses. Thus, Marketing ROI is: Marketing ROI
net marketing contribution $4,000,000 0.0976 9.76% net sales $41,000,000
As with marketing ROS, a high value is desirable, but this figure should be compared with previous levels for the given product and with the marketing ROIs of competitors’ products. Note from this equation that marketing ROI could be greater than 100%. This can be achieved by attaining a higher net marketing contribution and/or a lower total marketing expense. In this section, we estimated market potential and sales, developed profit-and-loss statements, and examined financial measures of performance. In the next section, we discuss methods for analyzing the impact of various marketing tactics. However, before moving on to those analyses, here’s another set of quantitative exercises to help you apply what you’ve learned to other situations.
Marketing by the Numbers Exercise Set Two 2.1 Determine the market potential for a product that has 50 million prospective buyers who purchase an average of 3 per year and price averages $25. How many units must a company sell if it desires a 10% share of this market? 2.2 Develop a profit-and-loss statement for the Westgate division of North Industries. This division manufactures light fixtures sold to consumers through home improvement and hardware stores. Cost of goods sold represents 40% of net sales. Marketing expenses include selling expenses, promotion expenses, and freight. Selling expenses include sales salaries totaling $3 million per year and sales commissions (5% of sales). The company spent $3 million on advertising last year, and freight costs were 10% of sales. Other costs include $2 million for managerial salaries and expenses for the marketing function and another $3 million for indirect overhead allocated to the division. a. Develop the profit-and-loss statement if net sales were $20 million last year. b. Develop the profit-and-loss statement if net sales were $40 million last year. c. Calculate Westgate’s break-even sales. 2.3 Using the profit-and-loss statement you developed in question 2.2b, and assuming that Westgate’s beginning inventory was $11 million, ending inventory was $7 million, and total investment was $20 million including inventory, determine the following: a. gross margin percentage b. net profit percentage c. operating expense percentage d. inventory turnover rate e. return on investment (ROI) f. net marketing contribution g. marketing return on sales (marketing ROS) h. marketing return on investment (marketing ROI) i. Is the Westgate division doing well? Explain your answer.
Financial Analysis of Marketing Tactics Although the first-year profit performance for HDX-treme’s DVD player was less than desired, management feels that this attractive market has excellent growth opportunities. Although the sales of HDX-treme’s DVD player were lower than initially projected, they were not unreasonable given the size of the current market. Thus, HDX-treme wants to explore new marketing tactics to help grow the market for this product and increase sales for the company. For example, the company could increase advertising to promote more awareness of the new DVD player and its category. It could add salespeople to secure greater product distribution. HDX-treme could decrease prices so that more consumers could afford its player.
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Finally, to expand the market, HDX-treme could introduce a lower-priced model in addition to the higher-priced original offering. Before pursuing any of these tactics, HDX-treme must analyze the financial implications of each.
Increase Advertising Expenditures Although most consumers understand DVD players, they may not be aware of highdefinition DVD players. Thus, HDX-treme is considering boosting its advertising to make more people aware of the benefits of high-definition DVD players in general and of its own brand in particular. What if HDX-treme’s marketers recommend increasing national advertising by 50% to $15 million (assume no change in the variable cooperative component of promotional expenditures)? This represents an increase in fixed costs of $5 million. What increase in sales will be needed to break even on this $5 million increase in fixed costs? A quick way to answer this question is to divide the increase in fixed cost by the contribution margin, which we found in a previous analysis to be 21%: Increase in sales
increase in fixed cost $5,000,000 $23,809,524 contribution margin 0.21
Thus, a 50% increase in advertising expenditures must produce a sales increase of almost $24 million to just break even. That $24 million sales increase translates into an almost 1 percentage point increase in market share (1% of the $2.5 billion overall market equals $25 million). That is, to break even on the increased advertising expenditure, HDX-treme would have to increase its market share from 4% to 4.95% ($123,809,524 ÷ $2.5 billion 0.0495 or 4.95% market share). All of this assumes that the total market will not grow, which might or might not be a reasonable assumption.
