Read Chapter 11 - Building Customer Relationships Through Effective Marketing
Students,
Read Chapter 11 - Building Customer Relationships Through Effective Marketing
This chapter introduces marketing as a process that facilitates exchanges of goods, services, and ideas among individuals and organizations.
To form utility (included in our discussion of production in Chapter 8), we now add place, time, and possession utility—direct creations of the marketing process. We also trace the evolution of the marketing concept and outline the steps in its implementation.
Following a description of market classifications, we explore the development of marketing strategies. The marketing mix is covered briefly in this section; the four elements of the marketing mix (product, price, distribution, and promotion) are covered in greater detail in Chapters 12 and 13.
We explain how the marketing environment affects strategic market planning. We then examine the major components of a marketing plan. We consider several tools for effective marketing planning, including market measurements, sales forecasts, marketing information systems, marketing research, and information technologies.
Finally, we focus on an analysis of buying behavior.
Although marketing encompasses a diverse set of decisions and activities, it always begins and ends with the customer. The American Marketing Association defines marketing as “[t]he activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” The marketing process involves eight major functions and numerous related activities. (See Table 11-1.)
MANAGING CUSTOMER RELATIONSHIPS. The term relationship marketing refers to “marketing decisions and activities focused on achieving long-term, satisfying relationships with customers.” Relationship marketing deepens and reinforces the buyer’s trust, which, as the customer’s loyalty grows, increases a company’s understanding of the customer’s needs and desires. Successful marketers respond to customers’ needs and strive to increase value to buyers continually over time. Eventually, this interaction becomes a solid relationship that fosters cooperation and mutual trust.
Customer relationship management (CRM) is the process of using information about customers to create marketing strategies that develop and sustain desirable customer relationships. Managing customer relationships requires identifying patterns of buying behavior and using this information to focus on the most promising and profitable customers. Companies must be sensitive to customers’ requirements and desires and establish communication to build customers’ trust and loyalty. This involves determining how much the customer will spend over his or her lifetime. The customer lifetime value (CLV) is a measure of a customer’s worth (sales minus costs) to a business during one’s lifetime.
CLV also includes the intangible benefits to retaining lifetime-value customers, such as their ability to provide feedback to a company and referring new customers of similar value. In general, when marketers focus on customers chosen for their lifetime value, they earn higher profits in future periods than when they focus on customers selected for other reasons. Because the loss of a potential lifetime customer can result in lower profits, managing customer relationships has become a major focus of marketers.
UTILITY: THE VALUE ADDED BY MARKETING. Utility is the ability of a good or service to satisfy a human need. There are four kinds of utility. (See Figure 11-1.) Form utility is created by converting production inputs into finished products. The three kinds of utility that are directly created by marketing are place, time, and possession utility. Place utility is created by making a product available at a location where customers wish to purchase it. Time utility is created by making a product available when customers wish to purchase it. Possession utility is created by transferring title (or ownership) of a product to the buyer. Along with the title to its product, the seller transfers the right to use that product to satisfy a need.
Place, time, and possession utility have real value in terms of both money and convenience. This value is created and added to goods and services through a wide variety of marketing activities. Overall, these marketing activities account for about half of every dollar spent by consumers. Place, time, and possession utility are only the most fundamental application of marketing activities; in recent years, these have been influenced by a broad business philosophy known as the marketing concept.
THE MARKETING CONCEPT. The marketing concept is a business philosophy that a firm should provide goods and services that satisfy customers’ needs through a coordinated set of attributes that allows the firm to achieve its objectives. Initially, the firm communicates with potential customers to assess their product needs. Then, it develops a good or service to satisfy those needs. Finally, it continues to seek ways to provide customer satisfaction. This process is an application of the marketing concept or marketing orientation.
Evolution of the Marketing Concept
From the start of the Industrial Revolution until the early 20th century, business had a strong production orientation, in which emphasis was placed on increased output and production efficiency.
Consumer demand for manufactured products was so great that manufacturers could almost bank on selling everything they produced.
Business had a strong production orientation, in which a strong emphasis was placed on increasing output and production efficiency.
Marketing was limited to taking orders and distributing finished goods.
In the 1920s, production caught up with and began to exceed demand. Producers had to direct effort toward selling goods, rather than just producing them.
