Business Studies HSC Course

Topic 3: Marketing

Section 3.5: Developing Marketing Strategies

Section Overview:

3.5.1 Market segmentation and product/service differentiation

3.5.2 Product and service – positioning – branding – packaging

3.5.3 Price including pricing methods — cost, market and competition-based – pricing strategies/tactics — skimming, penetration, loss leaders, price points – price and quality interaction

3.5.4 Promotion – elements of the promotion mix — personal selling, advertising, below-the-line promotions, public relations – the communication process including opinion leaders and word of mouth

3.5.5 Place/distribution – distribution channels and reasons for intermediaries – channel choice including intensive, selective, exclusive – physical distribution issues including transport, warehousing, inventory

3.5.6 Environmental effects on distribution — technology, local government

1 January 2004 Section 3.5 Developing Marketing Strategies

3.5.1 Market Segmentation and Product/Service Differentiation

MARKET SEGMENTATION is the process of identifying niche markets within mass markets or putting it another way, the breaking of the total market into smaller parts based on similar characteristics. This is often necessary as the total market for a product is often too wide and complex to be treated as an individual unit. Once the market has been broken down into smaller parts (segmented), and information has been gathered about the market segments important to the business, a TARGET MARKET, or number of target markets are selected. A target market is the group of customers at which the business focuses its marketing program. By focusing on a particular market, businesses can develop the right products for their target market (or markets). In fact, the whole marketing program can be tailored to suit the target markets, setting prices at the best level, using the right sort of promotion to get the attention of customers, and distributing the product through the appropriate channels. Through segmentation, businesses can better identify the needs of their customers and try to satisfy these needs more efficiently and more accurately. This means happier customers, greater sales, less waste and increased profitability. There are several easily identifiable factors that allow us to segment the market. These factors are considered below.

A) Demographic Segmentation

Demographic segmentation breaks down the market into variables such as age, sex, education, religion, job and level of income. Most businesses use a combination of demographic variables to segment a market. As you can imagine, the number of possible combinations is large.

B) Geographical Segmentation

Geographical segmentation groups customers according to some geographic feature such as location. Consider the needs of the consumer in a particular location, for example, a resident of far North Queensland. This consumer may have a greater need for sunscreen and lightweight cotton clothing than a resident of Tasmania. In this example, the needs and wants are clearly influenced by their location. Geographical factors other than location include topography (physical

2 January 2004 Section 3.5 Developing Marketing Strategies geography: mountains, rivers, lakes, oceans), climate, and region (such as rural or urban).

C) Psychographic Segmentation

Psychographic segmentation is concerned with lifestyle characteristics, including the personality types of consumers (beliefs, aspirations, interests) and their perceived social class. These factors are often difficult to measure accurately, as they are concerned with the way people ‘feel’ about a particular product.

D) Behavioural Segmentation

Behavioural segmentation divides buyers into groups based on their attitude and responses to a product. The main behavioural groupings are purchase occasion, benefits sought, usage rate, and user loyalty.

i) Purchase occasion Customers can be grouped according to the occasions when they buy a product or a service. Some products are usually consumed at particular times of the day, like breakfast cereal, or particular times of the year like Easter eggs.

ii) Benefits sought Customers buy products for different reasons and expect different benefits. Some customers will buy a product because they think it will give them status or prestige; others will buy a product because they believe it has the best quality and reliability.

iii) Usage rate Customers can be grouped as light, medium or heavy users of a product. Knowing the usage rate can help a business to better promote a product. For example: airlines collect information on passengers through their frequent flyer programs. Those that fly regularly are treated to upgrades and access to other privileges such as lounges.

iv) User loyalty Customers can have loyalty to a particular product. For Example: A person may choose Coca-Cola every time as their cola of choice, they may support the same football team year after year, they mat fly with the same

3 January 2004 Section 3.5 Developing Marketing Strategies airline every time they fly. Businesses can learn a lot by looking at usage and loyalty patterns in their markets.

By studying its own customers, a business can really learn more about them.