Increase Distribution Coverage
Workload method An approach to determining sales force size based on the workload required and the time available for selling.
HDX-treme also wants to consider hiring more salespeople in order to call on new retailer accounts and increase distribution through more outlets. Even though HDX-treme sells directly to wholesalers, its sales representatives call on retail accounts to perform other functions in addition to selling, such as training retail salespeople. Currently, HDX-treme employs 60 sales reps who earn an average of $50,000 in salary plus 10% commission on sales. The DVD player is currently sold to consumers through 1,875 retail outlets. Suppose HDX-treme wants to increase that number of outlets to 2,500, an increase of 625 retail outlets. How many additional salespeople will HDX-treme need, and what sales will be necessary to break even on the increased cost? One method for determining what size sales force HDX-treme will need is the workload method. The workload method uses the following formula to determine the salesforce size: NS
NC FC LC TA
where NS number of salespeople NC number of customers FC average frequency of customer calls per customer LC average length of customer call TA time an average salesperson has available for selling per year HDX-treme’s sales reps typically call on accounts an average of 20 times per year for about 2 hours per call. Although each sales rep works 2,000 hours per year (50 weeks per year 40 hours per week), they spent about 15 hours per week on nonselling activities such as administrative duties and travel. Thus, the average annual available selling time per sales rep per year is 1,250 hours (50 weeks 25 hours per week). We can now calculate how many sales reps HDXtreme will need to cover the anticipated 2,500 retail outlets: NS
2,500 20 2 80 salespeople 1,250
Therefore, HDX-treme will need to hire 20 more salespeople. The cost to hire these reps will be $1 million (20 salespeople $50,000 salary per sales person).
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Appendix 2 Marketing by the Numbers What increase in sales will be required to break even on this increase in fixed costs? The 10% commission is already accounted for in the contribution margin, so the contribution margin remains unchanged at 21%. Thus, the increase in sales needed to cover this increase in fixed costs can be calculated by: Increase in sales
increase in fixed cost $1,000,000 $4,761,905 contribution margin 0.21
That is, HDX-treme’s sales must increase almost $5 million to break even on this tactic. So, how many new retail outlets will the company need to secure to achieve this sales increase? The average revenue generated per current outlet is $53,333 ($100 million in sales divided by 1,875 outlets). To achieve the nearly $5 million sales increase needed to break even, HDXtreme would need about 90 new outlets ($4,761,905 ÷ $53,333 89.3 outlets), or about 4.5 outlets per new rep. Given that current reps cover about 31 outlets apiece (1,875 outlets ÷ 60 reps), this seems very reasonable.
Decrease Price HDX-treme is also considering lowering its price to increase sales revenue through increased volume. The company’s research has shown that demand for most types of consumer electronics products is elastic—that is, the percentage increase in the quantity demanded is greater than the percentage decrease in price. It has also been found that when the price of HDTVs goes down, the quantity of DVD players demanded increases because they are complementary products. What increase in sales would be necessary to break even on a 10% decrease in price? That is, what increase in sales will be needed to maintain the total contribution that HDXtreme realized at the higher price? The current total contribution can be determined by multiplying the contribution margin by total sales:11 Current total contribution contribution margin sales .21 $100 million $21 million Price changes result in changes in unit contribution and contribution margin. Recall that the contribution margin of 21% was based on variable costs representing 79% of sales. Therefore, unit variable costs can be determined by multiplying the original price by this percentage: $336 0.79 $265.44 per unit. If price is decreased by 10%, the new price is $302.40. However, variable costs do not change just because price decreased, so the contribution and contribution margin decrease as follows:
Price Unit variable cost Unit contribution Contribution margin
Old
New (reduced 10%)
$336 $265.44 $70.56 $70.56/$336 0.21 or 21%
$302.40 $265.44 $36.96 $36.96/$302.40 0.12 or 12%
So a 10% reduction in price results in a decrease in the contribution margin from 21% to 12%.12 To determine the sales level needed to break even on this price reduction, we calculate the level of sales that must be attained at the new contribution margin to achieve the original total contribution of $21 million: New contribution margin new sales level original total contribution So, New sales level
original contribution $21,000,000 $175,000,000 new contribution margin 0.12
Thus, sales must increase by $75 million ($175 million $100 million) just to break even on a 10% price reduction. This means that HDX-treme must increase market share to 7% ($175 million ÷ $2.5 billion) to achieve the current level of profits (assuming no increase in the total market sales). The marketing manager must assess whether or not this is a reasonable goal.
