Case St Udies 1 CASE ASSIGNMENT: Netflix Ready for Primetime

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AN OVERVIEW OF MARKETING Case St udies 1 CASE ASSIGNMENT: Netflix Ready For Primetime

Shocked at the $40 fee he incurred for a late return of Apollo 13, Netflix founder Reed Hastings decided that in the age of the Internet, there had to be a better way to rent videos for home viewing. Thus, in 1997, he started an Internet- based, DVD rental service that offered direct-to-home deliveries with no late fees. A mere decade and 4 million subscribers later, Netflix has taken on established video rental companies such as Blockbuster, Hollywood Video, and Wal-Mart and emerged as the leader in innovation and customer service. In addition to betting that the Internet would be the future of the video rental market, Hastings made a few other key predictions that helped him develop a company with almost $700 million in revenue in under ten years. He watched as moviegoers fled public theaters for the comfort of home theater systems, and he observed those same consumers embracing the features, capacity, and high-quality format of the DVD. Realizing that the Internet could allow those same convenience seekers 24-hour browsing and selection access to an unprecedented volume of movie titles in a single digital catalog, Hastings shrewdly designed a service that outperforms traditional, store-based video rentals. Netflix allows consumers to choose from a variety of subscription plans. The most popular plan offers three DVDs for $17.99 per month. Once a subscriber builds a list of favorite movies and TV shows from a selection of over 60,000 titles, Netflix mails out the three titles at the top of the list, along with return-addressed prestamped envelopes. After viewing the DVDs, the customer simply mails them back to Netflix in the supplied packaging. When the titles are scanned in at one of the distribution warehouses, the customer is simultaneously sent the next selections on the favorites list. With 34 strategically placed distribution centers, Netflix can deliver 92 percent of its movies within one day of being ordered. That outstand- ing delivery service is just the tip of the iceberg. Netflix’s Web site takes personalization to new levels through its high-powered recommendation software, called Cinematch. Cinematch uses over a million lines of code and over half a billion customer-supplied ratings to suggest rental choices upon request. Amazingly, over 60 percent of the titles added to users’ favorites lists come from Cinematch recommendations, and over a million ratings are sent to Netflix every day. Just how effective is Cinematch? Netflix uses fewer than 50 customer service reps to support its entire customer base! Of those, 10 are authorized to make direct callbacks to customers with complaints to find out how the problem could have been pre- vented in the first place. It’s that kind of attention to customers that forced retail giant Wal-Mart to give up and turn over its entire customer list to Netflix. Netflix even added two key features to its service in response to customer requests. The first is the ability to generate multiple favorites lists for a single account, allowing families to build multiple wish lists that can differ as much as Steel Magnolias and Old School. The second is the addition of a community feature called “Friends.” Friends enables users to share the titles, ratings, and preferences for recently viewed shows with those they invite to be part of their network. Always looking to the future, Hastings wants to diversify Netflix by adding high-definition DVD rentals to its current service, selling previously rented DVDs in the rapidly growing used-DVD market, and developing an on-demand video download service. Though it’s impossible to tell exactly what blockbuster service Netflix will deliver next, it’s a safe bet its customers will applaud.

SOURCES: Jena McGregor, “At Netflix, the Secret Sauce is Software,” Fast Company, December 2005, 48–51; Jennifer Netherby, “Netflix Delivers Big Earnings Increase: Sets 5.9 Million Subs as Modest 2006 Goal,” Video Business, January 30, 2006, 1; Steven Zeitchnik, “Download Dreams: Netflix Eager to Expand Online Efforts,” Daily Variety, January 25, 2006, 5; Jennifer Moeller, “You’ve Got (Movies in the) Mail,” The Christian Science Monitor , December 2, 2005, 15; B en Fritz, “Freaky Disc Biz: Netflix Grows at Blockbuster’s Expense,” Daily Variety, October 20, 2005, 1; “All Queued Up: How the Netflix Distribution Network Supports the Company ’s Business Model,” Material Handling Management, November 2005, 9.

Discussion Questions: 1. Describe the elements of the exchange process as they occur between Netflix and its customers. 2. Which marketing management philosophy does Netflix subscribe to? 3. How does Netflix’s approach to relationship marketing increase customer satisfaction?

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Quiz Questions: Multiple Choice 1. What is Netflix’s marketing management philosophy? 7. If Netflix refocused its expertise in supply chain management on a. production orientation collecting and distributing new and used documentary DVDs to b. sales orientation schools, it would indicate the company was implementing a c. marketing orientation ______orientation. d. societal marketing orientation a. product e. Internet marketing orientation b. sales 2. When Hastings decided to use the Internet for his DVD rental c. marketing service he was: d. educational a. creating value e. societal marketing b. delivering value 8. By eliminating late fees, Netflix: c. communicating value a. improves customer value d. creating exchange b. improves customer satisfaction e. building relationships c. builds relationships with suppliers 3. Netflix’s recommendation software, Cinematch, helps the d. increases its catalog company to: e. advertises to a broader range of customers a. deliver sales messages 9. Netflix’s network of 34 distribution centers is a key factor in b. be socially responsible keeping ______high. c. communicate value a. customer value d. certify exchange b. customer satisfaction e. build relationships c. exchange ratings 4. Which mission statement best describes Netflix’s business? d. teamwork a. We rent DVDs. e. revenue b. We are Internet-based. 10. According to the case, one reason Wal-Mart was forced out of c. We deliver videos. the movie rental business was because of Netflix’s: d. We are a 24-hour virtual media rental store. a. low pricing e. We are expanding into the used DVD market. b. value proposition 5. Which of the following demonstrates an outward organizational c. teamwork focus? d. customer-oriented personnel a. Netflix promotes from within. e. attractive promotions b. Netflix considered adding video game rentals because it would be convenient for the company to do so. c. Netflix added the Friends feature because of consumer requests. d. Wal-Mart turned its customer list over to Netflix. e. Netflix has distribution centers in a wide range of geographic locations. 6. Are consumers using Cinematch taking part in an exchange? a. No, because exchange must occur in person, not online. b. No, because consumers don’t always choose to rent the movies it recommends. c. Yes, because consumers are trading their time and willingness to use the service in exchange for movie recommendations. d. No, because consumers don’t pay extra for the service. e. Yes, because the service used consumer-supplied ratings. MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 33

STRATEGIC PLANNING FOR COMPETITIVE ADVANTAGE Case St udies

2 CASE ASSIGNMENT: Cirque du Soleil The Fire Within A 27-foot-long bronze clown shoe is the only indication that there is something otherworldly within the concrete walls of the large, rather nondescript building. Located in Montreal, the building is home to what many feel is the most successful entertainment company in the world—Cirque du Soleil. The company’s massive headquarters houses practice rooms the size of airplane hangars where cast members work on their routines. More than 300 seamstresses, engi- neers, and makeup artists sew, design, and build custom materials for exotic shows with stage lives of 10 to 12 years. In fact, the production staff often invents materials, such as the special waterproof makeup required for the production of O, a show performed mostly in a 1.5 million-gallon pool of water that was also specially designed and engineered by Cirque employees. Another key in-house resource is Cirque’s team of 32 talent scouts and casting staff that recruits and cultivates performers from all over the world. The department maintains a database of 20,000 names, any of whom could be called at any time to join the members of Cirque’s cast, who number 2,700 and speak 27 languages. Shows with exotic names like Mystère, La Nouba, O, Dralion, Varekai, and Zumanity communicate through style and tone that they are intended to do more than just amuse. Cirque designs productions with distinct personalities that are meant to evoke awe, wonder, inspiration, and reflection. As one cast member put it, “The goal of a Cirque performer is not just to perform a quadruple somersault, but to treat it as some manifestation of a spiritual, inner life. Like in dance, the goal is . . . to have a language, a conversation, with the audience.” Audiences have responded. Even with ticket prices that start at $45 and can run as high as $360, the company sells about 97 percent of all its seats at every show. For Cirque, that translates to about $500,000 a week in sales and yearly profits of $100 million on gross revenues of $500 million. Incredibly, every one of the 15 shows that Cirque has produced over its 20-year history has returned a profit. In contrast, 90 percent of the high-budget Broadway shows that strive to reach the same target market fail to break even. Cirque’s statistics, however, are eye- popping. Mystère, which opened at the Treasure Island hotel and casino in Las Vegas in 1993 and still runs today, cost $45 million to produce and has returned over $430 million; O, which opened at the Bellagio hotel and casino in 1998, cost $92 million to produce and has already returned over $480 million. Though the company splits about half of its profits with its hotel and casino partners, those same partners sometimes absorb up to 75 percent of Cirque’s production costs. At the helm of this incredible business machine is the dynamic duo of Franco Dragone and Daniel Lamarre. Dragone, a Belgian, is the creative force behind most of the company’s nine current productions, and Lamarre, a former television executive, presides over show and new venture development. Together, they have transformed a one-tour, one-residence circus company into an entertainment powerhouse with five simultaneous world tours; four permanent facilities in Las Vegas—Treasure Island, the Bellagio, New York–New York, and the MGM Grand—all of which are part of the Mirage family of casinos; another permanent theater at Disney World; and a series of shows on the cable television channel Bravo that has already won an Emmy. Lamarre claims that his business is successful because he and his staff “let the creative people run it.” He guides the company with an invisible hand, making sure that business policies do not interfere with the creative process; it is Dragone and his team of creative and production personnel, not a predetermined budget, that defines the content, style, and material requirements for each project. Because of their sound planning, Cirque du Soleil can claim that it is one of the world’s elite businesses, as well as one of the world’s elite entertainment companies.

SOURCES: “The Phantasmagoria Factory,” Business 2.0, January/February 2004, 103; Christopher J. Chipello, “Cirque du Soleil Seeks Partnerships to Create Entertainment Centers,” WSJ.com, July 18, 2001; Steve Friess, “Cirque Dreams Big,” Newsweek, July 14, 2003, 42; “Bravo Announces Programming Alliance with Cirque du Soleil; Original Series, Specials, and Documentaries to Air on Bravo, ‘ The Official U.S. Network of Cirque du Soleil,’” Business Wire, June 19, 2000; “Inhibitions Take the Night Off for International Gala Premiere of ZUMANITY™; Another Side of Cirque du Soleil™ at New York–New York Hotel and Casino,” PR Newswire, September 21, 2003; Laura Del Rosso, “‘O’ Dazzles with Air, Underground Acrobatics,” Travel Weekly , August 5, 2002; Gigi Berardi, “Circus + Dance = Cirque du Soleil,” Dance Magazine, September 2002.

Discussion Questions: 1. Based on what you have read in the case, outline a rudimentary SWOT analysis for Cirque du Soleil. 2. List and describe three keys to Cirque du Soleil’s competitive advantage. 3. Explain how Cirque du Soleil implements, evaluates, and controls the elements of its marketing plan? MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 4

Quiz Questions: True/False 1. Cirque du Soleil has created a sustainable competitive advantage. 6. If Cirque expands into ready-to-wear fashion, hotels, or night- a. True b. False clubs, it would be an example of: a. market penetration Multiple Choice b. market development 1. In conducting a SWOT analysis of Cirque du Soleil, the fact that c. product development ticket prices may be too high for many who would like to see d. diversification one of its shows is an example of a(n): e. None of these describe Cirque’s expansion into other areas. a. opportunity 7. When Cirque du Soleil opened permanent venues in Las Vegas, b. threat it was practicing: c. strength a. market penetration d. weaknesses b. market development e. Ticket prices are not a part of a SWOT analysis. c. product development 2. Competing circuses that revamp their productions to include d. diversification Cirque-type entertainment constitute a(n)______to Cirque du e. None of these describe Cirque’s opening of permanent ven- Soleil. ues in Las Vegas. a. strength 8. When Cirque du Soleil opened permanent venues in Las Vegas, b. weakness the company was altering which element in its marketing mix? c. opportunity a. Cirque’s new venues are unrelated to the marketing mix. d. threat b. product e. control c. place 3. Expanding Cirque du Soleil into other markets, like ready-to-wear d. promotion fashion, hotels, or resorts represents a(n)_____for Cirque du e. price Soleil. 9. Extreme costumes, specialized makeup, and custom sets are all a. strength part of which element in Cirque’s marketing mix? b. weakness a. product c. opportunity b. place d. threat c. promotion e. control d. price 4. Even though tickets start at $45 and can run as high as $360, e. None of these are related to Cirque’s marketing mix. the company sells about 97 percent of all its seats at every one of its distinctive shows. What kind of competitive advantage best describes the one built by Cirque du Soleil? a. cost b. product/service differentiation c. niche d. retrievable e. assailable 5. If Cirque defined its business mission as “Performing circuses without animals,” company managers would be suffering from: a. marketing blockades b. mission stigmatism c. marketing myopia d. experience curves e. a niche mission MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 5

SOCIAL RESPONSIBILITY, ETHICS, AND THE MARKETING ENVIRONMENT Case St udies

3 CASE ASSIGNMENT: Rockstar Games Rockstar—Caught in Its Own Vice In Oakland, California, police arrest a gang of teens who now face charges for five homicides, several carjackings, and a slew of armed robberies. Roughly 2,000 miles away in Tennessee, stepbrothers Joshua and William Buckner, ages 14 and 16, are arrested and plead guilty to reckless homicide, aggravated assault, and reckless endangerment for fatally shooting one motorist and critically wounding a second. The tie that binds these seemingly unrelated crimes is a video game—Rockstar Games’ Grand Theft Auto: Vice City. When questioned about their crimes, both sets of perpetrators cited boredom and a desire to emulate the action of the main character in Vice City as the cause of their violent behavior. In Vice City, players assume the role of Tommy Vercetti, an ex-con who loses cocaine and money in a botched drug deal. To recoup his losses, he must accomplish various missions in an attempt to ascend the hierarchy of Vice City ’s under- world. The game awards points to players for mass shootings, graphic rapes, liaisons with prostitutes, car thefts, and drug sales. The violence is extreme and often grotesque. In one mission, players controlling Vercetti can earn points for raping a woman in the back of a stolen car and then deciding whether to kick her to death, cut her to pieces with a machete, or fatally shoot her. Its graphic violence and sexually explicit material have earned Vice City an M rating from the Entertainment Software Rating Board, which indicates to consumers that the game is intended only for gamers aged 17 or older. Younger gamers, however, are playing the game in large numbers, and critics, parents, and politicians are horrified to find that children are being exposed to a game that glorifies such behavior. Racism rears its head in the game too, as Vercetti at one point is instructed by a narrator to “shoot the Haitians.” The backlash against Rockstar Games has been significant. Haitian and Cuban groups have filed suit against the company in Florida, where state legislators have proposed a bill that would increase the fines levied against retailers who rent or sell M-rated video games to minors. The lawmakers note that several small towns and cities have already passed such legislation. In New York, Rockstar’s racial insensitivity aroused the ire of New York City Mayor Michael Bloomberg and the Anti-Defamation League. Their pressure persuaded Rockstar to remove the racially offensive line from all future copies of the game. Other than that, Rockstar has officially declined to comment on any other inquiries for almost a year. The Interactive Entertainment Merchants Association, an industry group including giant retailers such as Wal-Mart and Blockbuster, Inc., has reacted by adopting procedures intended to stop the sale of mature and adult video games to minors. Despite the negative reactions, the game has gained mass-market acceptance. Vice City alone accounted for nearly half of Rockstar’s $1.04 billion in revenue in 2003—a year when revenue for all M-rated video games actually declined from $910 million to $833 million. Rockstar currently dominates the adult segment of the market with the ten M-rated games it produces. Players of the game say its plot lines are pure fantasy, and the chief operating officer of Rockstar Games, Terry Donovan, defends his company by claiming that if the popular HBO television series The Sopranos was a video game, it would be Grand Theft Auto. His customers, he asserts, are young male professionals who are willing to spend serious money on intense simulation-type games that provide primal stress release. Donovan and many others believe that the M rating is enough to alert parents to the games’ adult content and that legislation from the government infringes on freedom of speech. At the moment, the popular counterargument is that like drugs, alcohol, and pornography, the games represent a threat to the psychological development of young people and should be controlled as such.

SOURCES: http://www.rockstargames.com; http://www.take2games.com; Logan Hill, “Why Rockstar Games Rock,” Wired.com, July 2002; Michael Serazio, “Vice City Confidential: The ‘Atari’ Generation Grows Up,” Columbia.edu, March 7, 2003; “The Games Kids Play: Are Mature Video Games Too Violent for Teens?” Current Events, February 7, 2003; “Deadly Inspiration? Teens Say Video Game Inspired Them in Deadly Highway Shooting,” ABCnews.com, September 5, 2003; “Florida Officials Take Aim at Violent Games,” Reuters, February 6, 2004; Andrew Bushell, “Popular Video Game Instructs Players to ‘Shoot the Haitians’—New York AG Takes on Grand Theft Auto,” VillageVoice.com,January 30, 2004; Christopher Byron, “Give Back Take-Two,” New York Post,December 29, 2003.