This new sales orientation was characterized by increased advertising, enlarged sales forces, and, occasionally, high-pressure selling techniques.
Manufacturers produced the goods they expected consumers to want, and marketing consisted primarily of promoting products through personal selling and advertising, taking orders, and delivering goods.
During the early 1950s, businesspeople started to realize that even enormous
advertising expenditures and proven sales techniques were not sufficient to gain a competitive edge.
Marketers realized that the best approach was to adopt a customer orientation—in other words, they had to first determine what customers need and then develop goods to fill those particular needs. (See Table 11-2.)
All functional areas—research and development, production, finance, human resources and, of course, marketing—play a role in providing customer satisfaction.
Implementing the Marketing Concept
To implement the marketing concept, a firm must first obtain information about its present and potential customers.
The firm must determine not only what customers’ needs are but also how well those needs are satisfied by products currently on the market.
It must ascertain how its products might be improved and what opinions customers have of the firm and its marketing efforts.
The firm must then use this information to pinpoint the specific needs and potential customers toward which it will direct its marketing activities and resources.
Next, the firm must mobilize its marketing resources to:
Provide a product that will satisfy its customers.
Price the product at a level that is acceptable to buyers and that will yield profit.
Promote the product so that potential customers will be aware of its existence and its ability to satisfy their needs.
Ensure that the product is distributed so that it is available to customers where and when it is needed.
Finally, the firm must again obtain marketing information—this time regarding the effectiveness of its efforts.
The firm must be ready to modify any or all of its marketing activities based on information about its customers and competitors.
MARKETS AND THEIR CLASSIFICATION. A market is a group of individuals and/or organizations who have needs for products in a given category and have the ability, willingness, and authority to purchase them. Markets are broadly classified as consumer or business-to-business markets. Consumer markets consist of purchasers and/or household members who intend to consume or benefit from the purchased products and who do not buy products to make a profit. Business-to-business markets, also called industrial markets, are grouped broadly into producer, reseller, governmental, and institutional categories.
- Producer markets consist of individuals and business organizations that buy certain products to use in the manufacture of other products.
- Reseller markets consist of intermediaries such as wholesalers and retailers that buy
finished products and sell them for a profit. - Governmental markets consist of federal, state, county, and local governments. They buy goods and services to maintain internal operations and to provide citizens with products such as highways or education.
- Institutional markets include churches, not-for-profit private schools and hospitals, civic clubs, fraternities and sororities, charitable organizations, and foundations.
DEVELOPING MARKETING STRATEGIES. A marketing strategy is a plan that will enable an organization to make the best use of its resources and advantages to meet its objectives. A marketing strategy consists of two elements: (1) the selection and analysis of a target market and (2) the creation and maintenance of an appropriate marketing mix, a combination of product, price, distribution, and promotion developed to satisfy a particular target market.
Target Market Selection and Evaluation. A target market is a group of individuals, organizations, or both, for which a firm develops and maintains a marketing mix suitable for the specific needs and preferences of that group. In selecting a target market, marketing managers examine potential markets for their possible effects on the firm’s sales, costs, and profits. They attempt to determine whether the organization has the resources to meet the needs of the target market and whether satisfying these needs is
consistent with the firm’s overall objectives. They also analyze the strengths and weaknesses of competitors already marketing to people in this target market. A target market can range in size from millions of people to only a few, depending on the product and the marketer’s objectives.
Undifferentiated Approach. When a company designs a single marketing mix and directs it at the entire market for a particular product, it is using an undifferentiated approach. (See Figure 11-2.)
This approach assumes that individual customers for a specific kind of product have similar needs, so the organization can satisfy most customers with a single marketing mix which consists of one type of product with little or no variation, one price, one promotional program aimed at everyone, and one
distribution system to reach all customers in the total market.
Products that can be marketed successfully with the undifferentiated approach include staple food items, such as sugar, salt, and some farm produce.
An undifferentiated approach is useful only in a limited number of situations because buyers have varying needs for most product categories, which requires the market segmentation approach.
Market Segmentation Approach. A market segment is a group of individuals or organizations, within a market, that share one or more common characteristics. The process of dividing a market into segments is called market segmentation. There are two types of market segmentation approaches: concentrated and differentiated. (See Figure 11-2.)