Extend the Product Line As a final option, HDX-treme is considering extending its DVD player product line by offering a lower-priced model. Of course, the new, lower-priced product would steal some sales from
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Cannibalization The situation in which one product sold by a company takes a portion of its sales from other company products.
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the higher-priced model. This is called cannibalization—the situation in which one product sold by a company takes a portion of its sales from other company products. If the new product has a lower contribution than the original product, the company’s total contribution will decrease on the cannibalized sales. However, if the new product can generate enough new volume, it is worth considering. To assess cannibalization, HDX-treme must look at the incremental contribution gained by having both products available. Recall in the previous analysis we determined that unit variable costs were $265.44 and unit contribution was just over $70. Assuming costs remain the same next year, HDX-treme can expect to realize a contribution per unit of approximately $70 for every unit of the original DVD player sold. Assume that the first model high-definition DVD player offered by HDX-treme is called HD1 and the new, lower-priced model is called HD2. HD2 will retail for $400, and resellers will take the same markup percentages on price as they do with the higher-priced model. Therefore, HD2’s price to wholesalers will be $224 as follows: Retail price: minus retail margin (30%):
$400 $120
Retailer’s cost/wholesaler’s price: minus wholesaler’s margin (20%):
$280 $ 56
Wholesaler’s cost/HDX-treme’s price
$224
If HD2’s variable costs are estimated to be $174, then its contribution per unit will equal $50 ($224 $174 $50). That means for every unit that HD2 cannibalizes from HD1, HDX-treme will lose $20 in contribution toward fixed costs and profit (that is, contributionHD2 contributionHD1 $50 $70 $20). You might conclude that HDX-treme should not pursue this tactic because it appears as though the company will be worse off if it introduces the lowerpriced model. However, if HD2 captures enough additional sales, HDX-treme will be better off even though some HD1 sales are cannibalized. The company must examine what will happen to total contribution, which requires estimates of unit volume for both products. Originally, HDX-treme estimated that next year’s sales of HD1 would be 600,000 units. However, with the introduction of HD2, it now estimates that 200,000 of those sales will be cannibalized by the new model. If HDX-treme sells only 200,000 units of the new HD2 model (all cannibalized from HD1), the company would lose $4 million in total contribution (200,000 units $20 per cannibalized unit $4 million)—not a good outcome. However, HDX-treme estimates that HD2 will generate the 200,000 of cannibalized sales plus an additional 500,000 unit sales. Thus, the contribution on these additional HD2 units will be $25 million (i.e., 500,000 units $50 per unit $25 million). The net effect is that HDX-treme will gain $21 million in total contribution by introducing HD2. The following table compares HDX-treme’s total contribution with and without the introduction of HD2: HD1 only
HD1 and HD2
HD2 contribution
600,000 units $70 $42,000,000 0
Total contribution
$42,000,000
400,000 units $70 $28,000,000 700,000 units $50 $35,000,000 $63,000,000
HD1 contribution
The difference in the total contribution is a net gain of $21 million ($63 million $42 million). Based on this analysis, HDX-treme should introduce the HD2 model because it results in a positive incremental contribution. However, if fixed costs will increase by more than $21 million as a result of adding this model, then the net effect will be negative and HDX-treme should not pursue this tactic. Now that you have seen these marketing tactic analysis concepts in action as they related to HDX-treme’s new DVD player, here are several exercises for you to apply what you have learned in this section in other contexts.