Discussion Questions: 1. Describe the technological, social, and political factors acting on the video game industry. 2. How is Rockstar responding to its environmental conditions? Do you agree with Rockstar’s approach? Why or why not? 3. Do you think Rockstar Games’ chief operating officer, Terry Donovan, displays adequate concern for corporate social responsibility? Explain MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 6

Quiz Questions: Multiple Choice 1. At what level of social responsibility is Rockstar Games operating? 7. The high number of children and teens playing Vice City most a. economic likely indicates shifting: b. legislative a. social values c. ethical b. economics d. philanthropic c. legislation e. altruistic d. generations 2. The backlash against Rockstar Games is part of which element e. ethnic markets of the company’s external environment? 8. Sales of Rockstar’s Vice City account for more than half the total a. technological market for M-rated video games, a market with declining sales b. political and legal overall. That statement regards which component of Rockstar’s c. social external environment? d. demographic a. technological e. competitive b. demographic 3. According to Terry Donovan, Rockstar’s customers mostly fall c. economic into which demographic group? d. competitive a. Older boomers e. political b. Generation Y 9. The appeal of Vice City’s violent urban storylines to young pro- c. Older Consumers fessionals is evidence of how ______are shaping people’s d. Younger boomers purchasing decisions. e. All of these. a. technological aptitudes 4. Fines levied against retailers that sell M-rated video games to b. component lifestyles minors are part of which factor of Rockstar’s external environment? c. working women a. social d. regulatory agencies b. competitive e. social pressures c. technological 10. Officially, Vice City has a rating that makes it only available to d. political/legal which target markets: e. demographic a. Generation Y 5. When Rockstar decided to delete the racially offensive line from b. Generation X Grand Theft Auto: Vice City, the company was operating at c. Younger boomers which level of morality? d. Older boomers a. preconventional e. All of these segments b. conventional c. postconventional d. neomodern e. operational 6. When confronted with the objectionable content and speech in Grand Theft Auto: Vice City, Rockstar managers did not publicly comment for over a year. When managers did respond to external pressure and removed the offensive content, they most likely made their decision based on: a. potential magnitude of the consequences b. number of people to be affected c. length of time between the decision and the onset of the consequences d. probability of harmful outcome e. social consensus MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 7

DEVELOPING A GLOBAL VISION Case St udies

4 CASE ASSIGNMENT: MTV Rocking the World One Nation at a Time To most people, MTV is as American as apple pie, baseball, and freedom of speech. It is a cultural icon to every American who grew up in the 1980s or 1990s, and it is easily the most palpable influence on the behavior of the demographic it targets with its programming. A closer look at MTV’s business, however, reveals that its true signifi- cance is its ability to translate its formula for success into the many languages of the world. The network now owns 33 distinct channels that broadcast shows in 18 languages to 1.8 billion viewers in over 160 countries. MTV Networks International, a subsidiary of MTV that actually dwarfs its parent, took its first steps on foreign soil with MTV Europe in 1987 and soon thereafter became Europe’s largest television network. With a blueprint for success in hand, the large subsidiary turned its attention to the global youth market, which today includes over 2.5 billion people between the ages of 10 and 34. As it watched demand for television sets and paid programming services explode in rapidly developing markets, such as China, Latin America, and India, MTV was poised to capitalize. Large and diverse markets, however, are difficult to understand and expensive to penetrate. Initially, MTV simply tried to export a standard- ized version of its American programming, but it quickly discovered that teens from around the world—while they do enjoy American music— are mostly interested in what’s happening in their own regions. MTV responded by undertaking the costly and complex task of producing localized content for specific markets. Now, veejay selection, programming, and service offerings are all unique in any given market. Digital television and interactive services are very popular in Europe, so MTV UK developed a service that allows viewers to obtain information on CDs, check concert dates, and vote for their favorite performers during the MTV European Music Awards directly from their TV sets. In Asia, a virtual animated veejay named LiLi can interact with viewers in five different languages. Controlled by an actor behind the image, LiLi can also interview guests and provide popular culture tips. Brazilian viewers, who also tend to be huge soccer fans, enjoy Rockgol, an MTV-produced soccer championship contested by Brazilian record industry executives and musicians. MTV Japan, a joint venture between MTV Networks and local investment firm H&Q Asia Pacific, operates in the world’s second largest music market and one of the world’s most advanced mobile telecommunications markets. Identifying those two trends, MTV Japan developed a service that lets subscribers use their mobile phones to download entertainment news and new music or vote for their favorite veejay. The development cycle is long for such detailed international projects, but MTV Networks International president Bill Roedy is a patient man. He spent ten years working with Chinese officials for the right to air MTV programming for just six hours a day. The payoff? Forty cable providers now carry MTV Mandarin into 60 million Chinese homes. Roedy is also sensitive to foreign leaders’ fears that their culture will be “Americanized” by MTV. Before his networks enter markets with extreme cultural differences, such as Israel, Singapore, Cuba, or China, Roedy meets with key political figures to allay their fears. “We’ve had very little resistance once we explain that we’re not in the business of exporting American culture,” he notes.

SOURCES: Martin Lindstrom, “One Voice?” Clickz.com, February 26, 2002; Steve McClure, “New MTV Post in OZ, Japan: MTV Asia President to Assume Responsibility,” Billboard, March 8, 2003, 59; “MTV Announces International Expansion Plans for Europe, Asia, and Latin America: Company to Add New Services in Regional Growth Markets Worldwide,” Business Wire, March 9, 1996; Kerry Cappel, Catherine Belton, Tom Lowry, Manjeet Kripalani, Brian Bremner, and Dexter Roberts, “MTV’s World,” BusinessWeek.com,February 18, 2002.

Discussion Questions: 1. Identify the key environmental challenges MTV has faced in its effort to expand globally, and discuss how MTV has overcome them. 2. What is MTV’s global market entry strategy? Discuss whether you agree with MTV’s approach, and identify its advantages and disadvantages. 3. Discuss MTV’s global product strategy. MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 8

Quiz Questions: Multiple Choice 1. The increasing numbers of television sets in homes in rapidly 6. When MTV realized that teens around the world wanted to see developing markets such as China, India, and Brazil reflects an things happening in their own region, the company changed to a increase in: ______strategy. a. cultural awareness a. one product, one message b. purchasing power b. product invention c. American cultural hegemony c. product modification d. global vision d. message adaptation e. global marketing standardization e. message and product modification 2. MTV’s first foray into international marketing can best be 7. How would you describe MTV’s joint venture with a Japanese described as: investment firm in comparison to MTV’s original exporting a. one product, multiple messages strategy? b. product adaptation a. The joint venture is less risky than exporting. c. global market standardization b. The joint venture is more risky than exporting. d. product invention c. The joint venture is just as risky as exporting. e. countertrade 8. MTV Japan used which kind of strategy in the Japanese market? 3. The first business model MTV used to enter global markets was: a. one product, one message a. exporting b. product invention b. licensing c. product adaptation c. contract manufacturing d. message adaptation d. joint venture e. message and product modification e. direct investment 9. MTV is an example of a ______multinational corporation. 4. After MTV first began broadcasting its U.S. shows in foreign a. first-stage markets, the company soon realized that even though teens b. second-stage around the world like American music, they are mostly inter- c. third-stage ested in what is happening in their own regions. MTV managers d. fourth-stage failed to recognize that ______factors might require them to 10. MTV was able to roll out novel product offerings in Europe and change how they do business in foreign markets. Japan because of the level of ______in those areas. a. demographic a. technological development b. economic b. legal structure c. technological c. political actions d. cultural d. economic feasibility e. political e. purchasing power 5. MTV’s original use of global market standardization represents which marketing mix strategy? a. one product, one message b. product invention c. product adaptation d. message adaptation e. message and product modification MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 9

PART 1 THE WORLD OF MARKETING Case St udies

MARKETING MISCUES Mental Health Advocates not Crazy about Valentine’s Day Offering Valentine’s Day 2005 was memorable for many people in Vermont and, in particular, for those at Vermont Teddy Bear Company. The company’s “Crazy for You” teddy bear garnered more attention than the company had anticipated. Though the teddy bear did spark a same-period sales increase from the previous year, the company may have wondered whether the controversy set off by the bear’s strait jacket was worth the additional sales. Providing handcrafted, American-made teddy bears, Vermont Teddy Bear Company is a pioneer of direct marketing. The company sells direct to consumers via its 1-800-829-BEAR phone number or online at http://www.vermontteddybear.com. The company is pursuing an aggressive growth strategy in a competitive battle with the floral delivery providers. Every year its Bear-Gram service delivers over 450,000 Vermont Teddy Bears. Additionally, more than 150,000 tourists each year visit the company’s two factory retail stores in Shelburne and Waterbury, Vermont, and many purchase a bear. The company offers over 100 bears, with special-occasion bears for special events and holidays. With 92 percent of Americans celebrating Valentine’s Day, the holiday ranks fourth in holiday sales transactions and third in dollar volume. Thus, it is not surprising that Vermont Teddy Bear offers a wide variety of Bear-Grams for this Valentine’s Day. Customers can choose from specialty teddy bears, such as “Fool for Love,” “Heart Throb,” “Country Lovin,” “All Star Lover,” “Playbear Playmate,” “Playboy,” “Love Match,” “Romantic at Heart,” “Love Me Tender,” “Jailhouse Rock,” “Redhot Lover,” and “Purple Passion,” that range in price from around $60 to $100 each. In 2005, customers could also order the “Crazy for You” bear. With a direct to consumer price of $69.95, the “Crazy for You” bear came with its own straitjacket to restrain its paws and a commitment report. The accessories upset mental health advocates across the United States. In a letter to the company, the executive director of the Vermont chapter of the National Alliance for the Mentally Ill said that these accessories were completely inappropriate. He explained that strait- jackets are used as a method of involuntary restraint to prevent persons in severe psychological crisis from injuring themselves or others and that commitment reports are used to involuntarily commit individuals to psychiatric treatment when they are temporarily incapable of making informed decisions on their own behalf. Using these symbols of serious mental illness to sell teddy bears was tasteless. Vermont’s governor described the “Crazy for You” bear as very insensitive and said that it stigmatized those suffering from mental health problems. Meanwhile, the executive director of the Vermont Human Rights Commission suggested that the company divert a portion of the bear’s profits to assist those struggling with mental illnesses. In response to these criticisms, Vermont Teddy Bears’ CEO Elisabeth Robert (pronounced “ro-BEAR”) announced that the company would not withdraw the bear from the market. She pointed out that not only had the concept received a positive response in pretesting but that, once on the market, the bear was being enthusiastically purchased by customers. Therefore, she said, the company would continue selling the bear, which was intended for a onetime Valentine’s Day offering, until it was sold out. The furor began on January 12, 2005, with national media attention, and the “Crazy for You” bear sold out on February 3, 2005. Though the total number of “Crazy for You” bears sold was not reported publicly, the company did receive Valentine’s Day orders well in advance of its normal holiday selling season and reported an increase of 29 percent over the 2004 same-period sales. Though Vermont Teddy Bear fared well, in the short term, from sales of the “Crazy for You” bear, CEO Robert was asked to give up her seat on the board of Vermont’s largest hospital, Fletcher Allen Health Care. Her perceived disparagement of the mentally ill was thought to be con- trary to the mission of the hospital. Meanwhile, critics wondered if the company would suffer longer-term damage. Would the way Vermont Teddy Bear handled the controversy cause it to lose sales and/or investors? As one public relations expert noted, society would have forgiven a mistake (the introduction of the bear), but it might not forgive arrogance (the company’s refusal to withdraw the bear after it was criticized as insensitive).

SOURCES: www.VermontTeddyBear.com; American Floral Endowment’ s Consumer Tracking Study, “Valentine’s Day Statistics;” www.growerflowers.com/SEholidaystats.asp, 2003; Associated Press, “Company Won’t Pull Straightjacketed Bear,” ABC News, www.abc.news.com, 2005; Pam Belluck, “ Toy’s Message of Affection Draws Anger and Publicity,” The New York Times, www.nytimes.com, January 22, 2005; DHL Press Office, “DHL Survey Uncovers Valentine’s Day Gift-Giving Habits,” www.dhl-usa.com, February 9, 2005; Gram, David, “Crazy for You Bear Raises Ethics Questions,” Associated Press, www.namiscc.org/Advocacy/2005/Winter/CrazyForYou.html, February 14, 2005; National Stigma Clearinghouse, “ Vermont Teddy Bear Controversy,” http://community.webtv.net/stigmanet.

Discussion Questions: 1. Did Vermont Teddy Bear Co., Inc. violate the ethos of social responsibility? Why or why not? 2. Was the controversy a positive or a negative for the company? For Robert? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 10

Quiz Questions: Multiple Choice 1. By choosing not to cancel its “Crazy for You” line of teddy bears, 7. The governor of Vermont’s description of the “Crazy for You” the Vermont Teddy Bear Company chose to favor the bear charged the Vermont Teddy Bear Company with neglecting ______management philosophy over the ______its ______responsibilities. The executive director of the management philosophy. Vermont Human Rights Commission suggested that the com- a. production, market pany should fulfill its ______responsibilities and give b. market, sales some of the bear’s profits to charity. c. societal, market a. legal, ethical d. market, societal b. ethical, philanthropic e. production, societal c. ethical, ethical 2. Which of the following companies would most likely provide d. philanthropic, economic direct competition for Mother’s Day Bear-Grams? e. legal, philanthropic a. Ethel’s Chocolate 8. If the Vermont Teddy Bear Company outfitted its “Purple b. Ty Beanie Baby Passion” bear in a purple and gold sari for the Indian market and c. Toys “R” Us a purple and gold kimono for the Japanese market, the company d. Nike would be using: e. PetSmart a. dumping 3. A more thorough ______may have helped the Vermont b. product invention Teddy Bear Company anticipate the controversy surrounding the c. message adaptation “Crazy for You” teddy bear before bringing it to market. d. product adaptation a. mission statement e. distribution b. external situation analysis 9. The “Crazy for You” teddy bear represents which element of the c. target market strategy marketing mix? d. internal situation analysis a. promotion e. product differentiation b. place 4. Which of the following was most likely the intended target mar- c. product ket for the “Crazy for You” bear? d. price a. infants and toddlers e. problem child b. the National Alliance for the Mentally Ill 10. If the Vermont Teddy Bear Company gave the German teddy c. adults who otherwise may have purchased flowers bear company Steiff Inc. the right to manufacture and distribute d. people who are drawn towards controversy its line of Bear-Grams in Europe in exchange for a share in prof- e. bear hunters its, this would be an example of: 5. Which of the following best describes the competitive advan- a. contract manufacturing tage that the Vermont Teddy Bear Company seeks with its Bear- b. joint venture Grams? c. exporting a. market development d. direct investment b. niche e. licensing c. sustainability d. cost e. product differentiation 6. Whose question, “If businesspeople do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is?”, seems to support the Vermont Teddy Bear Company’s decision to keep selling its “Crazy for You” bear? a. Adam Smith b. Elisabeth Robert c. Milton Friedman d. Jeffrey Immelt e. John Maynard Keynes MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 11

PART 1 THE WORLD OF MARKETING Case St udies

CRITICAL THINKING CASE Pharmaceutical Marketing—Direct to Consumers or Not? There is growing controversy over the estimated $4 billion the pharmaceutical industry spends annually on direct-to-consumer (DTC) advertising. Prior to 1997, pharmaceutical advertising and promotion focused on physicians. Companies adver- tised their products in professional medical journals and sent sales personnel to visit doctors (referred to as “detailing”) and provide them with free samples, which were then passed on to their patients. Since 1997, however, when the Food and Drug Administration (FDA) relaxed pharmaceutical advertising rules, companies have been shifting advertising dollars toward DTC advertising. The marketing issue boils down to whether pharmaceutical companies should influence prescription choices via the physician or the patient. According to estimates, pharmaceutical companies spend close to $25 billion a year on promoting new drugs in the United States. With an estimated 80,000 drug company representatives visiting physicians every day, detailing accounts for around $5 billion of this amount, and free drug samples account for slightly over $16 billion. An estimated 80–95 percent of medical doctors see drug company representatives on a regular basis. Nevertheless, research has shown that such marketing tactics have little impact on the prescribing behavior of physicians. The question, however, is whether DTC advertising affects physician prescribing behavior. Critics say that it does and that consumer ads prompt patients to seek medications they do not need. Additionally, they argue, advertising benefits the market leader because that company can afford to spend the most on advertising and then gains sales from new patients seeking treatment. Some research indicates that doctors comply with patient requests for drugs 85 percent of the time—drugs the patients learned about via DTC ads. At the same time, critics say, creating brand awareness for a particular product makes it more difficult for physicians to prescribe equivalent drugs and plays on consumers’ lack of knowledge instead of the physician’s level of expertise. In addition, critics claim, ads may encourage overconsumption of some drugs by creating a false impression of a drug’s capabilities and exaggerating its effect on the disease or illness. Opponents also argue that DTC advertising is driving up prescription costs which leads to higher individual drug prices as companies seek to cover expensive advertising costs. Proponents of DTC pharmaceutical advertising contend that it offers several benefits. First, they say, the changing role of information in the health care system has created a need for DTC advertising. Patients have much greater access to health care information (via the Internet) and are entering into a patient-doctor relationship empowered by this information. Thus, advertising, as a major means of mass communication, is a primary form of information dissemination. In particular, sufferers of certain diseases and medical conditions benefit from the advertising. For example, disease awareness ads help patients recognize symptoms at an early stage when the disease can still be treated. Ads can help remove the stigma of some illnesses, particularly mental illness. Thus, ads can serve to educate the public. Another benefit of drug advertising is that it encourages compliance. Many conditions (e.g., high cholesterol) do not exhibit outward signs of improvement when the patient takes the medication. These conditions require medical monitoring to determine if the drug is working. Ads can help remind patients to take their medication and to have prescriptions refilled. Furthermore, these proponents point out, there does not appear to be a direct correlation between advertising expenditures and product price, and the annual growth in marketing expenditures has remained relatively constant—although there has been a shift of funds from doctor-focused to patient-focused. Pharmaceutical advertising is regulated by the FDA’s Division of Drug Marketing, Advertising, and Communications. Division employees review between 30,000 and 40,000 ads a year. Although the annual number of complaints received by the FDA has remained about the same since DTC advertising began in 1997, the number of citations issued to drug manufacturers has dropped about 80 percent during this same time period. Prescription drug spending is projected to be one of the fastest-growing segments of health care costs. It is estimated that, by 2012, prescription drugs will account for 14.5 percent of the $3.1 trillion that the United States spends on health care (compared to 10 percent in 2001). Is marketing the reason behind the increased expenditures? Or are knowledgeable consumers taking more drugs and thereby avoiding other health care costs?

SOURCES: Anonymous, “Doctors Not Influenced by Pharmaceutical Marketing Tactics,” Medical News Today, www.medicalnewstoday.com, December 8, 2004; Linda A. Johnson, “Web Sites New Twist in Celebrity Drug Ads,” AP News, www.apnews.myway.com, July 17, 2005; Merrill Matthews, “Who's Afraid of Pharmaceutical Advertising?,” IPI Policy Report–#155, May 17, 2001; Ray Moynihan, “Who Pays for the Pizza? Redefining the Relationships between Doctors and Drug Companies,” BMJ, May 31, 2003, 1189–1192; Julie Schmit, “FDA Races to Keep Up with Drug Ads that Go Too Far,” USA Today, www.usatoday.com, May 30, 2005; Shankar Vedantam & Marc Kaufman, “Doctors Influenced by Mention of Drug Ads,” The Washington Post, April 27, 2005, A01.