PRODUCT DIFFERENTIATION is how businesses separate themselves from the competition by altering their product and creating a competitive advantage. Product differentiation can be achieved by changing the look of the product, the way the product operates, its quality or its image.

Product/service differentiation occurs for two reasons:

1) To tailor a base product for a different target market: by altering their products to suit the needs of different markets, businesses can penetrate a range of markets and increase their chance of success.

2) To be different from the competition: one way of encouraging consumers to buy your product is to make it appear superior to competitors’ products.

Using successful product differentiation can not only give a business more market share than their competitors, but it can also allow a business to increase its prices without losing market share – as consumers now feel they are getting a superior product. An example of a company that successfully differentiated its product offering is Apple. It introduced a radically different look and a variety of features when it released its iMac range.

The MARKETING MIX refers to the combination of the marketing tactics of product, price, promotion and place. These four elements are commonly referred to as the 4 P’s of marketing. A marketing mix must be designed to satisfy the wants of customers and achieve the marketing objectives of the business. These will now be considered in turn.

3.5.2 Product and Service – Positioning, Branding and Packaging

4 January 2004 Section 3.5 Developing Marketing Strategies A PRODUCT refers to a good, service or idea which is going to be exchanged in the market. A product is characterised by a set of tangible and intangible benefits or attributes which are aimed at satisfying the customer’s demands and needs.

 TANGIBLE BENEFITS are physical attributes such as size, colour, shape and model.  INTANGIBLE BENEFITS relate to non-physical attributes such as prestige of the label or brand name, and the reputation of the company.  The combination of all these benefits combine to produce what is known as a TOTAL PRODUCT CONCEPT.

As part of this marketing element, there are other additional factors complementing or helping to create a total product. These are positioning, branding and packaging.

A) Positioning

POSITIONING is about creating a certain perception or image of the good or service in the eyes of the consumer.

For Example: Streets Magnum Ice Creams are considered to be a superior type of ice-block. They are promoted as an indulgence and as one of lifes little luxuries. They have been priced accordingly. In this example, Magnum has been positioned using a strategy of price and quality.

B) Branding

BRANDING is a symbol, name, term, design, or any combination of these that identifies the product and distinguishes it from its competitors.

For Example:

Arnott’s Nike McDonald’s

To be successful, a brand must:

 Attract attention  Be memorable  Assist in communicating the position of the product  Be easily distinguishable from its competitors

If consumers associate a certain level of quality with a brand, it not only increases brand loyalty and encourages repeat purchases, it also allows a business to sell its products at a premium to its competitors.

C) Packaging

PACKAGING is an activity concerned with designing and producing a wrapper or container for the product. Packaging plays an important part in creating an image for the product in the marketplace and helps create a difference between the product and the product’s competitors. For Example: The different beers have been packaged in such a way that many have become very easy to identify at a glance. i.e. a Crown Lager as compared with a Hahn Premium.

Crown Lager Hahn Premium

3.5.3 Price Including Pricing Methods — Cost, Market and Competition-Based - Pricing Strategies/Tactics — Skimming, Penetration, Loss Leaders, Price Points - Price and Quality Interaction 6 January 2004 Section 3.5 Developing Marketing Strategies

The price of a product is one of the most important factors in a customer’s decision to buy a product. Consumers usually choose from a number of competing products which offer similar benefits. Price is often the difference that will push a customer to buy one product over another. The most important strategic pricing decision is whether the product will compete against the competition on price, or use product differentiation to lower the significance of price to consumers. Once firms have decided which strategy to employ, they must choose from three different pricing methods: cost, market or competition-based.