Marketing by the Numbers Exercise Set Three 3.1 Kingsford, Inc. sells small plumbing components to consumers through retail outlets. Total industry sales for Kingsford’s relevant market last year were $80 million, with
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Appendix 2 Marketing by the Numbers Kingsford’s sales representing 10% of that total. Contribution margin is 25%. Kingsford’s sales force calls on retail outlets and each sales rep earns $45,000 per year plus 1% commission on all sales. Retailers receive a 40% margin on selling price and generate average revenue of $10,000 per outlet for Kingsford. a. The marketing manager has suggested increasing consumer advertising by $300,000. By how much would dollar sales need to increase to break even on this expenditure? What increase in overall market share does this represent? b. Another suggestion is to hire three more sales representatives to gain new consumer retail accounts. How many new retail outlets would be necessary to break even on the increased cost of adding three sales reps? c. A final suggestion is to make a 20% across-the-board price reduction. By how much would dollar sales need to increase to maintain Kingsford’s current contribution? (See endnote 12 to calculate the new contribution margin.) d. Which suggestion do you think Kingsford should implement? Explain your recommendation. 3.2 PepsiCo sells its soft drinks in approximately 400,000 retail establishments, such as supermarkets, discount stores, and convenience stores. Sales representatives call on each retail account weekly, which means each account is called on by a sales rep 52 times per year. The average length of a sales call is 75 minutes (or 1.25 hours). An average salesperson works 2,000 hours per year (50 weeks per year 40 hours per week), but each spends 10 hours a week on nonselling activities, such as administrative tasks and travel. How many sales people does PepsiCo need? 3.3 Hair Zone manufactures a brand of hair-styling gel. It is considering adding a modified version of the product—a foam that provides stronger hold. Hair Zone’s variable costs and prices to wholesalers are:
Unit selling price Unit variable costs
Current hair gel
New foam product
2.00 .85
2.25 1.25
Hair Zone expects to sell 1 million units of the new styling foam in the first year after introduction, but it expects that 60% of those sales will come from buyers who normally purchase Hair Zone’s styling gel. Hair Zone estimates that it would sell 1.5 million units of the gel if it did not introduce the foam. If the fixed cost of launching the new foam will be $100,000 during the first year, should Hair Zone add the new product to its line? Why or why not?
chapter
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Part 3: Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix
7
Previewing the Concepts So far, you’ve learned what marketing is and about the importance of understanding consumers and the marketplace environment. With that as background, you’re now ready to delve deeper into marketing strategy and tactics. This chapter looks further into key customer-driven marketing strategy decisions—how to divide up markets into meaningful customer groups (segmentation), choose which customer groups to serve (targeting), create market offerings that best serve target customers (differentiation), and position the offerings in the minds of consumers (positioning). Then, the chapters that follow explore the tactical marketing tools—the Four Ps—by which marketers bring these strategies to life. As an opening example of segmentation, targeting, differentiation, and positioning at work, let’s look at Dunkin’ Donuts. Dunkin’, a largely Eastern U.S. coffee chain, has ambitious plans to expand into a national powerhouse, on a par with Starbucks. But Dunkin’ is no Starbucks. In fact, it doesn’t want to be. It targets a very different kind of customer with a very different value proposition. Grab yourself some coffee and read on.