Discussion Questions: 1. Who are the customers in the pharmaceutical drug market? 2. Is there a difference between the marketing of pharmaceuticals and the marketing of other consumer products (e.g., computers)? Why/why not? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 12

Quiz Questions: Multiple Choice 1. The emphasis on direct-to-consumer (DTC) advertising shows a 7. Which of the following is a well-stated marketing plan objective general trend towards a ______orientation in the phar- for a major pharmaceutical company? maceutical industry. a. Our objective is to be 25% better than our leading competitor. a. production b. Our objective is to double our profits by selling more anti- b. sales depressants than any other pharmaceutical company. c. market c. Our objective is to get more doctors to prescribe our medica- d. societal tions and more customers to ask for our medications. e. global d. Our objective is to spend 50% more on advertising than we 2. Critics say that “consumer ads prompt patients to seek medica- did in the previous year in an effort to win 30% of all first- tions they do not need.” If this is the actual intention of pharma- time pharmaceutical customers. ceutical companies, what strategic alternative does it represent? e. Our objective is to spend 15% more on production of anti- a. market penetration depressants, 8% more on production of heart medication, b. market development and 6% less on arthritis medication. c. product development 8. Pfizer, a large pharmaceutical company based in New York, is d. diversification able to sell its products in Mexico without paying import/export e. niche tariffs. This is because of the: 3. Which federal law would pharmaceutical companies be accused a. Uruguay Round of violating if their critics’ claim that “consumer ads prompt b. North American Free Trade Agreement patients to seek medications they do not need” were proven true? c. Central America Free Trade Agreement a. Kefauver-Harris Drug Amendment of 1962 d. General Agreement on Tariffs and Trade b. Consumer Product Safety Act of 1972 e. Doha Round c. Lanham Act of 1946 9. If Merck & Co., a New Jersey pharmaceutical company, decided d. Wheeler-Lea Amendments to the FTC Act of 1938 to order the bottles for its line of Zocor drugs from a Chinese e. Federal Food and Drug Act of 1906 company instead of producing its own bottles, this would be an 4. If the FTC (Federal Trade Commission) deemed some DTC adver- example of: tising illegal for leading patients to buy medications they did not a. licensing need, which of the following actions could it NOT immediately b. cooperation take? c. a strategic alternative a. cease-and-desist order d. a new method of service delivery b. consent decree e. contract manufacturing c. affirmative disclosure 10. If Eli Lilly and Company, a global pharmaceutical company, pro- d. corrective advertising vided DaimlerChrysler with a number of its pharmaceutical prod- e. restitution ucts (to be used by DaimlerChrysler as part of its employee 5. By attracting new customers with controversial DTC advertising, health care benefits) and received DaimlerChrysler trucks in pharmaceutical companies have been turning the pharmaceuti- return (to be used by Eli Lilly and Company for moving products), cal drug industry into a ______industry. this would be an example of: a. growth a. dumping b. global b. an exchange c. competitive c. product adaptation d. strategic d. countertrade e. mature e. diversification 6. If an employee at a large pharmaceutical company did an SWOT analysis, he or she would identify the willingness of customers to consider medication they do not actually need as the ______element of SWOT and would identify critical response to DTC advertising as the ______element of SWOT. a. W, T b. O, W c. O, T d. S, T e. S, W MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 13

CONSUMER DECISION MAKING Case St udies

5 CASE ASSIGNMENT: Ethel’s Chocolate Boutiques Chocolate Lounges Taste Sweet Success The chocolate house dates back to seventeenth century London, when members of society’s elite would gather in luxurious surroundings to relax and sip on hot chocolate. Later, Europeans expanded on that idea and developed solid chocolate treats that sold in upscale boutiques. Lacking the resources and economy of established continentals, boot- strapping American settlers pioneered the development of cheaper chocolate bars for the masses. Centuries have passed, however, and the American palate has tired of the taste of mass-produced chocolate. The U.S. chocolate industry has experienced growth of less than 3 percent since the turn of the millennium, and the lack of industry innovation has left a bad taste in chocolate purveyors’ mouths, too. Enter Ethel’s Chocolate Lounges, named in honor of the matriarch of the Mars family, who founded the candy company with her husband Frank in 1911. Now Ethel Mars’s name adorns the signs at the company’s latest attempt to breathe fresh life into chocolate. Aware that chocolate sales at upscale retail outlets, like Godiva and Starbucks, grew by nearly 20 percent from 2002 to 2004, Mars opened Ethel’s Chocolate Lounge in the Lincoln Park neighborhood of Chicago in April 2005. More Ethel’s have opened since then, and the chic chocolate houses are Mars’s bet that well-heeled and sweet-toothed consumers will take to premium chocolate the same way that well-to-do coffee lovers flock to Starbucks for high-priced java. Ethel’s Lounges are designed to coddle patrons in the lap of luxury, but Mars president John Haugh maintains that what makes Ethel’s special is that it offers “approachable gourmet chocolate.” In other words, you don’t have to be a millionaire to enjoy the sweet taste of the good life. Prices are not for everyone’s wallet, however. Truffles and Tea for Two, which features all 11 of Ethel’s truffles served on a silver platter, sells for $15. Chocolates and Cocoa for Two includes two cocoas and 10 pieces of chocolate for $18, and a box of 48 chocolates is $42. Five “Collections” offer over 50 individual chocolates that sell for between $.90 and $1.50 a piece. Supporting Haugh’s claim of approachability, the menus at Ethel’s feature icons and descriptions of the chocolates’ contents so that customers won’t experience an unwanted filling surprise. A multitude of hot and cold beverages give visitors more reasons to extend their stays. But it’s not just the chocolate that makes Ethel’s such a desirable destination. Advertising describes Ethel’s as “a place for chocolate and chit-chat.” Generously stuffed pink couches with brown accents combine upscale modern and traditional looks to give the stores a hip and classy feel. For those who don’t immediately get it, a sign behind the counter reads, “Chocolate is the new black.” The stores’ appeal is their relaxing ambience and neighborhood vibe – these shops encourage socializing and extended lounging. The effect is carefully planned like a modern American coffeehouse. Mars’s research revealed that even calorie-conscious consumers will splurge for the good stuff as long as a broader social experience comes with it. Parallels to the Starbucks-led American coffee revival are obvious and inescapable. Confectionary industry insiders note that chocolate cafés are taking hold, and research confirms their belief. Datamonitor, a research firm specializing in trend identification, described chocolate as “the new coffee” on its list of the top ten trends to watch in 2006. The popularity of the Chocolate Bar in New York, billed as a “candy store for grown-ups,” and South Bend Chocolate’s ten chocolate cafés shows that the trend is for real. Even some Hershey’s stores now offer seating for patrons. Joan Steuer, president of Chocolate Marketing, claims that, for women, enjoying chocolate in a luxurious lounge is like taking a candle-lit bubble bath. She notes, too, that much of the appeal is that the experience is testimony to the person’s upward mobility. It’s a perfect way to cater to the American desire to have the best that money can buy.

SOURCES: Amy Chozick and Timothy Martin, “A Place for Cocoa Nuts?” Wall Street Journal, July 15, 2005, B1, B3; http://www.ethelschocolate.com; “Ethel’s Launches First- Ever Approachable, Everyday Gourmet Chocolate and Chocolate Lounges; Opens First Two Stores in Chicago, Expected to Expand to Six b y End of Summer,” PR Newswire, June 6, 2005; Karen Hawkins, “Chocolate Lounges Present Themselves as Sweet Alternatives to Coffee Shops, Bars,” Associated Press, February 13, 2006; Melinda Murphy, “Trend Report: Chocolate Is Hot,” CBS News Online, http://www.cbsnews.com/stories/2006/02/07/earlyshow/contributors/melindamurphy/main1289922.shtml.

Discussion Questions: 1. What type of consumer buying decision best describes choosing to indulge at Ethel’s? 2. List the factors that influence a consumer to spend their money and time at Ethel’s. Which one do you think will motivate a consumer the most? Why? 3. Review the section on Culture and Values on pages 69-70. To which core American value does the Ethel’s experience appeal to most? Explain. MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 14

Quiz Questions: Multiple Choice 1. Which core American value would most likely be associated 6. Katie is a college student in South Bend, Indiana. After classes, with the ability to buy upscale chocolates? she decides to grab a snack before going back to her apartment. a. freedom Before leaving campus, she can go to the cafeteria or a pretzel b. success stand. Along her walk home are an Ethel’s and a Panera. Katie c. youth really wants a sandwich and a hot drink, so in all likelihood, her d. progress evoked set ______contain ______. e. independence a. will; the pretzel stand 2. Keeping the familiar Mars brand name attached to the new b. will not; the cafeteria Ethel’s Chocolate Lounges allows marketers to take advantage of: c. will; Ethel’s a. stimulus generalization d. will; Panera b. selective retention e. will not; Panera c. stimulus discrimination 7. Marketers at Ethel’s hope consumers will add the new choco- d. motivation late boutiques to Starbucks in their ______for everyday lux- e. justification ury snacking experiences. 3. The best way for Ethel’s Chocolate Lounges to influence ambiva- a. evoked matrix lent customers to purchase the company’s products would be to: b. consideration set a. send post purchases thank you letters c. extensive decision set b. offer guarantees d. internal information search c. display its product superiority in advertising e. routine response mechanism d. reassure consumers that their product is just like other Mars 8. Because Mars has built its company on the success of mass- products produced chocolate candies (like Mars, Snickers, Twix, and e. cater to a wide variety of consumers M&Ms), the company may have a problem overcoming con- 4. When an Ethel’s Chocolate Boutique first opens in a city, consumers’ ______as it tries to launch Ethel’s chocolates as a sumers probably use ______when deciding to spend $42 on luxury product. a box of chocolates. a. perceptions a. a cognitive decision b. subliminal perceptions b. routine response behavior c. safety needs c. limited decision making d. social dynamics d. extensive decision making e. social class e. specialty choicing 9. The only one of Maslow’s needs that Ethel’s products and expe- 5. If a manager at Mars created a short brochure about the con- riences cannot meet is: cept of Ethel’s Chocolate Boutiques and the products sold in the a. physiological boutiques, it would be an example of: b. social a. an internal information search c. esteem b. nonmarketing-controlled information d. safety c. marketing-controlled information d. a prepurchase shopping tool e. evoked set MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 15

BUSINESS MARKETING Case St udies

6 CASE ASSIGNMENT: CamelBak Hydration Packs New Stars of U.S. Armed Forces In 1989, Michael Eidson probably never imagined that his homemade, do-it-yourself fix for dehydration during long cycling races would evolve into the world’s premier hydration device for outdoor enthusiasts, soldiers, and law enforcement personnel. That is exactly what happened to the CamelBak backpack, however. The first version, which used medical tubing to flow water from an intravenous drip bag that was insulated by a sock and strapped to the back of his shirt, was born as most inventions are—out of necessity. The special pack made it possible for Eidson to take in fluids while sitting upright without having to sacrifice speed by reaching down for a water bottle during a race. The packs gained fame during the 1991 Gulf War as extreme sports enthusiasts in the U.S. Special Forces carried their personal CamelBaks into combat during Desert Storm. Thereafter, the CamelBak name would be forever associated with extreme performance and the U.S. Armed Forces. By 1995, Eidson sold the company for $4 million. Its buyer, Kransco, introduced the first camouflaged models, and the packs continued to gain acclaim. In 1999, two years after buying his first CamelBak pack, cyclist Chuck Hunter left Lockheed Martin to join the upstart company in hopes of growing its military business. He promptly moved the company to the Sonoma Valley, built a research and development center, and leveraged his experience in the defense industry to launch a military-specific line of packs. Hunter partnered with DuPont to help CamelBak develop the Low Infrared Reflective (LIRR) system. LIRR applies specially developed materials to a pack’s compartments, buckles, and straps to shield soldiers from enemy detection systems. As advanced identification and kill technologies are increasingly being deployed on the battlefield, individual protection applications like the LIRR will be the camouflage of tomorrow. Other CamelBak innovations include the WaterBeast reservoir, a fluid storage system that boasts 30 percent more rigidity than other packs on the market. The WaterBeast has the ability to withstand lengthy field engagements, aided by its silver-ion reservoir and tube linings that eliminate 99.99 percent of all fungus and bacteria in the water delivery system. The WaterBeast reservoir is now a standard feature on all CamelBak packs, as is the company’s proprietary drinking nozzle, or bite valve, which must withstand 10,000 compressions to guarantee it will last through three years of combat use. Another CamelBak first is its CBR 4.0 pack system, which is specially designed to perform under a chemical or biological weapons attack. The CBR 4.0 took five years to develop, and like all CamelBak military and law enforcement products, it was created to meet the specific requests and requirements of the target market. Since its introduction in 2005, the U.S. Special Forces, New York Police Department, U.S. Secret Service, Department of Health and Human Services, and a myriad of HAZMAT, law enforcement, and government agencies from around the world have adopted and deployed the CBR 4.0. Though CamelBak specializes in offering extreme performance packs for the military, industrial, and professional markets, it also sells a variety of products for hunting, extreme sports, recreational, and “light” law enforcement applications. Having claimed more than 90 percent of the military market for hydration packs, product manager Shawn Cullen likens CamelBak to Kleenex: “Everyone calls a hydration system a CamelBak,” he says. Ironically, the company’s biggest customer is its biggest competitor. While it continues to use CamelBaks, the U.S. Army is working with a former supplier to develop its own version, most likely in an attempt to reduce costs. At prices up to $200 for combat-ready systems, one thing CamelBaks aren’t is cheap. But then again, neither is CamelBak itself. Its strong product lines, history of innovation, secure strategic relationships, and dominance in government and institutional markets drove its value to over $200 million when investment bank Bear Stearns Company bought the outfit from Kransco in 2003. Not bad for a product that started life as an intravenous fluid bag wrapped in a sock.

SOURCES: Jonathan Karp, “How Bikers’ Water Backpack Became Soldiers’ Essential,” Wall Street Journal, July 19, 2005, B1, B2; “CamelBak Introduces New Line of Strength/Stealth Technology Responding to L aw Enforcement and Military Needs; R&D Innovations Protect against Infrared Detection, Provide Strongest Hydration Reservoir Available,” PR Newswire, January 27, 2005; Mark Riedy, “The Birth o f CamelBak,” Mountain Bike, Summer 2004, 104; “CamelBak Announces Chem-Bio Hydration Reservoir for Military, Law Enforcement and First Responders; New Reservoir Is World’s Only Hands-Free Hydration System That Withstands Exposure to Chemical and Biological Agents to Provide Safe Drinking Water in All Combat Environments 24/7/365.” PR Newswire, August 26, 2004.

Discussion Questions: 1. Discuss how business relationships and strategic partnerships have helped to increase the value of CamelBak’s products and the business itself. 2. What type(s) of business market customers does CamelBak sell to? 3. Review the types of demand that most influence business markets. Which ones do you think are most important for CamelBak to consider in their marketing strategy? Why? 4. What type of business product is a Camelbak backpack? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 16

Quiz Questions: True/False 1. CamelBak was invented to be a business product. 5. CamelBak has experienced astronomical growth as a result of: a. True a. strategic alliances b. False b. reciprocity c. derived demand Multiple Choice d. happenstance 1. The CamelBak is an example of which kind of business product? e. government subsidies a. major equipment 6. When CamelBak came out with its WaterBeast technology, the b. accessory equipment U.S. Federal Government changed from buying the old model to c. processed material buying the WaterBeast model. The first time a government pur- d. component part chasing agent placed an order for CamelBak hydration systems e. supply outfitted with the new WaterBeast technology, it was an exam- 2. The extreme sports enthusiasts who brought their CamelBaks ple of a(n): with them on Special Forces missions might be called: a. modified rebuy a. gatekeepers b. straight rebuy b. influencers c. new buy c. purchasers d. upgraded buy d. initiators e. flat rebuy e. deciders 7. The silver used in the reservoir of the WaterBeast is an example 3. If the U.S. Government begins manufacturing its own hydration of a(n): systems using the CamelBak as an inspiration, CamelBak might a. raw material consider it a breach of: b. supply a. keiretsu c. processed material b. trust d. accessory c. alliance e. component part d. demand 4. The bladder and the tubing that make up the basic CamelBak hydration system will necessarily experience_____demand. a. joint b. high c. elastic d. inelastic e. accelerating MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 17

SEGMENTING AND TARGETING MARKETS Case St udies

7 CASE ASSIGNMENT: LVCVA Viva Las Vegas In 2003, more than 35.5 million travelers made Las Vegas their destination of choice. It was the second largest volume of visitors the city has ever entertained, lagging just slightly behind the 35.8 million recorded for the year 2000. Those numbers are remarkable given the recent slump in the travel industry, and the city has the Las Vegas Convention and Visitors Authority to thank. For almost 50 years, the LVCVA has been promoting Las Vegas in an effort to maximize occupancy for the city’s hoteliers who suffer from the cyclical demand in the travel industry. The authority’s marketing of the city’s convention, lodging, and entertainment facilities to convention organizers, meeting planners, and leisure travelers plays an integral role in keeping hotel rooms and convention facilities occupied during off-peak times of the year. Many types of visitors go to Las Vegas for a variety of reasons, and the LVCVA uses a multilevel promotions strategy to reach them all. The organization’s promotional mix includes national television advertising, grassroots marketing, and relationship building with a variety of organizations. Each element is specifically designed to address issues within particular segments of its growing target market, such as changes in the composition of the visitor pool, shifts in visitors’ travel preferences, the emergence of potentially lucrative metropolitan markets, and trends in foreign visitors. An LVCVA study of the area’s visitors for 2001, for example, found that African Americans, Hispanics, and Asian Americans accounted for 9, 5, and 4 percent, respectively, of the total visitor pool. The same study also revealed that the number of visitors from each of those groups had been steadily rising and that all U.S. visitors were beginning to prefer two- or three-day stays to weeklong vacations. With those data in hand, the LVCVA produced its award-winning “Vegas Stories” series of TV commercials for 2003 and 2004. The irreverent ads poke fun at the sticky situations travelers may find themselves in as a result of too much revelry in the desert. Using the tagline, “What happens here, stays here,” the spots from the “Vegas Stories” campaign include an older Asian woman trying to alter an after-the-trip love letter while Roy Orbison’s “Only the Lonely” plays in the background and a bachelorette party of African American women riding quietly in a limousine until the group is slowly overcome with sheepish laughter. Other commercials depict elderly couples, busi- nesswomen, and young professional males. The LVCVA also produced its first-ever commercial recorded entirely in Spanish, which was written specifically to appeal to Hispanics’ historical preference for family or group activities for vacations. Additionally, the authority’s director of diver- sity began promoting Las Vegas to ethnic chambers of commerce and organizations like the International Association of Hispanic Meeting Planners and the National Coalition of Black Meeting Planners. Other research performed by the LVCVA identified Portland, Oregon, and Atlanta, Georgia, as emerging regional markets based on the their median household incomes, their available flights to Las Vegas, the cost of advertising in those markets, and the propensity of their citizens to gamble. The LVCVA then bought billboards in each city, cruised the towns in a specially prepared van featuring an Elvis impersonator and a traditional Vegas showgirl, and promoted special travel deals to promote the entertainment options that Las Vegas offers in addition to gambling. The authority’s message carries beyond the borders of the United States, too. When it noticed significant drops in the visitor volume from Canada—Las Vegas’s leading source of international travelers—the LVCVA sent an official delegation to Toronto. The group canvassed Toronto’s Canadian Meeting & Incentive Travel Symposium & Trade Show to persuade convention operators to host their future productions in the desert. Representatives also met with private convention and leisure travel planners and attended events in Montreal and Vancouver to promote their cause. Las Vegas is clearly on the rise again thanks to the tireless work of the LVCVA, and the authority has the hard data to prove it. As long as the LVCVA continues to understand its many diverse customers and communicate with them appropriately, the city of lights should continue to shine brightly for many years to come.