i) Cost Based Pricing If the business derives its prices using a cost-based method, it adds an amount to the cost of producing each product and uses that new total as the price. There are two methods of cost based pricing: 1) The business adds a profit margin to the cost of the product. For Example: If a bicycle costs a store $100, they could add a 50% margin and sell the good in their store for $150 ($100 x 1.50). 2) The business adds a fixed profit amount to the cost of the product. For Example: In the case of the bicycle store above, they might decide that they want to make $70 for each bike sold, so they will set the price at $170 ($100 + $70). Although cost-based pricing is easy, it ignores the customer and the competition. It is impossible to predict demand or competitors’ actions by only looking at costs. For these reasons, cost-based pricing is becoming less popular. ii) Market Based Pricing Some businesses have to accept a price that is set by the market, regardless of what costs were involved in getting the product to market. This can be found in a range of markets such as produce and commodity markets, where there are a large number of suppliers. Prices are set in auction style, and determined by supply and market demand. The real-estate auction market is an example of market-based pricing. Here, the market decides the price of the house regardless of what it costs. iii) Competition-Based Pricing

7 January 2004 Section 3.5 Developing Marketing Strategies As the name suggests, competition-based pricing methods set prices according to the prices of competitors’ products. Businesses can either price their products at the same level, or above or below competitors’ prices.

A) Pricing Strategies and Tactics Businesses have a number of pricing strategies that they can use. They include market skimming, penetration, loss leaders and price points.

i) Market Skimming This is where a new product is priced relatively high in order to achieve maximum returns before the entry of competitors. When competitors enter the market, prices can be dropped to maintain sales. For Example: Hyper-Colour T-Shirts

The high levels of pricing can only be successfully performed if there is little or no competition within the market. If a new competitor entered the market, they could seek to gain large percentages of market by severely undercutting the business’s product. However, the new competitor could also choose the same pricing strategy, maintaining the high prices. ii) Penetration This is where the business sets the price of the product below the price of competitors, making its product more attractive. It is a pricing strategy commonly employed by new products. Offering such low prices is an attempt to induce customers to trial the product, hoping that they will then make repeat purchases, increasing the product’s market share. Initially, some businesses may enter the market at a loss, hoping that the long term revenues from increased market share will compensate. iii) Loss Leaders Loss leaders are products that are priced below their cost of production in order to attract customers. The aim is to get customers into the shop and then encourage them to stay to buy other normally priced goods. For Example: McDonald’s and Bunnings Hardware.

iv) Price Points In many industries, businesses use well established price points for their product range. Price points are normally used when a business has a number of products in a particular product line. Marketers have to develop significant differences in quality, design or function to support the price differences. This is because, in many cases, products can be

8 January 2004 Section 3.5 Developing Marketing Strategies substituted for each other. A $550 suit is a substitute for one costing $750. Customers will ask what the higher priced good will deliver that the cheaper one doesn’t (and whether it is worth the extra cost).

The role of the marketing department is to select the pricing strategy that will best help achieve the objectives of the marketing plan. The price chosen must make the product accessible to the customers in the target market. The price should also cover the business expenses and include an appropriate profit margin.

B) Price and Quality Interaction

When consumers are purchasing an unknown product, they often employ price as a measure of the product’s overall quality. In this way, price creates perceptions of quality. Pricing strategies that give a product a lower price than its competitors will not always gain a greater market share.

Customers may attribute the lower price to lower quality inputs and production techniques and thus be reluctant to purchase it, despite the lower price. Conversely, a high price can attract an image of quality. For Example: Lexus motor cars were originally released onto the Australian market at significantly lower prices than its competitors such as BMW and Mercedes. However, the price of Lexus cars soon rose to near their competitors as they failed to attract luxury car buyers because of their low price.

3.5.4 Promotion – Elements of the Promotion Mix — Personal Selling, Advertising, Below-the-line Promotions, Public Relations – The Communication Process Including Opinion Leaders and Word of Mouth

Any business wanting to sell a good or service has to bring it to the attention of its target market and try to make sure that the consumers recognise and want it. Effective communication with the target market is essential for the success of any product and

9 January 2004 Section 3.5 Developing Marketing Strategies business. PROMOTION is designed to inform the marketplace about who you are, how good your product is and where they can buy it.