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Customer-Driven Marketing Strategy Creating Value for Target Customers ast year, Dunkin’ Donuts paid dozens of faithful customers in Phoenix, Chicago, and Charlotte, North Carolina, $100 a week to buy coffee at Starbucks instead. At the same time, the no-frills coffee chain paid Starbucks customers to make the opposite switch. When it later debriefed the two groups, Dunkin’ says it found them so polarized that company researchers dubbed them “tribes”— each of whom loathed the very things that made the other tribe loyal to their coffee shop. Dunkin’ fans viewed Starbucks as pretentious and trendy, whereas Starbucks loyalists saw Dunkin’ as plain and unoriginal. “I don’t get it,” one Dunkin’ regular told researchers after visiting Starbucks. “If I want to sit on a couch, I stay at home.” William Rosenberg opened the first Dunkin’ Donuts in Quincy, Massachusetts, in 1950. Residents flocked to his store each morning for the coffee and fresh doughnuts. Rosenberg started franchising the Dunkin’ Donuts name, and the chain grew rapidly throughout the Midwest and Southeast. By the early 1990s, however, Dunkin’ was losing breakfast sales to morning sandwiches at McDonald’s and Burger King. Starbucks and other high-end cafes began sprouting up, bringing more competition. Sales slid as the company clung to its strategy of selling sugary doughnuts by the dozen. In the mid-1990s, however, Dunkin’ shifted its focus from doughnuts to coffee in the hope that promoting a more frequently consumed item would drive store traffic. The coffee push worked—coffee now makes up 62 percent of sales. And Dunkin’s sales are growing at a double-digit clip, with profits up 35 percent over the past two years. Based on this recent success, Dunkin’ now has ambitious plans to expand into a national coffee powerhouse, on a par with Starbucks, the nation’s largest coffee chain. Over the next three years, Dunkin’ plans to remake its nearly 5,000 U.S. stores and to grow to triple that number in less than 15 years. But Dunkin’ is not Starbucks. In fact, it doesn’t want to be. To succeed, it must have its own clear vision of just which customers it wants to serve (what segments and targeting) and how (what positioning or value proposition). Dunkin’ and Starbucks target very different customers, who want very different things from their favorite coffee shop. Starbucks is strongly positioned as a sort of high-brow “third place”—outside the home and office—featuring couches, eclectic music, wireless Internet access, and art-splashed walls. Dunkin’ has a decidedly more low-brow, “everyman” kind of positioning. With its makeover, Dunkin’ plans to move upscale—a bit but not too far—to rebrand itself as a quick but appealing alternative to specialty coffee shops and fastfood chains. A prototype Dunkin’ store in Euclid, Ohio, outside Cleveland, features
L
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rounded granite-style coffee bars, where workers make espresso drinks face-to-face with customers. Open-air pastry cases brim with yogurt parfaits and fresh fruit, and a carefully orchestrated pop-music soundtrack is piped throughout. Yet Dunkin’ built itself on serving simple fare to working-class customers. Inching upscale without alienating that base will prove tricky. There will be no couches in the new stores. And Dunkin’ renamed a new hot sandwich a “stuffed melt” after customers complained that calling it a “panini” was too fancy. “We’re walking that [fine] line,” says Regina Lewis, the chain’s vice president of consumer insights. “The thing about the Dunkin’ tribe is, they see through the hype.” Dunkin’s research showed that although loyal Dunkin’ customers want nicer stores, they were bewildered and turned off by the atmosphere at Starbucks. They groused that crowds of laptop users made it difficult to find a seat. They didn’t like Starbucks’ “tall,” “grande,” and “venti” lingo for small, medium, and large coffees. And they couldn’t understand why anyone would pay as much as $4 for a cup of coffee. “It was almost as though they were a group of Martians talking about a group of Earthlings,” says an executive from Dunkin’s ad agency. One customer told researchers that lingering in a Starbucks felt like “celebrating Christmas with people you don’t know.” The Starbucks customers that Dunkin’ paid to switch were equally uneasy in Dunkin’ shops. “The Starbucks people couldn’t bear that they weren’t special anymore,” says the ad executive.