SOURCES: “Las Vegas Tourism Agency Announces 1.3 Percent Rise in Visitor Totals for 2003,” Las Vegas Review-Journal, February 14, 2004; Jennifer Bjorhus, “Las Vegas Tourism Authorities Campaign in Portland, Ore,” Knight Ridder/Tribune Business News, June 4, 1999; Chris Jones, “Las Vegas Tourism Agency Executive Says Research, Marketing Are Key to Success,” Las Vegas Review-Journal, April 6, 2003; Chris Jones, “Las Vegas Tourism Chief Opposes Ads; Board Members Object to ‘Sin City’ Phrase,” Las Vegas Review-Journal, December 16, 2003; Chris Jones, “Las Vegas Tourism Officials Plan Marketing Blitz to Attract Canadian Tourists,” Travel Weekly, March 3, 2003; Chris Jones, “New Las Vegas Tourism Ads Target Hispanics with Tradition-Focused Messages,” Las Vegas Review-Journal, July 17, 2003; Chris Jones, “Las Vegas Tourism Authority Unveils Culturally Diverse Television Ads,” Las Vegas Review-Journal, February 11, 2004.

Discussion Questions: 1. What basis does the LVCVA use for segmenting its target market? 2. Does the LVCVA use an undifferentiated, a concentrated, or a multisegment targeting strategy? Why? Should the LVCVA be concerned with cannibalization? 3. Think of the many reasons a person might want to travel to Las Vegas. Given a target market of all U.S. citizens aged 18 to 75, speculate how you might segment that market by lifestyle. 4. What do you think makes the LVCVA so successful? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 18

Quiz Questions: True/False 1. A list of reasons people travel to Las Vegas would be most help- 4. When the LVCVA cruised through Portland, Oregon and Atlanta, ful for marketers using benefit segmentation. Georgia, in a customized van complete with Elvis impersonator a. True and Vegas showgirl, it was trying to achieve: b. False a. product differentiation 2. If the LVCVA began designing programs for frequent visitors to b. perceptual mapping Las Vegas, it would be using psychographic segmentation. c. substantiality a. True d. critical mass b. False e. segmentation 3. If LVCVA were to begin marketing Las Vegas as a family destina- 5. Based on what you read in the case, the LVCVA is best tion, akin to Disney, it would be an example of repositioning. described as pursuing which kind of segmentation strategy? a. True a. concentrated b. False b. business 4. When LVCVA representatives went to Canada to persuade con- c. undifferentiated vention operators to host future events in Las Vegas, the LVCVA d. one-to-one was segmenting its business market by customer relationship. e. multisegment a. True 6. Children are noticeably absent from the “Vegas Stories” cam- b. False paign. That would indicate that LVCVA used______in its 5. Based on the content of the case, we can assume that LVCVA segmentation process. used all six steps in the segmentation process. a. perceptual mapping a. True b. age segmentation b. False c. family life cycle d. repositioning Multiple Choice e. responsiveness 1. When the LVCVA sent a delegation to Toronto to convince con- 7. The study of the area’s visitors in 2001 revealed that the vention planners to host future productions in Las Vegas, the Hispanic segment is: LVCVA was practicing ______segmentation. a. substantial a. benefit b. identifiable b. demographic c. responsive c. geographic d. accessible d. one-to-one e. all of these e. psychographic 8. The main disadvantage to LVCVA’s segmentation strategy 2. The results of the LVCVA’s study of the area’s visitors for 2001 would be: identified visitors according to ethnicity, which could help with a. cannibalization the organization’s ______segmentation efforts. b. high costs a. benefit c. segments too small b. demographic d. unimaginative product offerings c. geographic e. overreliance on a niche d. one-to-one e. psychographic 3. The award-winning “Vegas Stories” advertising campaign segments the market using: a. benefits sought b. demographics c. geodemographics d. psychographics e. usage rate MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 19

DECISION SUPPORT SYSTEMS AND MARKETING RESEARCH Case St udies

8 CASE ASSIGNMENT: Look-Look You can’t always believe what you hear, particularly in the fast-moving world of youth trends. That is, unless you listen to Sharon Lee and DeeDee Gordon, founders of Look-Look, the most accurate information resource on the global youth culture. The pair founded the company in 1999, determined to find whatever makes the cultural spider-sense tingle— music, shoes, clothes, games, makeup, food, and technology. Lee and Gordon took Look-Look online in 2000, and the company has since risen to be the paragon of trend forecasting in the youth market. How? When Sharon Lee needs to know what’s cool, she taps into a network of experts the CIA would envy. It’s a Web-linked weave of over 35,000 volunteers and part-timers, aged 14 to 35, recruited over several years at clubs and hangouts around the country, from New York to Los Angeles and points in between, to report on their world. Look-Look’s human database brims with youthful hipsters from all over the planet who log in to the company’s Web site to answer surveys and polls, register opinions, and communicate ideas. Some of the recruits communicate through Look-Look-supplied digital or video cameras, from which they upload pictures, document reports, and post content to the firm’s intranet message boards. Some, such as Portland, Oregon’s Emily Galash, receive small monthly sums—Emily’s is $125 per month—for capturing and sharing the moments of their personal lives. Gordon and Lee welcome images from anything as private as underground parties to simple adornments like posters on bedroom walls. Look-Look relies on “early adopters” and “influencers” to provide depth to information that traditional research practices only skim. For Look- Look, focus groups are strictly passé; such conventional tactics would not have raised its clients’ awareness of incoming trends such as under- a-dollar stores, fold-up scooters, or over-the-shoulder bags. Strangely enough, however, Gordon and Lee and counterparts, such as Jane Buckingham’s Intelligence Group, Irma Zandl’s Zandl Group, and Faith Popcorn’s BrainReserve, now run the risk of being out of date themselves. Once known as “cool seekers” or “cool hunters,” they now prefer to refer to themselves as “futurists” and “planners.” The Web-connected reality of instant digital feedback and content generation through blogs, text messages, and music, photo, and video hosting sites such as MySpace.com causes trends to flash before us and dissipate before most know they existed in the first place. “Cool” isn’t even cool anymore, and marketers to this age group must spot what’s going to be “in” before or as it develops. Look-Look’s success is well documented, however, and that’s the reason companies like Telemundo, Procter & Gamble, Nike, Kellogg’s, and Coca-Cola rely on its help to stay in the running for the $175 billion wielded by teen consumers. Recently, Look-Look began working with Microsoft to tap into the culture of the twenty-first-century teenager. On a project designed to help the software giant’s PC-gaming unit connect with the growing female presence in the video gaming market, Look-Look selected 30 teens from its database and asked them to keep blogs about their experiences with Microsoft PC games. Lisa Sikora, group product manager for Windows gaming, acknowledged Look-Look’s relevance, noting that companies like hers need to “start talking to this audience in their way, not our way.” But Look-Look doesn’t stop there. In addition to finding the future, Look-Look is defining it, too. Working with Virgin Mobile, an extremely youth-oriented marketer, Look-Look came up with two unique ideas. The first was to hold an art contest among members of its human database to devise cell phone covers. The top five designs, from artists ranged 17 to 20 years old, are now officially sold in stores as covers for the Kyocera K10 Royale. Remember Emily Galash? The money she earns is for the 30 to 40 pictures she sends to Look-Look every month. Instead of attempting to interpret her pictures for the sake of reporting on trends, Look-Look bolts select shots directly to the pages of Virgin Mobile’s internationally viewable Web site because they are trends. Amateur work like Emily’s and that of the artists who designed the Kyocera face plates is valued because it maintains its authenticity, individuality, and credibility with its target audience. Clients also ask Look-Look to identify which products are the hottest in a given market. After a small army is canvassed through online polls and surveys, the results are arranged into categories. “The turnaround,” says Lee, “can be as little as 48 hours.” Look-Look categorizes information into ten channels: fashion, entertainment, technology, activities, eating and drinking, health and beauty, mood of culture (how kids feel about life), spiri- tuality, city guide, and Look Out (a “best of” findings in a snapshot). The information is put through rigorous paces. “Methodology is crucial, especially with the quantity and quality of the sample,” says Lee. “We can take a sample of 300 or thousands. That’s up to Gallup standards.” Still, cool is as hard to pin down as a weather forecast for next week. But the real arbiters of cool are those who can afford to lead. “Ultimately,” says Que Gaskins, chief marketing office of the avant-garde, multicultural marketing Ad*itive, “the future of cool belongs to whoever has the most buying power.”

SOURCES: Gina Piccalo, “Fads Are So Yesterday,” Los Angeles Times, October 9, 2005; Stephanie Kang, “Trying to Connect with a Hip Crowd,” Wall Street Journal, October 13, 2005, B01.

Discussion Questions: 1. What is Look-Look offering businesses that traditional market research firms cannot offer? 2. Describe the role of the Internet in youth trend spotting. Do you think a research firm can accurately forecast youth trends without an online component to the research plan? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 20

Discussion Questions, Continued: 3. Go to Look-Look’s Web site at http://www.look-look.com and check out some of the free information in each category. How accurate do you find the information? Have you seen any of these trends in your city or region, or among your friends and classmates? 4. Make a list of products or companies that you think could benefit from Look-Look’s form of predictive market research. Next to each item, write a brief reason why and how you think cool-seeking would benefit the company or product.

Quiz Questions: Multiple Choice

1. The volunteers used by Look-Look are an example of a(n)_____ 6. Look-Look volunteers upload to the company Web site photos sample. that give a glimpse into their everyday lives. These photos could a. unrestricted Internet most reasonably be considered a type of: b. screened Internet a. diagnostic research c. recruited Internet b. multimedia sample d. judgment c. ethnographic research e. quota d. blog 2. If Look-Look were to ask its volunteers to recommend other e. stratified sample respondents, the company would be using a ___ sample. 7. Look-Look, Intelligence Group, Zandl Group, and BrainReserve a. quota specialize in collecting: b. judgment a. primary data c. convenience b. secondary data d. snowball c. competitive intelligence e. cluster 8. Microsoft determined that its products had less of a following 3. When Look-Look researchers obtain information about the youth among girls than boys, so the company engaged the services of market by questioning younger friends and relatives, it is an Look-Look. In this situation, Microsoft had a: example of which kind of sample? a. marketing research problem a. convenience b. marketing research objective b. cluster c. management decision problem c. systematic 9. By collecting volunteers’ candid photos, Look-Look is able to use d. stratified the Internet to conduct a form of: e. judgment a. observation research 4. Look-Look only gets information from respondents with Internet b. survey research access. This might be a source of_____. c. competitive intelligence a. random error d. diagnostic testing b. frame error e. recruited sampling c. sampling error d. competitive intelligence e. secondary data 5. As described in this case, what type of marketing research is Look-Look conducting? a. diagnostic b. predictive c. prescient d. descriptive e. synoptic MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 21

PART 2 ANALYZING MARKETING OPPORTUNITIES Case St udies

MARKETING MISCUES Has eBay Forgotten Its Faithful Followers? By the time it celebrated its tenth anniversary in 2005, eBay had become a cultural phenomenon with a community of customers devoted to buying and selling online. Unfortunately for eBay, however, this cultural phenomenon is no longer unique to the company, as online auction competitors have entered the marketplace. EBay began as a weekend project for Pierre Omidyar and has evolved into one of the largest Internet companies. Based in San Jose, California, the company has approximately 61 million active users (almost 150 million registered users worldwide), with quarterly revenue top- ping $1 billion in the first quarter of 2005. Collectively, merchandise sold on eBay during 2004 amounted to around $34 billion. In 2005, however, discontent erupted among eBay’s sellers when the company announced rather steep fee increases. The changes affected all types of sellers. The monthly cost for store owners (the larger sellers) increased 50 percent, with commissions increasing as much as 60 percent. In dollar terms, the monthly cost rose from $9.95 to $15.95, and the commission on a product selling for less than $26 increased from 5.25 percent to 8 percent. Under the new fee plan, individuals (the smaller sellers) would pay $0.35 for posting a thumbnail picture of a product, up from $0.25, and listing an item for a ten-day auction would cost $0.40, up from $0.20. Though these individual increases seemed relatively minor, the cost over hundreds or thousands of transactions for the sellers was considerable. More interesting, however, is that the anger over the fee hike uncovered a growing discontent among sellers. Entrepreneurs expressed concern that the company was catering to the professional sellers (e.g., big-ticket electronics vendors and industrial manufacturers) and ignoring smaller home-based sellers who might also be enthusiasts or collectors. Yet it was these faithful enthusiasts who had helped eBay grow during its early years. In addition, sellers began grumbling about issues such as the receipt of automated messages when contacting the company, the lack of shopping carts to enable multiple purchases at the same time, the slowing growth in a market reaching maturity, and the company’s hands-off approach to fraud. They complained that eBay was raising prices without attempting to increase traffic or provide better service. Regardless of whether the fee hikes were warranted, the buzz instigated by the increases was an advantage to eBay’s fledgling competitors. Combined, Overstock, Yahoo, and Bidville have only 3.5 million items listed for sale at any given time. By comparison, eBay’s listings amount to around 50 million items. Thus, even a small piece of eBay’s business would be big business for the newcomers. Although they don’t expect users to defect from eBay entirely, these competitors are hoping that sellers will begin listing merchandise on multiple Web-based auction sites. Company leaders at eBay were uncertain how many of its users were unhappy. Since the company was still growing, they knew that satis- fied users outnumbered dissatisfied ones. Nevertheless, the company’s earnings growth missed Wall Street expectations in the fourth quarter of 2004. Though the shortfall was only one penny, this was the first time in recent memory that eBay had fallen short. The company’s stock, which had soared in 2003 and 2004, lost 19 percent of its value on the earnings news. Had eBay only added salt to the wound by increasing fees and thereby generating more negative publicity for the firm?

SOURCES: Michael Bazeley, “EBay Nation Put to the Test,” San Jose Mercury News, June 20, 2005, K0182; Rachel Konrad, “EBay Losing Allure for Some Entrepreneurs,” Associated Press Financial Wire, June 26, 2005; Verne Kopytoff, “EBay Bids for Harmony,” San Francisco Chronicle, June 23, 2005, C1; Paul J. Lim, “Bidding Adieu to EBay,” U.S. News & World Report, February 28, 2005, 46.

Discussion Questions: 1. How can eBay segment its market? 2. What type of market research does an online auction company need? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 22

Quiz Questions: Multiple Choice 1. A collector wants to buy a grandfather clock online. When he 7. By providing a monthly rate for large-scale sellers and an individ- sits down at his computer, he considers buying from the online ual sale rate for personal sellers, eBay is using a ______auction sites eBay, Overstock, and Yahoo, but does not consider targeting strategy. buying from Bidville. The customer is using: a. undifferentiated a. an evoked set b. concentrated b. a marketing controlled information source c. multisegment c. routine response behavior d. one-to-one d. selective perception e. bimodal e. an aspirational reference group 8. eBay e-mails an online questionnaire to a number of store own- 2. If an eBay customer feels she is paying an unfairly high price for ers and smaller individual sellers in order to investigate its cus- an item listing, she may experience ______and consider tomer’s reactions to the price increases. Many of the individual alternatives, such as selling through one of eBay’s competitors. sellers, who aren’t as concerned about a price increase because a. need recognition they have such a small sales volume, choose not to respond. b. an evoked set However, almost all of the store owners who receive the survey c. cognitive dissonance respond. What type of error has occurred? d. self-actualization a. measurement e. psychographic segmentation b. sampling 3. According to the textbook, how much would eBay now have to c. frame reduce its monthly cost for store owners (from $15.95) for the d. random change to be “just noticeable”? e. incremental a. $1.00 9. A paperweight manufacturer routinely makes sales on eBay. b. $1.60 When the sales manager discovers eBay’s price increase, he c. $2.39 barely gives it a thought before renewing the company’s eBay d. $3.19 account. This company might be called a(n): e. $3.99 a. satisficer 4. A loyal eBay customer one day discovers that Overstock offers b. optimizer comparable services for half the price eBay charges for an online c. original equipment manufacturer listing. With no further information, the customer decides that d. drone eBay must now be offering more advanced services. This is an e. subcontractor example of selective ______. 10. A seller and a buyer who often make transactions through eBay a. exposure decide to change to direct transactions after learning that eBay b. distortion had increased prices. This process is known as: c. retention a. need recognition d. perception b. involvement e. adaptation c. A keiretsu 5. Which of the following could be eBay’s NAICS code? d. reciprocity a. 32871 e. disintermediation b. 56 c. 44 d. 45411 e. 4421941 6. “Entrepreneurs expressed concern that the company was catering to the professional sellers (e.g., big-ticket electronics vendors and industrial manufacturers) and ignoring smaller home-based sellers who might also be enthusiasts or collectors.” If this is the case, what type of marketing segmentation is eBay performing? a. discriminatory b. income c. psychographic d. benefit e. usage-rate MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 23

PART 2 ANALYZING MARKETING OPPORTUNITIES Case St udies

CRITICAL THINKING CASE The Marketing Challenge at Lyon College Lyon College (http://www.lyon.edu) is an independent, residential, coeducational, four-year undergraduate liberal arts college affiliated with the Presbyterian Church. Founded in 1872, it is the oldest independent college in Arkansas operating under its original charter. Situated on 136 acres in the scenic foothills of the Ozark Mountains, the college is located in Batesville, Arkansas. Batesville, which has 9,445 residents, is approximately 90 miles northeast of Little Rock (the state capital) and about 110 miles northwest of Memphis, Tennessee. A 2005 economic impact study conducted by EconImpact showed that Lyon College contributes $41 million annually to the economy of north central Arkansas. This includes $6.4 million in direct spending, $3.9 million in secondary spending, $19.2 million in increased alumni earnings, $10.5 million in social benefits, and $1.2 million in local government benefits. Conferring the bachelor of arts and bachelor of science degrees, Lyon College offers majors in accounting, art, biology, business administration, chemistry, computer science, early childhood/elementary education, economics, English, environmental studies, history, mathematics, music, political science, psychology, religion and philosophy, Spanish, and theater. The college enrolls around 500 students from 20 states and 17 countries. The middle 50 percent of entering freshmen score between 21 and 28 on the American College Test (ACT), and 60 percent rank in the top quartile of their high school graduating class. Faculty members at the college are talented teachers and scholars. Over 90 percent of the full-time faculty hold a Ph.D. or other terminal degree appropriate to their field. In 2005, a Lyon College faculty member was named as Arkansas Professor of the Year. This was the twelfth time in 17 years that a Lyon College professor had received this honor from the Council for Advancement and Support of Education (CASE). This record is unmatched by any other liberal arts college in the country; no other Arkansas institution of higher learning has won more than four times. Lyon regularly ranks among the nation’s best liberal arts colleges in U.S. News & World Report’s annual list of “America’s Best Colleges” (the list includes more than 200 liberal arts colleges that focus almost exclusively on offering bachelor degrees and award at least 50 percent of these degrees in the liberal arts). Heading the U.S. News list are institutions such as Williams College and Amherst College in Massachusetts and Swarthmore College in Pennsylvania. Joining Lyon in the third tier are institutions such as Eckerd College in Florida, Ogelthorpe University and Morehouse College in Georgia, Cornell College in Iowa, and Guilford College in North Carolina. Based on surveys of over 110,000 students at 360 colleges, Lyon was one of 140 schools receiving the “Best in the Southeast” designation from the Princeton Review. The college has developed a long-term strategic plan, “The Strategic Plan for Lyon College: 2005–2010,” that reaffirms its mission to offer a liberal arts education of superior quality in a personalized setting and envisions a time when the school will be recognized as one of the finest liberal arts colleges in the South. For the fall of 2006, the college’s objective was to enroll 160 well-qualified freshman students. The college’s recruiting has traditionally focused on the state of Arkansas and the adjoining six states (Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, and Texas). These seven states were expected to have 485,000 high school graduates in 2006, with 30,000 of them in Arkansas. Of these 30,000 Arkansans, 18,000 were expected to attend college, andapproximately one-half of them were likely to score over 21 on the ACT. Typically, applicants to Lyon College apply to at least four other colleges or universities. Lyon’s in-state public competitors include the University of Arkansas (Fayetteville), the University of Central Arkansas (Conway), and Arkansas State University (Jonesboro). Major private college competitors include Hendrix College (in Conway, Arkansas) and Rhodes College (in Memphis, Tennessee); both are considerably more expensive than Lyon. At $19,990 (tuition, room and board), Lyon is the fourth most expensive college in Arkansas, where the per capita income is $22,000. In choosing a college, high school graduates consider many factors including the college’s size, location, and curriculum, and their own ability or willingness to pay the tuition. One issue the college faces in recruiting students is the interactive aspect of the college choice process. That is, the college knows that it has to target its prospects (future college students), but a multitude of influencers will affect a prospect’s choice (parents, teachers, counselors, friends). Thus, for Lyon to meet its short-term recruitment goal as well as fulfill its longer-term vision, the college must distinguish itself from its competitors while developing lasting relationships with these multiple constituencies.