A) Elements of the Promotion Mix Essentially, promotion is about changing the buying behaviour of the consumer. In order to capture the hearts, minds and dollars of the consumer, businesses have a variety of promotional methods available to them. The elements of the promotion mix include: personal selling, advertising, below-the-line promotions and public relations.

i) Personal Selling Is where the consumer is directly approached by the sales-person. The aim is to persuade the customer to buy the product. Therefore, the key element in using this method is the effectiveness of the salesperson in selling the product. Matters such as explaining the benefits, educating the customer and responding to questions about the product are important in promoting the sale of the product. Cars are sold in this manner. However, this tool is expensive in terms of running a sales team and equipping sales people properly.

ii) Advertising Is any paid, non-personal presentation or message which is communicated to the consumer through the use of the mass media. It is probably the most effective and efficient way of communicating with the largest number of people in a variety of geographical areas. It has a low cost per consumer contact. The medium used to communicate to the consumer can be one, or a combination, of the following: magazines, radio, television, newspapers, billboards, brochures, the Internet.

iii) Below-the-line Promotions Below-the-line promotions are sales promotions using direct methods to induce customers to purchase the business’s products. Below-the-line promotions use promotional tools such as free samples or discounts. Below-the-line promotions are an effective method of inducing product trial amongst potential customers. For Example: Free taste tests at the supermarket, shampoo samples in your letterbox. They also allow the business to directly measure the success of the campaign by observing the usage rates of the potential tool.

iv) Public Relations

10 January 2004 Section 3.5 Developing Marketing Strategies Public relations is the use of publicity and other non-paid forms of advertising to develop a good image with the business’s market or the general public. Good examples of this are mentions of products in magazines and newspapers, when a product wins a prize in a design or quality competition and gets talked about in news items, or when a celebrity is seen wearing or using a brand of product.

As with all the other elements of the marketing mix, the promotional mix will be trying to achieve the objectives of the marketing plan in the most effective manner, and the marketing plan will include a combination of these promotional tools. Depending on the amount of money available for promotion, most businesses will use some mix of the four types discussed above to communicate with customers.

B) The Communication Process Including Opinion Leaders and Word of Mouth

Effective communication can be difficult to achieve because consumers are bombarded by thousands of messages daily. Marketers need to understand how communication works, how consumers can interpret the information, and what can interfere with the communication process. The main stages of the communication process have been depicted in Figure 3.5.1 below.

Source

Encoding

Message Channel NOISE Decoding

Receiver Feedback

Figure 3.5.1 The stages of the communication process

11 January 2004 Section 3.5 Developing Marketing Strategies Source The source of most marketing information will come from a group of marketers working for or with the business. Here they decide what information needs to be released.

Encoding At this stage, the marketers decide how they want the information to reach the target market. It needs to be put into terms that will be easily understood by the target audience.

Message Channel The means by which the message is released to the target audience. It could be a television commercial, a promotional flyer, the Internet or a range of other communication techniques.

Decoding Hopefully, the intended receivers of the marketing information will receive the information by viewing or hearing the message. They will then absorb the information and interpret it.

Receiver The receiver is a person within the target market.

Feedback Feedback is the response of the consumer to the marketing message such as purchasing the product or complaining about the message.

Noise Any distraction that reduces the effectiveness of the message. Noise is present at all stages in the marketing process and must be minimized if the communication process is to be successful.

OPINION LEADERS are people that have the ability to drive or influence the decisions of others. Opinion leaders include such people as celebrities or research groups such as Choice magazine. Opinion leaders will often gain their following by being an expert in a particular field.

Word of mouth (WOM) can be a powerful force influencing the success of a product. WOM advertising occurs when there is a conversation about a product, service or idea. One of the dangers of WOM advertising is that it is always difficult to influence what customers will say to other customers about your product. Research has shown that people will commonly hold the opinion of a friend or relative in higher regard than industry professionals, making it a powerful influence on purchasing decisions. The satisfaction of customers is the only way that a business will use WOM to its benefit.