Objectives After studying this chapter, you should be able to 1. define the four major steps in designing a customer-driven market strategy: market segmentation, market targeting, differentiation, and positioning 2. list and discuss the major bases for segmenting consumer and business markets 3. explain how companies identify attractive market segments and choose a market targeting strategy 4. discuss how companies position their products for maximum competitive advantage in the marketplace
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Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix Such opposing opinions aren’t surprising, given the differences in the two stores’ customers. About 45 percent of Dunkin’ Donuts customers have an annual household income between $45,000 and $100,000 a year, with 30 percent earning less than that and 25 percent earning more. Dunkin’s customers include blue- and white-collar workers across all age, race, and income demographics. By contrast, Starbucks targets a higher-income, more professional group. But Dunkin’ researchers concluded that it wasn’t income that set the two tribes apart, as much as an ideal: Dunkin’ tribe members want to be part of a crowd, whereas members of the Starbucks tribe want to stand out as individuals. “The Starbucks tribe, they seek out things to make them feel more important,” says Dunkin’ VP Lewis. Members of the Dunkin’ Donuts tribe “don’t need to be any more important than they are.” Based on such findings, Dunkin’ executives have made dozens of store-redesign decisions, big and small, ranging from where to put the espresso machines to how much of its signature pink and orange color scheme to retain to where to display its fresh baked goods. Out went the square laminate tables, to be replaced by round imitation-granite tabletops and sleek chairs. Dunkin’ covered store walls in espresso brown and dialed down the pink and orange tones. Executives considered but held off on installing wireless Internet access because customers “just don’t feel it’s Dunkin’ Donuts.” Executives continue to discuss dropping the word “donuts” from its signs to convey that its menu is now broader. To grab a bigger share of customers, Dunkin’ is expanding its menu beyond breakfast with hearty snacks that can substitute for meals, such as smoothies and dough-wrapped pork bites. The new Euclid store is doing three times the sales of other stores in its area, partly because more customers are coming after 11 A.M. for new gourmet cookies and Dunkin’ Dawgs, hot dogs wrapped in dough. Focus groups liked hot flatbreads and smoothies, but balked at tiny pinwheels of dough stuffed with various fillings. Customers said “they felt like something at a fancy co*cktail hour,” says Lewis, and they weren’t substantial enough. Stacey Stevens, a 34-year-old Euclid resident who recently visited the new Dunkin’ prototype store, said she noticed it felt different than other Dunkin’ locations. “I don’t remember there being lots of music,” she said, while picking up a dozen doughnuts. “I like it in here.” She said it felt “more upbeat” than Starbucks. One Euclid store manager even persuaded Richard Wandersleben to upgrade from a regular coffee to a $2.39 latte during a recent visit. The 73- year-old retired tool-and-die maker, who drinks about three cups of coffee a day, says the Dunkin’ Donuts latte suited him fine. “It’s a little creamier” than regular coffee, he said. Dunkin’ knows that it’ll take some time to refresh its image. And whatever else happens, it plans to stay true to the needs and preferences of the Dunkin’ tribe. Dunkin’s “not going after the Starbucks coffee snob,” says one analyst, it’s “going after the average Joe.” Dunkin’s positioning and value proposition are pretty well summed up in its new ad campaign, which features the slogan “America Runs on Dunkin’.” The ads show everyone from office and construction workers to harried families relying on the chain to get them through their day. Says one ad, “It’s where everyday people get things done every day.”1
Market segmentation Dividing a market into smaller groups with distinct needs, characteristics, or behaviors who might require separate products or marketing mixes.
Companies today recognize that they cannot appeal to all buyers in the marketplace, or at least not to all buyers in the same way. Buyers are too numerous, too widely scattered, and too varied in their needs and buying practices. Moreover, the companies themselves vary widely in their abilities to serve different segments of the market. Instead, like Dunkin’ Donuts, a company must identify the parts of the market that it can serve best and most profitably. It must design customer-driven marketing strategies that build the right relationships with the right customers. Thus, most companies have moved away from mass marketing and toward target marketing—identifying market segments, selecting one or more of them, and developing products and marketing programs tailored to each. Instead of scattering their marketing efforts (the “shotgun” approach), firms are focusing on the buyers who have greater interest in the values they create best (the “rifle” approach). Figure 7.1 shows the four major steps in designing a customer-driven marketing strategy. In the first two stpes, the company selects the customers that it will serve. Market segmentation involves dividing a market into smaller groups of buyers with distinct needs, characteristics, or behaviors who might require separate products or marketing mixes. The company
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