SOURCES: This case is based on communications with Walter Roettger, President of Lyon College, and approved for publication on December 1, 2005.

Discussion Questions: 1. Describe the consumer decision-making process employed in the college selection process. 2. How could Lyon College segment and reach its potential market(s)? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 2424

Quiz Questions: Multiple Choice 1. Which of the following is the first type of market segmentation 6. If Lyon College decided to spend half of its advertising funds on Lyon College should engage in? graduating seniors who like to go rock climbing, what element of a. geographic successful segmentation would it be violating? b. age a. accessibility c. gender b. substantiality d. ethnic c. viability e. income d. evaluation of alternatives 2. According to the last paragraph of this passage, what is the e. psychographic segmentation most important element of an applicant’s college choice 7. Which of the following is a product class Lyon College might try process? to disassociate itself from? a. the location of the college a. “first tier” liberal arts colleges b. how much the college costs b. influencers, such as parents and teachers c. comparison with other area colleges c. its competitors d. social class d. large state universities e. an external information search e. private high schools 3. In terms of the college choice process, the U.S. News & World 8. Which of the following would NOT be helpful if Lyon College Report is an example of a(n): wanted to determine general opinion of their college among a. opinion leader potential applicants? b. marketing-controlled information source a. a probability sample of the entire population of Arkansas c. reference group b. a nonprobability sample of Missouri high school seniors d. nonmarketing-controlled information source c. a scaled-response questionnaire given to high school e. keiretsu counselors 4. The college choice process involves which type of decision d. secondary data making? e. mall intercept interviews a. routine response behavior 9. Work study, in which students who pay tuition to the college are b. limited paid by the college for their labor, represents what business con- c. extensive cept (if both the college and the individual student are viewed as d. derived businesses)? e. open-ended a. derived demand 5. One year, 30% more of the accepted student pool than is b. a modified rebuy expected decide to attend Lyon College. Lyon College does not c. cannibalization however wish to expand in size. Thus, the next year, it accepts d. disintermediation 30% fewer students than it normally does. The year after, Lyon e. reciprocity College returns to its standard acceptance rate. This is an example of ______demand. a. derived b. inelastic c. fluctuating d. growing e. shrinking MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 2525

PRODUCT CONCEPTS Case St udies

9 CASE ASSIGNMENT: Garage Band Finally, A GarageBand That Really Rocks Steve Jobs’s keynote address at the 2004 MacWorld conference was roundly criticized for being blasé and void of any exciting new developments. It did, however, have one major and perhaps easily overlooked bright spot—the unveiling of the latest version of Apple’s iLife software. The standard suite of iLife products includes the popular and much heralded iTunes music management software, as well as a digital photograph manipulator and organizer called iPhoto, a digital video-editing program named iMovie, and a DVD mastering program called iDVD. The big news at MacWorld was that Apple has added a new program to iLife ’04 called GarageBand. Complete with Garage-Band, iLife ’04 comes free on all new Apple computers and is available as an upgrade to owners of older systems for a mere $49. That $49 buys more than a thousand prerecorded Apple loops (or riffs), over 50 virtual instruments, and a virtual recording engineer (which performs over 200 effects). Put simply, GarageBand helps any aspiring musician or hobbyist compose music, and all of those features turn any owner’s computer into a pretty substantial home recording studio. Whether the musician needs a drumbeat to back up an external electric guitar for a jam session or a full range of orchestral instruments to provide the background to a keyboard solo, GarageBand makes sure that all selected loops come together on time and in key. The user can even manipulate loops to create an entire song without using any instruments at all. The loops are royalty-free, so new songwriters don’t have to worry about paying licensing fees to loop creators if they happen to make the next Hip Hop chart topper. The software provides a synthesizer-like keyboard that displays on the screen for those who wish to play the plethora of virtual instruments via their computer keyboards, but plugging in an external keyboard allows the aspiring or accomplished musician to seriously expand his or her range. Whether the user selects a Stratocaster guitar, a Steinway piano, a pop organ, or a big band bass from the library of virtual instruments, the keyboard assumes its identity. Any notes or chords played on it will produce the exact sounds that would emulate from the original version of the virtual instrument. To the delight of guitar players, GarageBand also offers virtual amplifiers that allow them to extract the sounds of the British invasion, arena rock, or cool jazz from their axes. GarageBand comes with a vast array of effects that composers can apply to their arrangements, too. Loops and any recorded pieces can be faded, reverberated, brightened, echoed, compressed, or tweaked in any number of ways to obtain just the right sound. When masterpieces are finished, GarageBand automatically exports them to iTunes where they are filed in a playlist under the composer’s name. The program also inte- grates new compositions with the rest of the iLife programs so that users can match soundtracks to their slide shows and movies. In fact, the programs are so well integrated that Apple is advertising them as “just like Microsoft Office, for the rest of your life.” GarageBand is the latest push by Jobs and Apple to make its computers the hubs of digital home entertainment centers. Unlike iTunes, GarageBand is compatible only with Apple computers. Jobs is betting that with an active musician in one of every two U.S. households, Garage-Band will draw a virtually untapped market of more than a hundred million amateur musicians to Apple computers. Considering that iTunes’ music store owns 70 percent of the legal music download market and that the iPod is the best-selling digital music playback device, that bet looks like a sound one.

SOURCES: http://www.apple.com; Riva Richmond, “Apple’s New GarageBand Makes Making Music Easy,” Dow Jones Newswires, January 27, 2004; Walter Mossberg, “How to Become a Rock Star: Apple’s Latest Music Offering Lets Closet Crooners Record and Mix Their Own Tunes,” WSJ.com, February 4, 2004; Bob Massey, “Music-Making Made Slick,” Washington Post, January 25, 2004, F07; Jonathan Seff, “Center of Attention—iPod Mini, iLife ‘04 Expand Apple’s Digital Hub,” http://www.macworld.com, March 2004.

Discussion Questions: 1. What type of product is GarageBand? 2. To which of Apple’s product lines does GarageBand belong? 3. Is GarageBand a new product or a modification of an existing product? If it is a modification, what type of modification is it? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 2626

Quiz Questions: Multiple Choice 1. What type of product is GarageBand? 7. Apple is a(n): a. homogeneous shopping product a. private brand b. business product b. generic brand c. unsought product c. company brand d. heterogeneous shopping product d. manufacturer’s brand e. convenience product e. cobrand 2. iLife can be considered a product: 8. The image of the silver or blue apple is Apple’s: a. line a. trademark b. depth b. service mark c. item c. brand mark d. mix d. brand equity e. placement e. generic mark 3. GarageBand is a product: 9. When Apple grouped GarageBand into the iLife product line of a. line software, the company could expect to reap benefits like: b. depth a. niche advertising c. item b. specialized components d. mix c. unique packaging requirements e. placement d. efficient sales and distribution 4. Including GarageBand, iLife product line is how many products e. educating consumers about quality deep? 10. Apple inspires a devout following of customers who demon- a. 1 strate a consistent preference for the brand over all others. b. 2 Therefore, Apple has high: c. 3 a. brand loyalty d. 4 b. global branding e. 5 c. brand equity 5. The addition of GarageBand to iLife constitutes what kind of d. brand name recognition product modification? e. brand weight a. quality b. functional c. aesthetic d. style e. extensive 6. The addition of GarageBand to iLife is best described as: a. product line extension b. product line contraction c. product repositioning d. cobranding e. brand repackaging MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 27

DEVELOPING AND MANAGING PRODUCTS Case St udies

10 CASE ASSIGNMENT: Kandy Kastle Things Are Not What They Seem at the Kandy Kastle Meet Larry Jones, a former toy designer for the likes of Hasbro, Mattel, and Playmates Toys. Displaced when the industry turned to electronic toys, the irrepressible Jones is hard at play designing captivating candy concepts for niche manufacturer Kandy Kastle. He is not a confectioner, nor does he aspire to be one. Instead, Jones tinkers with candy delivery mechanisms and silly, sometimes grotesque names sure to capture the eyes, imaginations and tummies of youngsters. His products belong to the $250 million, nonchocolate segment of the U.S. novelty candy market. It’s the third largest segment of the sweets market, behind chocolate and chewy treats such as gummy candies, licorice, and taffy. The market has been flat in recent years, but several former toy designers and a slew of hobbyist designers are beginning to breathe new life into the industry. Their creations range from the simply fun to the outright goofy, and candymakers pay handsomely in hopes of landing the next big hit. Two of Jones’s latest hits include the Big Barf and the Big Burp. Repulsive though they sound, both are just mouth-shaped, sound-generating dis- pensers for harmless gumballs. Though items like the Big Barf reek of a style unique to Larry Jones, he is just one of a new breed of novelty candy container designers who are hoping to create the next confection legend that might someday be mentioned in the same breath as the almighty Pez. As action figures, toy trains, and other traditional toys are increasingly overshadowed by their digital counterparts, inventors and their employers are betting that products that combine toys with candy curiosities are positioned to capture the dollars left behind by that fading market. Deirdre Gonzalez, vice president of marketing for Cap Candy, says the reinvigorated novelty candy market is “a hybrid business between the two industries.” Often priced from $.99 to $1.29, candy items sold with toy novelties are now attracting dollars that used to be reserved for low-end toy purchases. And the competition is as fierce as children’s tastes are fickle. In addition to Kandy Kastle, companies like Cap Candy and Candy Planet race each other to develop new products, while the likes of Willy Wonka and Jelly Belly battle to promote their lines with tie-ins to blockbuster children’s movies. Even independent entrepreneurs are getting in on the act. Two married couples quit their postal service jobs to form BAAT Enterprises from their names: Bill, Ann, Anna, and Tom, and introduced the Spin Pop, a rotating motorized sucker. A modern take on the Ring Pop, the Spin Pop sold almost 6 million units in under two years. What’s cool with kids is fleeting, though. New products must be developed every month to keep up. Larry Jones, for example, did not rest on the laurels of his gastrointestinal gumball designs. He is also the wiz behind Ear Wax, Big Toe Goo, Tar Pits, Hose Nose, Brain Drain, and glow-in- the-dark Lightning Bugs. “What I’m after is to have the kid have a little bit of magic or a little giggle while eating his candy,” Jones says. Kandy Kastle is relying on him to come up with a host of interesting fare based on the hugely popular Hello Kitty brand, too. Originality is key. The children in this market space, aged 4 to 12 years, are increasingly savvy consumers and they are gaining in influence and even buying power. Influence with parents is crucial, of course, but sway with other kids in the peer group is more critical. Rose Downey, marketing manager at Au’Some Candy Company, puts extra emphasis on word-of-mouth endorsements for her company’s novelty products. “We feel that the right way to grasp the kids’ attention is word-of-mouth advertising,” she says. “Kids trust other kids’ judgment,” she continues. “If Child A buys the product and it tastes great and looks cool and is fun, Child B is going to want the product and so on. Trust the kids. They know best when it comes to candy.”

SOURCES: Neil Parmar, “Idled Toy Inventors Find a Sweet Niche: ‘Novelty’ Candy,” Wall Street Journal, July 21, 2005, B1, B3; “Novelties Engender Avid Fans,” MMR, June 13, 2005, 64; “Timing Is Everything with Licensed Novelty Candy,” Confectioner , March 2005, 32; “Securing Play Value: Novelty/Interactive Candy Isn’t Just Playing Around; It’s Aiming for a More Stable Shelf Spot,” Confectioner,February 2005, 38.

Discussion Questions: 1. To what category of new products does the Spin Pop belong? 2. Based on what you read in the case, what do you think Kandy Kastle’s new product development strategy is? Why do you think the development of the Hello Kitty product line is so important? 3. Visit www.KandyKastle.com and review the product descriptions. Discuss the characteristics that influence their rate of adoption and predict and explain their rates of acceptance and diffusion. 4. In what part of the product life cycle are both the candy and toy categories? What kind of future do you predict for the novelty candy category? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 28

Quiz Questions: True/False 1. Given the importance of new products to Kandy Kastle’s overall 6. When Rose Downey talks about the influence that children have business strategy, it would make sense for Larry Jones to do on each other’s buying habits, she references “Child B”, who test marketing on novelty candy items before widely distributing buys a new type of candy only on the recommendation of them. another child. Child B is most likely a(n): a. True a. innovator b. False b. early adopter c. late innovator Multiple Choice d. laggard 1. If Kandy Kastle were to introduce a new candy in a single city, it e. early buyer would be an example of: 7. BAAT sold 6 million Spin Pops in under two years. The most a. concept testing likely reason for the high rate of acceptance is the product’s: b. test marketing a. compatibility c. simulated market testing b. observability d. commercialization c. relative advantage e. diffusion d. trialability 2. Suppose Kandy Kastle distributed questionnaires asking school- e. All of these characteristics contributed to the Spin Pop’s children whether or not they would eat candy shaped like veg- wide acceptance. etables. This would be an example of: 8. Novelty candy items like Ear Wax, Big Toe Goo, and Nose Hose a. concept testing are best labeled: b. test marketing a. styles c. simulated market testing b. fashions d. commercialization c. fads e. diffusion 9. If Larry Jones asked the children in his neighborhood to design 3. What kind of new product is a Spin Pop? their fantasy candy, he would be in which phase of the new- a. discontinuous innovation product development process? b. new product line a. idea generation c. improvement to an existing product b. idea screening d. repositioned product c. business analysis e. new-to-the-world product d. research & development 4. In what stage of the product life cycle is the candy category? e. testing a. introductory b. growth c. maturity d. decline 5. While developing the Hello Kitty line of candy novelties, Larry Jones is likely to research the demand for other Hello Kitty novelty items and to estimate how many young girls would stop buying Spin Pops and instead start buying new Hello Kitty candy novelties. This describes the ______stage of new-product development. a. business analysis b. idea screening c. concept testing d. market testing e. research & development MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 29

SERVICES AND NONPROFIT ORGANIZATION MARKETING Case St udies

11 CASE ASSIGNMENT: Playbill Cast in the Leading Role, Playbill Shines

Anyone who has ever attended live theater has probably, at some point, flipped through a copy of Playbill. Established in New York City in 1884 as the program of choice for Broadway and off-Broadway theaters, Playbill the company publishes and distributes the near-ubiquitous black and white program with the familiar yellow and black cover to theaters in almost every major and medium-sized city in the United States. Over 3 million theatergoers read the programs every month. Complete with cast rosters and biographies, show synopses, lists of prominent theater sponsors, insider gossip columns, and various feature articles on nationally known actors and theater personalities, Playbill provides its readers with a panoramic view of the performing arts. Playbill distributes its programs free to theaters, which, in turn, give them to show attendees as a complimentary item included with the price of their tickets. Like most magazine publishers, Playbill earns revenue simply by selling the advertising space—a lot of it—within its pages. Thanks to its broad distribution network and its wealth of proprietary and nationally oriented editorial content, Playbill is able to extend its revenue base with a mix of local, regional, and national advertisers. Although the audiences at the many performing arts centers represent a highly coveted and affluent consumer demographic, Playbill’s competition has been limited to one national and several regional program publishers. To establish itself as the lone national brand, Playbill purchased its primary rival, Stagebill, which publishes Performing Arts magazine, in 2002. Though Playbill’s purchase of Stagebill could be interpreted as a move to exert its dominance, closer inspection of the deal and the state of the industry reveals that Playbill was motivated simply by survival. Program publishers suffer from exceptionally low profit margins, and continual pressure to cut costs left Playbill with the ability to supply programs to only a select few of Stagebill’s most lucrative former customers. Though Playbill has eliminated its most serious rival, fallout from the takeover emboldened the theater owners who were left behind. Consequently, demand for locally published programs has increased. Sizable theater consortiums in major markets such as San Francisco, Chicago, Seattle, and Los Angeles now work with local publishers who afford them more editorial control over their programs’ content. To venue owners in those markets, providing locally focused news, information and personal profiles is the key to building audience support for live theater in their particular market. To help offset their publishing costs, some even assume responsibility for selling advertising space in their programs in exchange for a share of the ad revenue they generate. In addition to effectively monopolizing the national market for printed programs, Playbill has further extended its appeal to advertisers by forming the necessary business partnerships to take its product to the airwaves and into cyberspace. Recently, Playbill and Sirius Satellite Radio formed a strategic alliance to provide daily news features, live programming, music, special programming, and information from the world of Broadway for Sirius Radio’s Broadway’s Best channel. In return for the increased brand exposure, Playbill will promote Sirius in printed editions of Playbill and through Playbill On-Line, at Playbill.com. Playbill.com uses a mix of exclusive content, feature articles pulled from the printed Playbill, show schedules, and seating charts for all of Playbill’s partner theaters around the world to generate 20 million hits each month. Playbill has used the Web site to coordinate partnerships with ticket agencies, restaurants, and hotels that offer discounts to the hundreds of thousands of subscribers to Playbill On-Line’s Playbill Club. Consumers can join the club for free, and it offers tremendous exposure for Playbill’s business partners who are able to place their products or services directly in front of individuals with an average yearly income of $80,000. Clearly, Playbill is on solid ground. Nevertheless, it still faces the challenge of finding innovative ways to earn a profit from a product that doesn’t cost its end customers a single cent.