3.5.5 Place/Distribution – Distribution Channels and Reasons for Intermediaries – Channel Choice Including12 Intensive, Selective, ExclusiveJanuary 2004 – Physical Distribution Issues Including Transport, Warehousing, Inventory Section 3.5 Developing Marketing Strategies

Place really refers to the methods and channels that can be used to get the product to the marketplace – how it is distributed. This involves things such as transportation and storage of the product, as well as what type of stores will sell the product.

A) Distribution Channels and Reasons for Intermediaries

A DISTRIBUTION CHANNEL is a business, or group of businesses, involved in moving goods and services from the manufacturer to the point of final use. In other words, the distribution channel connects a manufacturer or service provider with consumers. The simplest form of distribution channel is direct distribution, where the manufacturer sells its product directly to consumers. For Example: A farmer that sells produce from his farm to passing motorists is operating a direct distribution chain.

Traditionally, however, manufacturers will not sell their products directly to consumers and will make use of INTERMEDIARIES instead. Intermediaries are independently owned businesses (such as wholesalers, agents, brokers and retailers) that move products from the producer to the end users. A distribution channel that involves the use of an intermediary is referred to as indirect distribution. For Example: A retailer such as HMV is acting as an intermediary between the manufacturer (i.e. Sony Music) and the customer.

There are two major reasons for using intermediaries:  Firstly, they increase the efficiency of the market. They exist to move functions of distribution away from manufacturers allowing them to concentrate on their core purpose.

13 January 2004 Section 3.5 Developing Marketing Strategies  Secondly, they also reduce the amount of transactions and hassles that a manufacturing business must incur.

B) Channel Choice Including Intensive, Selective, Exclusive Businesses need to decide on a number of issues in relation to their distribution channels, such as the number of channel levels that will be used, and the intensity of distribution. The number of channel levels indicates how many intermediaries are involved in transferring the product form the manufacturer to the consumer. For Example: A three-stage channel would exist if a manufacturer sells to a retailer who then in turn sells to a customer, and a five-stage channel may include an agent and a wholesaler. (See below).

Manufacturer Retailer Customer

Manufacturer Agent Wholesaler Retailer Consumer

It is important to note that many manufacturers use a multiple channel system to reach the widest number of consumers in as many ways as possible.

For Example: Country Road distributes products through company-owned Country Road stores, as well as major department stores.

Before a business can determine which particular intermediaries it will deal with, it must determine the intensity of its distribution channels. INTENSITY refers to the number of intermediaries (generally retailers) involved in each stage of the distribution process. There are three main intensity choices for distribution channels: i) Intensive Intensive distribution is where the product is available at every possible outlet (i.e. all possible intermediaries are used). An intensive channel choice is usually used if the product is a low margin, high volume product and the business needs to maximise sales by maximising market exposure.

14 January 2004 Section 3.5 Developing Marketing Strategies Typically, consumer products such as milk or cleaning products will use intensive distribution channels, particularly at the retailing stage. ii) Selective Selective distribution is used when a manufacturer wants to widely distribute their product but does not want to use an intensive strategy. For example, certain brands of hair shampoo can only be purchased at hairdressers and not supermarkets or chemists. iii) Exclusive Exclusive distribution severely restricts the intermediaries involved in the distribution of the product. Usually the products are very expensive, or aiming to achieve a very elite image. This channel choice is vital in the creation of a status or prestige related product such as Versace clothing or Ferrari cars.

C) Physical Distribution Issues Including Transport, Warehousing, Inventory The producer of the product or the business aims to physically get the product to the place of sale or the marketplace at minimum cost. Management of physical distribution involves balancing customer service with efficient operations. Physical distribution costs such as transportation, warehousing and inventory levels make up a significant part of the total marketing costs. Therefore, costs need to be controlled in order to maintain profitability. Furthermore, if one part of the distribution channel should fail, then it has implications for all the businesses that have dealings with that part that has failed. It has the potential to bring down a business. There are three key components of physical distribution: transport, warehousing and inventory control. These will be considered below.