When an organization uses a concentrated market segment, a single marketing mix is directed at a single market segment.
If differentiated market segmentation is used, multiple marketing mixes are focused on multiple market segments.
Marketers used a wide variety of segmentation bases. Those bases most commonly applied to consumer markets are shown in Table 11-3.
Creating a Marketing Mix. A business controls four important elements of marketing that are combined to reach its target market: the product itself, the price of the product, the means chosen for its distribution, and the promotion of the product. When combined, these four elements form a marketing mix. (See Figure 11-3.)
A firm can vary its marketing mix by changing any one or more of these ingredients. Thus, a firm may use one marketing mix to reach one target market and
another, somewhat different, marketing mix to reach a different target market.
The product ingredient of the marketing mix includes decisions about the product’s design, brand name, packaging, and warranties.
The pricing ingredient is concerned with both base prices and discounts of various kinds.
The distribution ingredient involves not only transportation and storage but also
selecting intermediaries, determining how many levels of intermediaries is ideal, and whether the product should be distributed widely or restricted to specialized outlets in each area.
The promotion ingredient focuses on providing information to target markets. The major forms of promotion include advertising, personal selling, sales promotion, and public relations.
The ingredients of the marketing mix are controllable elements that the firm can vary to suit its organizational and marketing goals and target market needs.
Marketing Strategy and the Marketing Environment. The marketing mix consists of elements that the firm controls and uses to reach its target market. The firm also has control of organizational resources, such as finances and data, which can be utilized to accomplish marketing goals and refine the marketing mix. All of a firm’s marketing activities can be
affected by external forces, which are generally uncontrollable. The firm’s marketing activities are also affected by a number of external—and generally uncontrollable—forces. As Figure 11-3 illustrates, the following forces make up the external marketing environment.
Economic forces—the effects of economic conditions on customers’ ability and willingness to buy.
Sociocultural forces—influences in a society and its culture that result in changes in
attitudes, beliefs, norms, customs, and lifestyles.
Political forces—influences that arise through the actions of political figures.
Competitive forces—the actions of competitors, who are in the process of implementing their own marketing plans.
Legal and regulatory forces—laws that protect consumers and competition and government regulations that affect marketing.
Technological forces—technological changes that can create new marketing opportunities and can cause products to become obsolete.
DEVELOPING A MARKETING PLAN. A marketing plan is a written document that specifies the resources, objectives, marketing strategy, and implementation and control efforts an organization can use in marketing a specific product or product group. Marketing plans vary with respect to the time period involved. Short-range plans cover one year or less, medium-range plans cover one to five years, and long-range plans cover periods of more than five years. Developing a clear, well-written marketing plan and updating it frequently is important for several reasons:
- It helps establish a unified vision for an organization and is used for communication among the firm’s employees.
- It covers responsibilities, tasks, and schedules for implementation.
- It specifies how resources are to be allocated to achieve marketing objectives.
- It helps marketing managers monitor and evaluate the performance of the marketing strategy.
The major components of a marketing plan are shown in Table 11-4.
MARKET MEASUREMENT AND SALES FORECASTING. Measuring the sales
potential for specific types of market segments can help an organization make some important decisions, such as the feasibility of entering new segments and how best to allocate marketing resources and activities among market segments in which it is already active. All such measurements and estimates should identify the relevant time frame. These may be short-range, for less than one year, medium-range, for one to five years, and long-range, for more than five years. The estimates should also define the geographic boundaries of the forecast. Finally,
analysts should indicate whether their estimates are for a specific product item, a product line, or an entire product category.
A sales forecast is an estimate of the amount of a product that the organization expects to sell during a certain period of time, based on a specified level of marketing effort. Managers may rely on sales forecasts when they purchase raw materials, schedule production, secure
financial resources, etc. Because the accuracy of a sales forecast is so important, organizations often use several sales forecasting methods, including executive judgments, surveys of buyers or sales personnel, time series analyses, correlation analyses, and market tests. The specific methods used depend on the cost involved, type of product, characteristics of the market, time span of the forecast, purposes for which the forecast is used, stability of historical sales data, availability of the required information, and expertise of forecasters.