SOURCES: Claudia Peschiutta, “Theatres Scramble to Find New Program Publisher before Fall,” Los Angeles Business Journal, July 29, 2002; Randy Gener, “Get with the (New) Program: There’s Been a Big Shakeup in a Business That Audiences Take for Granted,” American Theatre 20 (January 2003): 20; “Venerable Theater Guide Takes Its Enduring Show on the Road,” PR Week, October 14, 2002, 14; Laura Weinert, “End Program: Will Acquisition of Performing Arts by National Playbill Damage West Coast Arts Coverage?” Back Stage West, July1, 2002, 1; Leonard Jacobs, “Theatre Mag Shake-up: Playbill Buys Stagebill; Show People to Debut,” Back Stage, June 14, 2002, 2.

Discussion Questions: 1. Is Playbill a good, as service, or both? 2. Using the material in learning objective 4 as a template, outline Playbill’s marketing mix. Discuss its product, core and supplementary services, mass customization, service mix, distribution, promotion, and pricing. 3. What role does the alliance with Sirius play in Playbill’s marketing mix? Do you think the alliance will enhance demand for Playbill’s services? Explain? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 30

Quiz Questions: Multiple Choice 1. What is Playbill’s core service? 6. Playbill offers its programs to art venues for free, paying for pro- a. providing the theater playbill duction through advertising income. Playbill’s pricing model is b. broadcasting on Sirius Broadway’s Best channel most likely: c. On-line Playbill Club a. bundled pricing d. offering advertising to local companies b. based on completing a task e. supporting arts programming c. revenue oriented 2. Playbill assembles performance-specific programs that include d. operations oriented cast rosters, show synopsis, lists of prominent sponsors, and e. patronage oriented local reviews and commentary. As such, into which category of 7. Playbill.com provides news and features about Broadway hap- service processes can Playbill be placed? penings in an _____ manner. a. people processing a. direct b. possession processing b. indirect c. mental stimulus processing 8. When theatergoers receive a Playbill program at an art venue, d. information processing Playbill is interacting with the customer: e. supplemental processing a. directly 3. Providing programs to theaters, the On-line Playbill Club, and the b. indirectly Broadway satellite radio channel are all part of Playbill’s: 9. When a theater buff sits at her computer and reads on a. product mix Playbill.com what is happening on Broadway, it is an example of b. service mix the service’s: c. customization strategy a. intangibility d. complementary services b. separability e. core product c. homogeneity 4. Because local and regional theaters began requesting local and d. imperishability regional content in their performance programs, Playbill began e. responsiveness practicing: 10. Playbill has been in business for roughly 125 years, providing all a. regional market standardization manner of theatrical information to patrons of the arts. During b. service standardization its 125 years in business, the company has become the industry c. special service delivery standard for dependable theater programming. This is evidence d. mass customization of the company’s: e. nonprofit service delivery a. tangibles 5. Playbill’s widely recognized program covers designed in yellow b. empathy and black and resembling a theater marquis help the company: c. assurance a. use personal information sources d. reliability b. use business information sources e. responsiveness c. engage in postpurchase communication d. stress intangible cues e. create a strong organizational image MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 31

PART 3 PRODUCT DECISIONS Case St udies

MARKETING MISCUES Manufacturing Defect Results in Quite a Stir for iPod Nano Innovation has been key in Apple Computer’s transition from just a computer company into a consumer electronics company as well. One of Apple’s most prominent consumer electronics product introductions has been the iPod. Though companies such as Dell countered with competing products (e.g., the Dell DJ), the iPod quickly became synonymous with MP3 players. Without a doubt, the iPod has been a runaway success for Apple. With estimated quarterly shipments of almost 7 million iPods, Apple continues to crush competitors. The company recognized that, as with any cool product offering, it had to keep the spotlight on the iPod. To do so, Apple introduced the iPod Nano in the fall of 2005. Considered by some to be the coolest iPod yet, the iPod Nano was a hybrid of the iPod Shuffle, the iPod Mini, and full- sized color iPods. Combining key features from all three products, plus some new features, the iPod Nano brought new meaning to the phrase “thin is in.” With dimensions of 3.5 by 1.6 inches and a back-to-front depth of 0.27 inches, the iPod Nano could fit into a business card wallet. Two models of this pencil-thin player, available in black or white, were introduced. Starting at $199, the 2GB model could hold 500 songs. The 4GB model could hold 1,000 songs and had an expected retail price starting at $249. Accessories for the Nano included lanyard head- phones, an armband, tubes in five colors that looked cool and also served as safety protection, in-ear earphones, a dock, a USB power adapter, and a USB cable. Apple expected the accessories to contribute significantly to its profits from the Nano. The new iPod was introduced with much fanfare, including Steve Jobs literally pulling the iPod Nano out of his pocket. This demonstration of where to carry the iPod Nano may linger in the minds of many purchasers, particularly those who retrieved their new iPod Nanos from their pockets only to find the color display screen scratched so badly that images were distorted. One Nano owner, Matthew Peterson, did something about the problem. Apparently, Peterson had the iPod Nano in his pocket while he was walking, only to have the screen shatter when he sat down—and no, he didn’t sit on it. Peterson took his Nano to the nearest Apple Store for repair or replacement, but the staff at the store declined to replace the broken unit or to admit any responsibility on the part of the company. According to Apple, the damage was not covered under the product warranty. At that point, Peterson felt that his only recourse was to see if there were any other disenchanted iPod Nano customers. So, he created a Web site, http://www.flawedmusicplayer.com, where he posted an autopsy photo of the Nano that showed the damage sustained after only four days of what should have been normal use (at least according to the way Jobs presented the product). The Web site quickly became an online gathering place for dissatisfied iPod Nano customers. Soon, close to 300 threads were posted on the Web site’s discussion board relating stories of damage ranging from severe scratches to shattered LCD screens. Ultimately, the Web site got Apple’s attention (which was Peterson’s mission), and the company began investigating the problem. In the interim, however, customers became even more irate when at least one iPod repair company, overwhelmed by the demand for its services, temporarily raised the price of repairing Nano LCD screens because of limited screen availability. Three weeks after introducing the iPod Nano, Apple took responsibility for the flawed product and offered to replace screens that cracked too easily. The company attempted to downplay what it referred to as a “minor issue” by saying that the defective screens were due to a vendor quality problem that affected less than one-tenth of 1 percent of total iPod Nanos that had been sold. The company insisted that the defects were not a design problem attributable to the size of the iPod Nano.

SOURCES: http://www.apple.com/ipodnano/; Christopher Breen, “Review: iPod Nano,” Playlist Magazine, September 9, 2005, http://wwwplaylistmag.com; Amanda Cantrell, “Mac Sales May Juice Apple’s Earnings,” CNN/Money, October 10, 2005, http://money.cnn.com/; Michael Bazeley, “EBay Nation Put to the Test,” San Jose Mercury News, June 20, 2005, K0182; Michelle Meyers, “Problems Surfacing with iPod Nano Screen,” CNET News, http://www.news.com, September 24, 2005; Greg Sandoval, “Apple: Small Number of iPod Nanos Flawed,” Associated Press, September 28, 2005, http://www.apdigitalnews.com/.

Discussion Questions: 1. Why did it take an international Web site to get Apple’s attention to this matter? 2. Will sales of the Nano be affected by the reports about defective screens? MKTG2_CasesQues_01-66.qxp 7/15/08 12:37 PM Page 32

Quiz Questions: Multiple Choice 1. When the original iPod was introduced to the market, what type 8. Matthew Peterson complained to an Apple customer service of product was it? representative about the damage his iPod Nano sustained. a. unsought Suppose the representative had answered, “It’s not covered by b. convenience warranty; if we cover yours, we’d have to cover everyone else’s, c. business too.” That answer is best described as a lack of which service d. obsolescent quality? e. generic a. reliability 2. Apple sells the iPod Classic, the iPod Nano, the iPod Touch, and b. responsiveness the iPod Shuffle. This product ______has a(n) c. assurance ______of four. d. empathy a. code, extension e. credence b. mix, cycle 9. Given that the original iPod essentially created the digital audio c. line, extension player market (digital audio players existed before the iPod, but d. mix, width only in a limited market), which stage of the product life cycle e. line, depth was the iPod in when a wave of competing products, each 3. When Apple expanded from selling just computers and moved claiming to be an “iPod Killer”, entered the market? into the consumer electronics market, it______. a. introductory a. made a product line extension b. growth b. made a product line contraction c. maturity c. cobranded d. decline d. increased product mix width e. competition e. repositioned 10. Assuming that screen damage was not covered in the iPod 4. The iPod Mini was introduced in February, 2004 but discontinued Nano’s product warranty, which of the following best describes on September 7, 2005, the same day the iPod Nano was intro- the gap in service quality Peterson would have experienced duced. Apple could be accused of which of the following? when the staff at an Apple Store refused to replace his broken a. product modification unit? b. planned obsolescence a. between what customers want and what management c. product line contraction thinks customers want d. individual branding b. between what management thinks customers want the qual- e. heterogeneity ity specifications management develops to provide the service 5. The apple that appears when one turns an iPod on or off is the: c. between the service quality specifications and the service a. brand mark that is actually provided b. trademark d. between what the company provides and what the customer c. brand name is told it provides d. brand label e. between the service that customers receive and the service e. universal product code that they want to receive 6. On the back of an iPod Nano package, you see two statements: (1) “1.5-inch (diagonal) color LCD with LED backlight” and (2) “Now that you can take your music everywhere, there’s no limit to where it will take you.” These statements represent ______and ______labeling, respectively. a. promotional, persuasive b. accurate, exaggerated c. informational, promotional d. persuasive, persuasive e. informational, persuasive 7. From your high school class of 200, 40 people ultimately decided to buy an iPod Nano. Of these, you were the 25th. According to the textbook, which category of adopter would you belong to? a. innovators b. early adopters c. early majority d. late majority e. laggards MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 33

PART 3 PRODUCT DECISIONS Case St udies

CRITICAL THINKING CASE Dallas Mavericks – The Total Entertainment Experience

Mark Cuban, ranked as number 327 on Forbes magazine’s list of the world’s richest people, paid $280 million for a losing product when he bought the Dallas Mavericks in January 2000. At the time, he described the sports franchise as a beaten organization, but one that had a culture of survival. As the new owner, Cuban began immediately to revitalize the product by changing the face of the organization. His objective was to transform Mavericks games into a total entertainment experience that would offer much more than just a basketball game. Internal changes paved the way for enhancing the customer’s experience. Cuban immediately tripled the size of the sales staff. Every sales representative was required to make 100 cold calls per day until games began to sell out. The new mantra was, “Every minute of every day, it’s selling time.” More important, however, was what these sales reps were selling. Cuban told them that they no longer sold basketball—they were selling fun, throats sore from yelling, and hands sore from clapping. Within three years, Mavericks fans had a sense of pride in their team, which had developed into a winning basketball franchise. Once a per- petual loser, the team was winning games, making the playoffs, and boasting franchise-best records. Though the team’s winning record was capturing fans, Cuban knew that he would have to offer a wide array of related products and enhancements if he was to continue to beat out his entertainment competitors in Northeast Texas. The Dallas Mavericks reside in a city with all of the “big four” professional sports teams. In addition to the Mavericks, Dallas is home to the Dallas Cowboys (football), the Dallas Stars (hockey), and the Texas Rangers (baseball). The Mavericks’ entertainment competitors also include the Texas Motor Speedway, Lone Star Park, Dallas Desperados Dancers, and Dallas Burn and Sidekicks soccer teams, as well as countless restaurants, bars, movie theaters, and music venues. Local collegiate sports teams (e.g., Southern Methodist University, the University of North Texas, and the University of Texas at Arlington) also compete for entertainment time and dollars. As a competitor in this vast entertainment marketplace, the Mavericks offered not just a winning team, but a great in-arena experience. The Mavs ManiAACs (men between the ages of 21 and 50) made their dancing debut at the first playoff game in 2001, and fans were entertained regularly by the Mavs Man mascot and the Mavs Dancers. The entertainment experience also included the merchandise sold, the music and videos played, the free entry of painted fans, and the team’s own version of Duke’s Cameron Crazies (allegedly some of the rowdiest, wittiest, and best-organized college basketball fans). The team’s attendance figures testify to Cuban’s ability to create a successful product. Since December 2001, the team has sold out every home game at the American Airlines Center. With this goal accomplished, team management had a new objective: to increase the team’s fan base in the Fort Worth area. Although the Mavericks consider themselves a Metroplex (Dallas-Fort Worth) team, they had not made a concentrated effort to market the team outside the city of Dallas. Demographically, Dallas and Fort Worth are very comparable. Fort Worth is located approximately 30 miles west of Dallas, with two major highways connecting the two cities. Like the Minnesota Timberwolves (Minneapolis and St. Paul) and the Golden State Warriors (Oakland and San Francisco), the Mavericks have easy access to markets in two large cities. The combined population of Dallas and Fort Worth is slightly over 1.7 million (compared to a market of almost 660,000 for the Timberwolves and around 1.2 million for the Warriors). Though Fort Worth does not boast a hometown professional team, the Texas Rangers claim Fort Worth, Dallas, and Arlington as their home- towns. Additionally, Fort Worth has minor league teams such as the Fort Worth Cats baseball team and the Fort Worth Brahmas hockey team. On the collegiate scene, the Horned Frogs of Texas Christian University have become a national phenomenon and draw considerable support. Other entertainment offerings in Fort Worth include Six Flags over Texas, Six Flags Hurricane Harbor, the Fort Worth Stock Show and Rodeo, the Bass Performance Hall, and the Will Rogers Coliseum and Museum district. Despite this competition, Cuban’s goal was to make the Mavericks a hometown brand in Fort Worth by 2005, while continuing to fill their arena to capacity.

SOURCES: Much of this case was prepared by Matt Miller in his case study, “Marketing the Dallas Mavericks to the Fort Worth Community,” Texas Christian University, 2005. See also, “Mark Cuban,” Billboard 2004 Digital Entertainment Conference & Awards, http://www.digitalentertainmentawards .com ; Mark Cuban, “How to Win Fans and Influence People,” Special to SportsNation, January 21, 2003, http://espn.go.com/.

Discussion Questions: 1. What is the product? 2. What does the term brand equity mean in relation to team management’s attempt to expand its fan base but not necessarily sell more game tickets? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 34

Quiz Questions: Multiple Choice 1. In competing against numerous other entertainment venues, 7. The experience of a Mavericks game appeals to consumers’ Mark Cuban is offering a(n) ______product. ______processing. a. better a. people b. specialty b. actualization c. shopping c. mental stimulus d. unsought d. information e. generic e. experience quality 2. Assuming the Mavericks do not currently offer any of the follow- 8. When Mark Cuban added new forms of entertainment (such as ing services, which of the following would NOT increase the the ManiAAC dancers) to Mavericks games, which of the fol- Mavericks’ product mix width? lowing did he create? a. basketball camps for kids a. mass customization b. afternoon games b. supplementary services c. a sports bar c. experience quality d. a playground basketball hoop d. new products e. a satellite radio channel e. complementary positioning 3. Even though the Mavericks already sell out every home game, 9. Mavs Man, the mascot of the Dallas Mavericks, is a(n) Mark Cuban is trying to recruit fans from Fort Worth so that he ______for the Dallas Mavericks’ brand. can increase other sales elements (such as ticket prices and a. product line extension memorabilia sales). Cuban’s efforts in Fort Worth represent an b. convenience product effort to increase brand: c. organizational image a. width d. persuasive label b. extension e. tangible cue c. recognition 10. The Mavs ManiAACs dancers give a performance at a Mavericks d. intangibility game that seems unsynchronized and clumsy. Which of the of e. equity the following best describes the gap in service quality that 4. Mavericks jerseys and practice shorts are manufactured by needs to be remedied? sports-clothing companies (such as Reebok and In Zone Athletic a. between what customers actually want and what manage- Wear) and sold with the logos of both the Mavericks and the ment thinks they want clothing company. This is an example of: b. between what management thinks customers want and the a. family branding quality specifications it develops to provide the service b. complementary branding c. between the service quality specifications and the service c. cobranding that is actually provided d. ingredient branding d. between what the company provides and what the customer e. simultaneous product development is told it provides 5. Fans with painted faces can attend Mavericks games for free e. between the service that customers receive and the service because these fans enhance the entertainment experience in they want to receive the arena. The enjoyment produced from seeing the painted fans is uniquely associated with attending Mavericks games and so demonstrates what element of services? a. experience quality b. inseparability c. intangibility d. credence quality e. perishability 6. If Mark Cuban determines that a series of home games against the struggling Charlotte Bobcats is not likely to sell out, what principle might encourage him to lower ticket prices for the series? a. inseparability b. intangibility c. perishability d. heterogeneity e. empathy MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 35