i) Transport Transport is the movement of products by air, rail, water, road or any other means (such as pipelines) and is the most obvious function required in distribution channels. The choice of transport method depends on the type of product, the speed with which products need to be delivered, and the distances that need to be covered. Fresh seafood needs to be moved quickly to the markets, whereas furniture has a long lifespan. A business must choose the most efficient form of transport, considering how and

15 January 2004 Section 3.5 Developing Marketing Strategies when the goods are required and the costs of each different form of transport. ii) Warehousing Warehousing is the storing of products until they are ready to move to the next stage in the distribution channel. Businesses must decide where to store their goods, how to store them and how to organise them when they need to be moved. Having more warehouses spread around the market means that consumers get their orders faster; however, costs increase dramatically. iii) Inventory Control Managing its level of stock or inventory is a constant challenge for businesses. Holding too much stock is expensive, and things can go wrong such as theft, fire or water damage. However, inventory levels also affect customer service. Having low stock levels could mean losing customers who do not want to wait for a product to be made or delivered if they can buy it from a competitor instead.

3.5.6 Environmental Effects on Distribution — Technology, Local Government

Changes in the business environment have had significant impact on the whole range of distribution activities. Technological innovations such as the Internet have changed the concept of distribution channels, while developments in computer technology and robotics have changed the nature of warehousing and materials handling.

Technological advances can increase the efficiency and cost effectiveness of distribution channels by speeding up the administrative processes and decreasing the lags associated with a multi-stage process.

Local governments can also have an influence on distribution channels, although this influence is usually minor. The most important function of local councils relates to their control of most land zoning regulations and building codes. (i.e McDonald’s in the mountains)

DEFINITIONS:

16 January 2004 Section 3.5 Developing Marketing Strategies Branding A symbol, name, term, design, or any combination of these that identifies the product and distinguishes it from its competitors. Distribution Channel A business, or group of businesses, involved in moving goods and services from the manufacturer to the point of final use. Intangible Benefits Non-physical attributes of the product such as prestige of the label or brand name, and the reputation of the company. Intermediaries Independently owned businesses (such as agents, brokers and retailers) that move products from the producer to the end users. Marketing Mix A combination of the marketing tactics of product, position, price, promotion and place. Market Segmentation The process of identifying niche markets within a mass market or the breaking of the total market into smaller parts based on similar characteristics. Opinion Leaders People that have the ability to drive or influence the decisions of others. Packaging An activity concerned with designing and producing a wrapper or container for the product. Positioning Creating a certain perception or image of the good or service in the eyes of the consumer. Product Differentiation How businesses separate themselves from the competition by altering their product and creating a competitive advantage. Promotion The part of the marketing mix that a business uses to inform, educate, persuade and remind customers. Tangible Benefits Physical attributes or characteristics of a product such as colour, size and shape. Target Market The part of a market in which the business focuses its marketing activities. Total Product Concept The combination of both the tangible and the intangible.

HOMEWORK ACTIVITIES:

Activity 1: Read the Case Study “Yahoo!” on P.228/229 of the Text.

Activity 2: Complete the Activities (Questions 1, 3 – 7) on P.236 of the Text.

Activity 3: Complete the Activities (Questions 1 – 3) on P.243 of the Text.

Activity 4: Computer Room

Visit the website: http://www.unilever.com.au

Read and Complete the Case Study “Unilever cuts small brands” on P.247 of the Text.

Activity 5: Complete the Activities (Questions 1 – 3 and 1 – 2) on P.248 of the Text.

Activity 6: Complete the Activities (Questions 1 – 3) on P.254/255 of the Text.

Activity 10: 1) What is a distribution channel? 2) List the three activities involved in the physical distribution of a product. 3) List four reasons why an efficient and effective distribution system, including channels and physical movement, is essential to successful marketing.

Activity 11: Read and Complete the Case Study “Woolworths sees the light” on P.269 of the Text.

Activity 12: Identify the impact of environmental factors on distribution channels.

18 January 2004