MARKETING INFORMATION. The availability and proper utilization of accurate and timely information is critical to effective marketing decisions. Marketers have access to a wealth of data. It is accessible through two major channels: a marketing information system or marketing research.
Marketing Information Systems. A marketing information system is a framework for managing marketing information that is gathered continually from internal and external sources.
Most systems are computer based because of the large quantities of data the system must accept, store, sort, and retrieve.
Continual collection is essential to ensure the most up-to-date information.
Data from internal sources include sales figures, product and marketing costs,
inventory levels, and activities of the sales force.
Data from external sources relate to the firm’s suppliers, intermediaries, and
customers; competitors’ marketing activities; and economic conditions.
Both the information outputs and their form depend on the requirements of the
personnel in the organization.
Marketing Research. Marketing research is the process of systematically gathering, recording, and analyzing data concerning a particular marketing problem.
Marketing research is an important step of the marketing process because it involves collecting and analyzing data on what consumers want and need, their consumption habits, trends, and changes in the marketing environment.
Table 11-5 outlines a six-step procedure for conducting marketing research.
Using Technology to Gather and Analyze Marketing Information. A database is a collection of information arranged for easy access and retrieval.
Many marketers use commercial databases, such as LEXIS-NEXIS, to obtain
information for marketing decisions.
A great deal of information that used to be obtainable only from companies specializing in producing commercial databases is now available via the Internet.
Information provided by a single firm on household demographics, purchases, television viewing behavior, and responses to promotions is called single-source data.
Online information services offer subscribers access to e‑mail, websites, files for downloading, news, databases, and research materials.
The Internet is a powerful communication medium, linking customers and companies around the world.
Table 11-6 lists a variety of good resources for secondary information, which is
existing information that has been gathered by other organizations, including
governments, trade associations, generation publications and news outlets, and
corporate information.
Many companies also use social media outlets to solicit feedback from customers on their existing or upcoming products.
TYPES OF BUYING BEHAVIOR. Buying behavior may be defined as the decisions and actions of people involved in buying and using products. Consumer buying behavior refers to the purchasing of products for personal or household use, not for business purposes. Business buying behavior is the purchasing of products by producers, resellers, governmental units, and institutions.
Consumer Buying Behavior. Consumers’ buying behaviors differ for different types of products.
For frequently purchased low-cost items, a consumer uses routine response behavior, which involves very little search or decision-making effort.
The buyer uses limited decision making for purchases made occasionally, or when more information is needed about an unknown product in a well-known product category.
When buying an unfamiliar, expensive item or one that is seldom purchased, the consumer engages in extended decision making.
Consumers have become empowered by information found on the Internet that
allows them to compare prices and read reviews about products without stepping into a store.
A person deciding on a purchase goes through some or all of the steps shown in Figure 11-4.
First, the consumer acknowledges that a problem exists.
Then, the buyer looks for information, which may include brand names,
product characteristics, warranties, and other features.
Next, the buyer weighs the various alternatives, makes a choice, and
acquires the item.
In the after-purchase stage, the consumer evaluates the suitability of the
The buying process is influenced by situational factors (physical surroundings,
social surroundings, time, purchase reason, and buyer’s mood and condition),
psychological factors (perception, motives, learning, attitudes, and personality), and social factors (family, roles, peer groups, social class, culture, and subculture).
Consumer buying behavior is also affected by ability to buy, called buying power, which is largely determined by income. Not all income is available for spending. Marketers consider income in three different ways:
Personal income is the income an individual receives from all sources less the Social Security taxes the individual must pay.
Disposable income is personal income less all additional personal taxes. These taxes include income, estate, gift, and property taxes levied by local, state, and federal governments.
Discretionary income is disposable income less savings and expenditures on food, clothing, and housing. Discretionary income is of particular interest to marketers because consumers have the most choice in spending it.
Business Buying Behavior. Business buyers consider a product’s quality, its price, and the service provided by suppliers.
Business purchases can be large, and acommittee or group of people, rather than single individuals, often decides on purchases.
The process of business buying is different than consumer buying. It occurs through description, inspection, sampling, or negotiation.
Because business transactions can be more complicated and orders tend to be larger, information on buyers and sellers is important.