MARKETING CHANNELS AND SUPPLY CHAIN MANAGEMENT Case St udies

12 CASE ASSIGNMENT: Current TV Current TV Plugs into the ‘Net Generation Ten years ago, the Internet began a revolution that has forever changed the way consumers shop for goods, send and receive mail, find and read news, and acquire and listen to music. A relatively new electronic distribution channel, the Web enables billions of near-instantaneous commercial, consumer, and information exchanges each day. And with the wide- spread dispersion of increasingly powerful and portable digital technologies, marketers are witnessing a new phenomenon– consumers devoting considerable time to archiving and sharing the personal events of their lives. Tech-savvy members of Generations X and Y are photographing, recording, cataloging, uploading, blogging, hyperlinking, downloading, and sharing peer-to-peer files at an accelerating pace. Moreover, the independent Web sites where those opinions, files, and reports are located are becoming an increasingly valid means of staying connected with the world. Quite simply, this phenomenon is turning traditional media channels on their collective ear. Few companies really comprehend that the digital technologies driving homemade reporting and entertainment productions are simultaneously increasing demand for them. One company that understands, and even anticipated, this trend is start-up cable channel Current TV. Cofounded, chaired, and led by the vision of former vice president Al Gore, Current predicted the relevance of do-it-yourself (DIY) media some time ago. Gore’s objective, as stated on Current TV’s Web site, is to democratize the production, distribution, and consumption of television. Years ago Gore recognized that the proliferation of affordable digital t echnology would make it possible to create “a powerful new brand of television that doesn’t treat audiences as merely viewers, but as collaborators.” And those collaborations, fueled by viewer-created content (VCC), are powering the DIY media boom. Shari Anne Brill, vice president and director of programming at the Carat Group, an independent media agency, predicts that “Current will appeal to a much younger-skewing and very unique audience. It opens up tremendous avenues between Internet and television, and it’s a very interesting way to reach out to viewers who want to participate in the viewing experience.” Current TV’s Web site already hosts a menu of more than 50 “pods” containing program lists chosen for their appeal to independent spirits who have grown disenchanted with the staid format of mainstream television. Recent feature programs on Current TV have included a piece on a man who spends his free time jumping from cliffs and bridges, a first-person perspective on the rescue efforts in the aftermath of Hurricane Katrina, and an in-depth report on a San Francisco rock band produced by a local college student. Most programs relate to current affairs, but other topics routinely covered include lifestyle themes such as art, fashion, culture, the environment, music, language, relationships, careers, travel, movies, and more. Regardless of subject, all Current TV programming has an intimate and unpretentious feel. Ever mindful of past pitfalls, Current is adamant that it will not devolve into a twenty-first-century version of the public access fiascoes that gave VCC a bad name many years ago. In an effort to protect program quality, only one-third of Current’s programming is viewer created, but the company doesn’t think that will dissuade viewers as long as its professionally produced work has credibility, relevance and appeal. The viewer-submitted content that is aired is also paid for, though it is repeated quite a bit, and watchers have the ability to vote for shows at Current TV’s Web site. What would enable Current to run more VCC? The answer, in a word, is access. At this time, Current distributes its programming to only 20 million residences in select metropolitan areas via Comcast, DIRECTV, and Time Warner. It lacks support from the major cable and satellite companies that, together, feed popular stations to around 80 million homes. Current needs access to viewers in order to appeal to their creative alter egos and fuel the DIY cycle. In an age when countless business models have seen explosive growth followed by a dramatic collapse, Current’s approach and situation look promising. Its concept has recently been validated by MTV’s purchase of independent, Web-based VCC site iFilm.com. MTV Networks Music Group president, Brian Graden, says that VCC “is obviously the next wave, and the purchase by Viacom of iFilm is probably the strongest statement that we’re very much on to that. The more control you put of everything into the viewers’ hands in this sort of multiplatform, on- demand age, that’s the only way you’re going to win.”

SOURCES: Christopher Lawton, “Made-by-Viewers TV,” Wall Street Journal, December 13, 2005, B1, B2; Steve Tomich, “Current TV: Think Outside, Get Inside the Box—Taking the Leap with a ‘New TV’ Network,” Digital Video Magazine, January 1, 2006, 38; James Hibberd, “Progress Report: The New Nets; T hree Rookies, All with Major Backers, Devise Strategies That Help Them Overcome the Odds and Find Their Place,” Television Week, November 14, 2005, 26; Paul Gogh, “Gore: Current TV Aims for the Masses,” Hollywood Reporter, October 10, 2005, 6

Discussion Questions: 1. Explain Current TV’s channel strategy. What factors influence it the most? Why? 2. Describe Current TV’s channel arrangement. What role do the intermediaries play? What potential conflicts would you predict for Current? 3. Who are Current’s channel partners? What do you think it will take to sustain those relationships? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 36

Quiz Questions: True/False

1. Current uses a dual distribution strategy. 6. Current TV’s selection of viewer-created content is analogous to: a. True b. False a. Procter & Gamble’s innovation labs b. Wal-Mart’s product inventory Multiple Choice c. T-Mobile’s service contracts 1. Using the Internet for media communication allows Current TV d. Ford’s dealership network to instantly overcome: e. Century 21’s sales contracts a. discrepancy of quantity 7. In 2006, Warner Brothers (division of Time Warner) signed an b. discrepancy of assortment agreement to distribute movies and TV shows online via Guba c. temporal discrepancy LLC’s search engine and video-sharing community, Guba.com. d. spatial discrepancy Given Current TV’s relationship with Time Warner Cable, this e. horizontal conflicts new agreement could be an example of: 2. The intermediaries in Current TV’s channel structure are: a. horizontal conflict a. networks b. vertical conflict b. show producers c. channel cooperation c. viewers 8. Current TV’s business model suggests that the company views d. satellite companies its channel partnering as more ______based. e. All of these are intermediaries for Current TV. a. transaction 3. Which best describes Current TV’s distribution intensity? b. customer a. exclusive c. supplier b. inclusive d. shareholder c. intensive e. partnership d. selective e. fractional 4. In the relationship between Current TV and its distributors, who is the channel captain? a. Current TV b. the distributors 5. Limelight provides Current TV access to what it calls its big fat content delivery network (cdn) that Current TV uses to serve its video material online. Limelight Network and Current TV have: a. a strategic channel alliance b. overcome spatial discrepancy c. created a dual distribution channel d. outsourced logistics e. created an agent/broker channel MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 37

RETAILING Case St udies

13 CASE ASSIGNMENT: Best Buy Thousands of Possibilities. Get Yours. The promise of the long-awaited digital revolution has finally been fulfilled. Flat-panel televisions, MP3 players, wireless laptops, cell phones with Internet browsing capability, wirelessly networked computing devices for the home, digitally controlled home appliances, and more are no longer the toys of a future generation. They are here today, and Best Buy wants to sell them—all of them—to anyone with the money to burn on such luxury items. In addition to all the gee- whiz electronic merchandise, the company still sells coffee makers, vacuum cleaners, and washing machines, albeit slightly more expensive ones than before. The new digital gadgets, however, are fast crossing the threshold from expensive luxury items to affordable common electronics. The upside is that more customers are able to buy such products; the downside is the negative pressure put on prices and revenues. If any retailer can find a way to survive and turn a profit in the fiercely competitive electronics and home appliance industry, it’s Best Buy. Twenty years ago, when it operated under the name Sound of Music, a tornado ripped through its flagship store, and the company held a “best buy” sale to liquidate its merchandise and cover the costs of repairs. The success of the sale was the impetus for the name change to Best Buy, and the opening of its first superstore in 1984 marked the beginning of “big box” retailing as it is known today. Nine years later, the new look national chain surpassed Circuit City as the number one retailer in the segment. Best Buy’s stores offer a dizzying array of products (its stores have nearly 25,000 separate items) at affordable prices. Usually located in a small- or medium-sized outdoor shopping centers with other “big box” retailers, an average 40,000-square-foot Best Buy store is large enough to hold ample stock of all available items while still comfortably accommodating customers. Bright lights, concrete floors, wide and easily navigated aisles, oversize shopping carts, and a helpful but unobtrusive staff dressed in blue shirts and khaki pants have put Best Buy at the head of the retail class when it comes to customer satisfaction surveys. Best Buy’s television commercials, which feature the tag line, “Thousands of Possibilities. Get Yours,” communicate an accurate picture of the customer experience. Inside every Best Buy store, a canned deejay plays the latest popular music over the public address system; recently released DVDs play on big-screen TVs; and personal computers, video game modules, home stereo systems, and more are turned on and available for customers to tinker with. The ability to connect with its customers has brought Best Buy a 16 percent share of the $130 billion North American market for electronics and related devices. It now operates 600 stores in the United States and plans to open 60 or so new stores each year for the near future. Competition, however, is stiffening. Best Buy’s main threat now comes from discount superstore Wal-Mart, whose share of the market has climbed rapidly to just 5 percentage points behind Best Buy’s. That development, combined with a downward pressure on prices for electronic devices similar to the pressures in the PC industry, has forced Best Buy to explore new and more profitable ways of meeting the needs of the market. The firm’s latest initiatives include selling more upscale and higher margin merchandise, hiring highly trained sales “consultants” to assist with more complex and expensive purchases, staying open for longer hours on weekends, outsourcing lower end items to China, and selling installation and connection services for its products. Those who prefer to shop in their pajamas can check out the possibilities online at BestBuy.com. Best Buy is also selling home entertainment packages direct to upscale homebuilders in cities such as Minneapolis, Dallas, and Las Vegas. For a nominal surcharge as low as $1,000, Best Buy will install, connect, and integrate the system while the house is being con- structed, leaving the home’s new owner to sit back and enjoy the show.

SOURCES: http://www.bestbuy.com; Mark Tatge, “Fun and Games,” Forbes, January 12, 2004, 138; Scott Carlson, “Best Buy Extends Weekend Store Hours,” Saint Paul Pioneer Press, February 17, 2004; Scott Carlson, “Best Buy, Target Stores Score High in Consumer-Approval Survey,” Saint Paul Pioneer Press, January 30, 2004; Laura Heller, “Connected Life Blooms in the Desert,” DSN Retailing News, February 9, 2004, 188.

Discussion Questions: 1. What type of retailer is Best Buy? 2. Describe the six components of Best Buy’s retailing mix. Is there anything you would change? Explain. 3. Do you agree with the strategy Best Buy has adopted to respond to its competition? Why or why not? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 38

Quiz Questions: True/False

1. Like all retailers, Best Buy markets only to consumers. 6. Recently, incursions by Wal-Mart into the market previously a. True dominated by Best Buy is prompting Best Buy to revamp which b. False part of its retailing strategy? 2. Best Buy sells electronics in a warehouse-club format. a. product assortment a. True b. place b. False c. presentation 3. The biggest threat to Best Buy’s retailing strategy comes from d. price small specialty retailers with exclusive products. e. promotion a. True 7. When a tornado ripped through the original Sound of Music b. False store and managers rolled out a “best buy” sale to liquidate 4. Even though Best Buy sells appliances, electronics, and music, merchandise and cover the cost of repairs, what part of Sound the company is not using scrambled merchandising. of Music’s retailing strategy was involved? a. True a. margin b. False b. place c. personnel Multiple Choice d. promotion 1. In retailing terms, Best Buy is best described as a(n): e. presentation a. electronics supercenter 8. The success of the liquidation sale prompted the company to b. department store permanently change which elements of its retailing strategy? c. off-price retailer a. personnel and presentation d. category killer b. personnel and product e. full-line discounter c. presentation and price 2. Best Buy’s product assortment is: d. personnel and promotion a. broad e. promotion and place b. medium to broad 9. The 25,000 items stocked by the average Best Buy store are its: c. medium a. margin d. medium to narrow b. assortment e. narrow c. liability 3. Best Buy is a(n): d. inventory turnover a. independent retailer e. merchandise type and density b. trade name franchise 10. Which statement best relates to the atmosphere at Best Buy? c. chain store a. Sales associates wear blue shirts and khaki pants. d. licensed store b. Each store stocks 25,000 products. e. business-format franchise c. Best Buy stores are destination stores. 4. Because it sells products through its Web site, d. The company uses disc jockeys to create canned music that www.bestbuy.com, Best Buy can also be considered a(n): is broadcast in the store. a. direct marketer e. Best Buy has high margins. b. home shopping portal c. targeted retailer d. mail-order retailer e. direct retailer 5. The concrete floors, bright lights, wide and easily navigated aisles, and oversized shopping carts all combine to create Best Buy’s unique: a. selling proposition b. retailing personality c. retailing strategy d. store density e. atmosphere MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 39

PART 4 DISTRIBUTION DECISIONS Case St udies

MARKETING MISCUES Retail Embargo of Harry Potter Book Violated

The sixth title in the magical tales of Harry Potter, Harry Potter and the Half-Blood Prince, was released on July 16, 2005, and quickly sold 10.8 million copies. This was a world record for the first printing of a book, but the records it broke were set by earlier books in the Harry Potter series. The fourth title, Harry Potter and the Goblet of Fire, was hailed as the “fastest-selling book in history” when it sold 3 million copies in the first 48 hours after its release in July 2000. Three years later, Harry Potter and the Order of the Phoenix took over the record. Only eight years after the publication of the first book in the series, Harry Potter and the Sorcerer’s Stone, the Harry Potter series has sold over a quarter of a billion copies, and the books have been translated into 61 languages and are distributed in more than 200 countries. Like the other books in the series, the sixth title was introduced with much fanfare and secrecy. Author J. K. Rowling wants readers to be the first to know a book’s contents. Therefore, there are no published previews of a new book, so the media cannot leak any secrets and steal its thunder. Naturally, such secrecy increases the hype about the book. Harry Potter followers gather to wait in long lines for the 12:01 A.M. opening of bookstores on the release date. On Thursday, July 7, 2005, however, an employee at the Real Canadian Superstore in Coquitlam, British Columbia, sold 14 copies of the new book, nine days before the scheduled release. The employee, apparently not a Harry Potter fan, did not know about the sales embargo and sold the books by mistake. Scholastic, a global publishing and media giant, is the American publisher of the Harry Potter series. With revenues of over $2 billion, this publisher of children’s material reaches a market of over 35 million children and 40 million parents. Though the company publishes over 750 new books annually, the release of a new Harry Potter book has a significant impact on both the company’s image and its bottom line. Scholastic says that it ships the books in steel container trucks that require retailers to use bolt cutters to open containers just before midnight at the time of the planned release. The Real Canadian Superstore, which sold the early copies, received its books from Raincoast Books, Ltd., the distributor of the Harry Potter books in Canada. Raincoast learned of the illegal early sales when a customer, interested in preserving Harry mania, informed Raincoast that he had purchased a copy of the book from the superstore. Raincoast acted quickly and obtained an injunction from the British Columbia Supreme Court that forbade the purchasers from copying or disclosing any part of the book prior to 12:01 A.M. on July 16. In addition, Raincoast attempted to entice the purchasers of the 14 books to temporarily return their books by offering them Harry Potter memorabilia, including a J. K. Rowling autographed book plate. This was not the first time Harry Potter’s publishers had gone to court to preserve the mystique surrounding the books. A similar situation occurred with the fifth book, when a bookstore clerk who claimed he was unaware of the restriction sold copies that led one newspaper to plan an early review of the book. Thus, the 2005 injunction in British Columbia included a provision prohibiting the media from publishing advance reviews or articles discussing specific aspects of the book’s plot or characters. Although the early sales of the 14 books were clearly just a mistake by the superstore, some wondered whether the injunction actually created even more hype about the upcoming book release. The distribution mistake ultimately led to increased publicity for Harry Potter and the Half-Blood Prince.

SOURCES: http://www.raincoast.com; http://www.scholastic.com; http://www.wikipedia.com; Nicholas Reed, “Harry Potter and the Vanishing Volume,” Vancouver Sun, July 12, 2005, A1; Tabassum Siddiqui, “Potter Purchases Bound to Secrecy,” Toronto Star, July 12, 2005, A01.

Discussion Questions: 1. What is the distributor’s role in creating and maintaining Harry mania? 2. Identify major players in the distribution of Harry Potter books. MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 40

Quiz Questions: Multiple Choice 1. Books need distributors like Raincoast Books, Ltd., to overcome 7. If Raincoast Books, Ltd., sued The Real Canadian Superstore for which of the following? breaching the sales embargo, it would be an example of which a. discrepancy of quantity of the following? b. spatial discrepancy a. horizontal conflict c. channel conflict b. vertical conflict d. scrambled merchandising c. a discrepancy of quantity e. geographic segmentation d. outsourcing 2. If all the copies of Harry Potter and the Half-Blood Prince had e. channel partnering sold out at a large bookstore, forcing customers to wait another 8. Unlike the Real Canadian Superstore, bookstores, where most week until a second shipment of the book arrived, which of the Harry Potter books are sold, are all ______. following would have occurred? a. independent retailers a. discrepancy of quantity b. chain stores b. temporal discrepancy c. franchises c. horizontal conflict d. specialty stores d. vertical conflict e. specialty discount stores e. scrambled merchandising 9. Almost all bookstores, from small, independent retailers to large 3. What is the primary marketing channel function performed by chain stores, offer a small product ______, but a large distributor Raincoast Books, Ltd.,? product ______. a. transactional a. depth, width b. facilitating b. width, depth c. logistical c. inventory, offering d. spatial d. offering, inventory e. risk taking e. depth, offering 4. The fact that Harry Potter and the Half-Blood Prince could be 10. Part of the expected hype surrounding the release of a new book bought at supermarkets and entertainment stores, not just at in Rowling’s Harry Potter series includes Hogwarts- and wizard- bookstores, suggests that Scholastic engaged in what type of themed parties hosted by booksellers in the hours leading up the distribution? midnight start time for selling. Typically, children and young a. selective adults can participate in games and activities; stores are deco- b. exclusive rated with a Harry Potter theme; and there are contests and c. intensive drawings with small prizes. These events are most closely d. non-traditional related to: e. agent/broker a. M commerce 5. According to the article, the Real Canadian Superstore sold 14 b. direct selling Harry Potte r books early as a result of an error in which of the c. interactivity following? d. direct channels a. distribution resource planning e. channel partnering b. materials-handling system c. inventory control system d. order processing system e. the employee’s personal knowledge 6. If Scholastic hired Werner Enterprises, an interstate trucking company, to transport the entire first printing of Harry Potter and the Half-Blood Prince across the country to Scholastic-owned warehouses, this would be an example of which of the following? a. outsourcing b. a wholesaler channel c. an agent/broker channel d. exclusive distribution e. a direct channel MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 41

PART 4 DISTRIBUTION DECISIONS Case St udies

CRITICAL THINKING CASE Whole Foods Thrives in a Declining Marketplace In a marketplace in where businesses are experiencing flat to declining growth, Whole Foods Market is gaining in share of wallet. Not only is the food chain profiting in grocery retailing, one of the toughest businesses in the world, but the company’s goal is to more than double its sales to $10 billion by 2010. Whole Foods is challenging both the way supermarkets do business and the way consumers shop for food. Americans spend $430 billion a year on food at approximately 34,000 supermarkets. Yet the typical grocery retailer makes only one cent on every dollar spent in the store. This low margin is the impetus behind vendor allowances and slotting fees (fees paid by food producers to have a supermarket carry their products), which netted grocery stores close to $100 billion in 2003. Whole Foods refuses to take slotting fees, however, and accepted only about $1 million in other inducements in 2004. The company’s niche is in organic foods that carry a price premium of 40 to 175 percent over regular goods—a niche market that provides Whole Foods with a profit margin that is triple the industry standard and sales per square foot of $800, double the industry standard. In the mid-1950s, consumers were spending 17 percent of their total income on groceries. By 2005, however, consumers were spending only 6 percent of their total income on groceries. Major supermarket chains were experiencing shrinking profits or losses. Considering that 2004 profits fell nearly 30 percent at Safeway and 6 percent at Albertson’s, while A&P, Pathmark, and Winn-Dixie experienced almost $200 million in losses, can Whole Foods attain its sales goal by 2010? Just as important, how has this grocery retailer managed to increase its net income by 32 percent when other supermarket chains are experiencing shrinking profits or losses? Whole Foods Market started in 1987 as a health food store in Austin, Texas. The company went public in 1992, and by the beginning of 2005 it had 166 stores (157 in the United States, 7 in Britain, and 2 in Canada) and 60 more stores under development in the three countries. Though the company ranks only twenty-first in grocery retailing sales, it ranks fourth in both profits and in total stock market value among publicly held grocery store chains. Whole Foods was ranked 479 in Fortune magazine’s list of the 500 largest publicly traded U.S. companies. Whole Foods’ quality standards are what sets Whole Foods apart from traditional grocery retailers. With just over 12,000 organic farms in the United States, the farmers have few opportunities to use economies of scale to reduce costs. Additionally, organic farming is much more labor-intensive than conventional farming. Whole Foods passes these higher costs on to the consumer and does not attempt to compete on price. Thus, Whole Foods customers are ensured a high-quality offering and are willing to pay a higher price for that quality. To reach its sales objective for 2010, Whole Foods is making food shopping an entertainment experience. The company intends to expand its customer base by making the shopping experience fun—one Whole Foods executive refers to its stores as food amusement parks. The company has already begun implementing its food entertainment strategy. Early in 2005, an 80,000-square-foot store opened in the company’s hometown of Austin, Texas. Consumers can stroll the aisles with a glass of wine and watch the store’s seafood team lob salmon back and forth, its pastry chefs roll dough, and its chefs prepare food for immediate (or later) consumption. Consumers can even become part of the ensemble by grinding their own flour or partaking in exchanges about the culinary arts. If the entertainment experience becomes too exhausting, the customer can take a break and get a massage (in the store, of course). Whole Foods stores in Atlanta, Georgia either already have or are planning a chocolate fountain (with free samples), wine-tasting stations, a wine and cheese island, a caviar and champagne station, and a grilling station with open flame to appeal to the southern love for brisket and ribs. For impatient New Yorkers, a Whole Foods store in New York City installed 26 cash registers and a line director to speed the checkout process. The company has decided that the grocery consumers of the future will want either the cheapest groceries in town or the best groceries in town. Whole Foods wants to provide the best.

SOURCES: Amy Culbertson, “The Aisles Have It!” Fort Worth Star-Telegram, March 19, 2005, K4065; Natalie Gott, “Whole Foods Offers New Ingredient to Grocery Shopping—Fun,” Miami Herald, May 22, 2005, http://www.herald.com; Seth Lubove, “Food Porn,” Forbes, February 14, 2005, 102; Chris Price, “Prices Don’t Stop Whole Foods Shoppers in New Orleans,” New Orleans City Business, February14, 2005, http://www.neworleanscitybusiness.com; Christine VanDusen, “A Whole New Kind of Grocery Store,” Atlanta Journal-Constitution,April 17, 2005, 1F.

Discussion Questions: 1. Describe niche marketing as it pertains to Whole Foods and grocery retailing. 2. Compare the characteristics of Whole Foods with those of traditional grocery retailers. MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 42

Quiz Questions: Multiple Choice 1. A farm in California sells artichokes to Whole Foods, but does 6. According to the textbook, which of the following modes of not ship the artichokes across country. Instead, it transports the transportation would be the best for Whole Foods to use if it artichokes to the Fresno Whole Foods Market and leaves further needs to ship avocados from California to its Atlanta store distribution to Whole Foods. This is an example of which of the before they rot? following? a. pipe a. dual distribution b. truck b. a nontraditional channel c. rail c. a wholesaler channel d. air d. a strategic channel alliance e. water e. intensive distribution 7. Whole Foods Market is a(n): 2. If a local farmer sells her strawberries directly to a Whole Foods a. independent retailer store, which type of channel structure is in place? b. department store a. direct c. supermarket b. retailer d. full-line discount store c. wholesaler e. specialty discount store d. local 8. The executive who refers to Whole Foods stores as “food e. efficient amusement parks” is focusing on which of the following ele- 3. An organic dairy farm decides to sell only to natural-foods stores ments of the retailing mix? such as Whole Foods, Wild Oats, and local health-food stores. a. personnel The dairy farm is practicing ______. b. product a. exclusive distribution c. promotion b. selective distribution d. entertainment c. merchant wholesaling e. presentation d. nontraditional distribution 9. It is safe to assume that, compared to its competitors, Whole e. channel control Foods’ gross margin is: 4. Which of the following might enable a Whole Foods store to a. higher limit the amount of rotten produce it must discard while also b. comparable ensuring that produce shelves are never empty? c. the industry standard a. just-in-time production d. moderate b. contact efficiency e. low c. selective distribution 10. If Whole Foods decided it wanted to begin franchising as a way d. mass customization to increase the number of stores in North America, the company e. distribution resource planning would most likely engage in which type? 5. At a Whole Foods deli, employees make sub sandwiches only a. product when a customer orders a sandwich. The customer is asked to b. trade name choose from a selection of meats, breads, and condiments. This c. business format is an example of which of the following? d. joint venture a. just-in-time production e. contracted service b. mass customization c. channel cooperation d. a discrepancy of assortment e. dual distribution MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 43

INTEGRATED MARKETING COMMUNICATIONS Case St udies

14 CASE ASSIGNMENT: Wicked Wicked Awesome! Musical Enchants Record Crowds

When the curtains first lifted on the Broadway musical Wicked, it appeared that audiences had been scared away from the box office. The Gershwin Theatre was rarely full and a production that had cost over $14 million to make posted advance ticket sales of only $9 million. Crippled by cost overruns, cast changes, song rewriting, and a 2003 start date that was much later than projected, excitement and enthusiasm waned for what was once a much-anticipated show. Based on Gregory Maguire’s best-selling 1995 novel of the same name, the story is a prequel to Frank Baum’s 1939 classic, The Wizard of Oz. The musical examines the lives of two teenage witches, Glinda and Elephaba, and wonders which one is truly evil. Glinda, a beautiful, ambitious, and popular blond, grows up to become the Good Witch; Elephaba, a green-skinned, intelligent, free-spirited rebel, develops into the nefarious Wicked Witch of the West. Elaborate sets, lighting, and costumes and a score by Academy Award-winning songwriter Stephen Schwartz did not impress the New York Times, however. Its scathing review claimed, “There’s trouble in Emerald City . . . [it’s] a sermon of a musical.” Unfazed, Wicked producer Marc Platt, a former Universal Pictures executive, never lost faith in his production. He remained convinced that if he could just get people in the door, they would leave completely captivated by what he considered a truly exceptional experience. So, he cut ticket prices by 30 percent and watched as patrons began to make repeat ticket purchases during intermission. After the shows, swarms of enthralled teenage girls began to gather outside the stage door in hopes of meeting the cast. As the target market emerged before his eyes, Platt leveraged his Hollywood experience to turn Wicked into a musical marketing machine. The hot ticket sales during show intermissions indicated that the show’s success would hinge on word-of-mouth referrals from the show’s core audience—teenage girls. To get more of them talking, Platt and the marketing team published feature articles on the show’s Web site and seeded Internet chat rooms with Wicked related topics. An all-out promotions blitz ensued. Wicked lined up character endorsement deals with makeup manufacturer, Stila, and sent hot new stars Kristen Chenoweth and Idina Menzel to Sephora stores to give makeovers to teen fans with Glinda facial glitter and Elephaba lipstick. In an interesting twist on American Idol, Wicked karaoke contests at malls served as fake auditions that awarded real tickets to the most passionate fans. Radio promos in New York and Chicago were supported by advertising at Macy’s and in Elle Girl magazine for a Halloween campaign that lasted a month. As the show became profitable, two U.S. tours were launched. The shows routinely sell out, and yearly revenues are now close to $200 million. Tickets to the shows on Broadway now command a record-tying $110, and the show’s take is about $1.3 million a week in New York alone. Mike Isaacson, vice president of the Fox Theatre in St. Louis, sold an amazing $1.5 million of tickets a mere 48 hours after they went on sale. “This show is a rocket because it’s attracting people from teenagers to grandparents,” he mused. Day-of-show raffles for tickets at sold-out venues give a few lucky patrons a chance to buy $25 tickets. Those raffles generally appeal to younger theatergoers, but those witch-wannabes bring mom and dad out for the night of mischief too. And their dollars help fund purchases of merchandise at the traveling OzDust Boutiques. Items like Wicked -branded golf balls, T-shirts, necklaces, and CDs of the show’s musical numbers sell at the stands and at http://www.wickedthemusical.com. Sales generate weekly merchandise receipts of more than $300,000. But that doesn’t surprise Marc Platt. Reflecting on the show’s universal premise, he quips “There’s a little green girl inside all of us.”

SOURCES: Brooks Barnes, “How ‘Wicked’ Cast Its Spell,” Wall Street Journal, October 22, 2005, A1, A4; http://www.wickedthemusical.com; http://broadwayworld.com.

Discussion Questions: 1. Identify and describe the elements of Wicked’s promotional mix. 2. Describe how the AIDA process worked for various Wicked promotions. Which one do you think was most effective? 3. Did Wicked use a push or a pull promotions strategy? Explain. 4. As Wicked progresses through its life cycle, what changes would you recommend making to the current promotional mix? Why? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 44

Quiz Questions: True/False

1. Because Wicked is a play, it is marketed best by personal selling. 6. Wicked’s character endorsements—during which the actors a. True offer makeovers to teenage fans—fall under which step in the b. False AIDA concept? a. attention Multiple Choice b. initiative 1. Wicked’s day-of-show raffles for cheap tickets are a form of: c. interest a. publicity d. desire b. advertising e. action c. competitive advantage 7. The show’s marketing strategy is best described as a ______d. sales promotion because producers are trying to create consumer demand to see e. personal selling their show. 2. The show’s radio promotions and magazine advertisements are a. pull strategy an example of: b. push strategy a. noise c. reflex strategy b. mass communication d. mass communication c. interpersonal communication e. sales promotion d. sales promotion 8. Keeping Wicked’s advertising messages similar across maga- e. competitive advantage zines, radio, and Web sites is an illustration of: 3. Advertisements for the musical placed in radio and magazines a. promotional mixing served as ______for the producers’ marketing message. b. integrated marketing communications a. senders c. target marketing b. noise d. media promotion c. channels e. advertising organization d. receivers 9. Wicked is in which stage of the product life cycle? e. decoders a. introduction 4. Establishing Internet chat rooms with Wicked -related topics b. growth allowed marketers to collect: c. maturity a. decoded information d. decline b. receivers e. death c. advertising d. senders e. feedback 5. What role in the communication process was Platt fulfilling when he noticed that Wicked was especially popular with teenage girls? a. receiver b. encoder c. decoder d. sender e. promoter MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 45

ADVERTISING AND PUBLIC RELATIONS Case St udies

15 CASE ASSIGNMENT: MySpace Racy Place MySpace Makes Big-Time Advertisers Wary Suddenly, on the Internet, it’s 1999. But instead of Hotmail, Yahoo, or ICQ, its social networking site MySpace.com that is attracting Web surfers at a blistering pace. More than 80,000 visitors are registering every day at a Web site that attracted its first 60 million registered users in under 30 months. Already laying claim to about half the reach that monster players Yahoo! and Google enjoy, MySpace typically draws over 20 million unique visitors each month. And, by the time you read this, all of these statistics will probably have been easily surpassed, given the site’s incomprehensible growth rate. As Internet success stories go, the MySpace phenomenon is nothing short of spectacular. Rupert Murdoch’s News, Inc., bought the site from parent company Intermix Media in 2005 for $580 million, but many observers think that was about one-fourth of what the site could have sold for had the board and the lead investors not rushed into the deal. What reminds industry observers of 1999 though is that MySpace is such a hot property, yet it has no visible business model beyond trading eyeballs for ad dollars. So why aren’t mega advertising dollars flooding the doors at corporate headquarters? A quick tour of MySpace.com would probably answer that question for anyone with a brain and a pulse. MySpace is an anything-goes, youth-oriented, social hub at the center of music, matchmaking, and social rendezvousing. Friends keep in touch with each other by posting their profiles, photos, music preferences, social events and more to personalized Web pages. The pages they create can host automatically loaded music videos or tracks that start to play as soon as the Web page loads. Pictures are uncensored, as are avatars and messages posted to pages by friends or any registered visitor who happens to land there. The only thing the site monitors is hate speech, but that may change in the wake of a 2005 controversy in which two sexual predators were convicted of luring minors into sex acts by trolling MySpace’s public pages. Skin, lewd language, and descriptions of adult events and activities can be found if and when users care to share or search for them. Not all of the content on MySpace is mature or off-color, however. More than 350,000 music groups or individual performers are registered there, and mainstream acts post pages there so that fans can follow their activities. The Foo Fighters even allowed their album, In Your Honor, to air free for a week on MySpace before its official release. The site also hosts hundreds of thousands, possibly millions, of unique video clips in 16 categories. There are blog listings, independent and user-generated film reviews, event listings, classifieds, discussion forums, and, of course, those personal pages and music samples. At least 45 percent of MySpace users are in advertisers’ coveted under-25 age bracket. The minimum age requirement is 14, and therein lies the advertisers’ rub. Advertising on MySpace raises ethical concerns and sparks fear of unwanted brand association, even though the user base is the most valued. Though the site claims to generate tens of millions of dollars in ad revenue each month, that pales in comparison to what it could be making. David Cohen, the senior vice president of Interpublic Group’s top ad agency, Universal McCann, considers the advertising opportunities on MySpace “a double-edged sword.” He points out that user-generated content can be “risqué, in bad taste, et cetera.” His Fortune 100 clients don’t like the idea of placing advertisements for their products in an environment where they have little control over what appears next to them. Still, MySpace has its supporters. As the fifth largest Web property on the Internet, it is always going to be attractive to somebody. HSBC, Cingular, Aquafina, and H&R Block have all bought ad space there; surely, many more deep-pocketed firms will follow. As Richard Doherty, research director of Envisioneering Group, asks, “If you pull away from MySpace, where do you go? Do you do due diligence on the next 10 [social networking sites]? Advertisers need this audience. This is a new double-digits-minutes eyeball magnet and advertisers have to be there.’’

SOURCES: Ethan Smith, “Can MySpace Work as Ad Space?” Wall Street Journal, July 22, 2005, B2; Kris Oser, “MySpace: Big Audience, Big Risks; News of Sexual Predators on Social-Networking Sites Gives Buyers Jitters,” Advertising Age, February 20, 2006, 3; “News Corp. Subsidiary Sued by Founder of Company That Created MySpace.com,” PR Newswire, February 23, 2006; “Social Networks: More Bubble than Profit?” BusinessWeek Online, February 28, 2006; http://www.myspace.com.

Discussion Questions: 1. Considering the effects of advertising on consumers, what are the risks that advertisers take in placing advertisements on MySpace? 2. What kind of people or personalities might companies try to appeal to by advertising on MySpace? 3. Do you think the MySpace environment will make it easier or more difficult for advertisers to induce ad viewers to follow the AIDA plan? 4. Compose a list of the companies, products and services that you think would benefit from advertising on MySpace.com. Are there any in particular that you think should stay away from MySpace, regardless of its popularity? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 46

Quiz Questions: Multiple Choice 1. If Aquafina posted an advertisement emphasizing the convenience 7. If an advertiser makes the decision to include advertising on of its bottled water on MySpace, that would be an example of: MySpace in addition to its ads in magazines, television, and a. institutional advertising radio, the advertiser is engaging in: b. product advertising a. ad awareness c. advocacy advertising b. product publicity d. pioneering advertising c. media planning e. competitive advertising d. audience selectivity 2. If Cingular posted an advertisement on MySpace highlighting e. comparative advertising charitable donations it had made, that would be an example of: 8. If Pepsi were to launch an aggressive advertising campaign on a. product advertising MySpace and found it was not boosting sales at all, Pepsi would b. pioneering advertising be experiencing the phenomenon of: c. competitive advertising a. law of diminishing sales d. advocacy advertising b. flawed advertising campaign e. comparative advertising c. advertising response function 3. If Cingular posted an advertisement on MySpace comparing its d. stagnant consumer response monthly rates to Verizon’s, that would be an example of: e. soft market a. product advertising 9. The choice by H&R Block to advertise on MySpace to reach an b. competitive advertising important segment of the popular Web site’s consumer audi- c. comparative advertising ence is an example of: d. advocacy advertising a. media planning e. institutional advertising b. market saturation 4. If Aquafina posted an advertisement depicting children drinking c. ad awareness bottles of water in a park after school, which executional style d. ad blitzing for advertising would best describe the image? e. Internet savvy a. lifestyle 10. If H&R Block hosted a series of pages on MySpace discussing b. fantasy different tax issues from January through mid-April, the com- c. humorous pany would be engaging in: d. mood a. Internet propaganda e. slice-of-life b. consumer education 5. MySpace can offer its advertisers all of the following advantages c. Web-based media scheduling except: d. Internet event planning a. high flexibility e. Web-based media planning b. fast growing medium c. easy to measure ad effectiveness d. short lead time e. easy to reach target audience 6. One of the risks of advertising on MySpace is that a company’s advertisement might appear next to content or an entire page that is against the company’s philosophy or shows objectionable material. When that happens, the company will most likely quickly begin: a. press relations b. lobbying c. corporate communications d. crisis management e. product publicity MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 47

SALES PROMOTION AND PERSONAL SELLING Case St udies

16 CASE ASSIGNMENT: Ron Popeil Wheels, Deals, Has Mass Appeal At Age 71, Ron Popeil is an avid inventor, tireless entrepreneur, clever marketer, and master salesman all in one. He just happens to be an American icon, too. The godfather of the infomercial, Popeil even has his famous Veg-O-Matic on display in the Smithsonian Institution as an American cultural artifact. His other famous products include the food dehydrator, the Ronco spray gun and the Popeil Pocket Fisherman. As a teenager, Popeil helped his father sell his kitchen gadgets at local Woolworth’s and later, in the 1950s, on the Chicago fair circuit. That is probably why his famous shtick, which included such memorable catch phrases as “But wait, there’s more,” “Price so low,” and “Operators are standing by”, always seemed like a blend between sincere eccentric inventor and excitable carnival barker. The combination suited him well and brought him enough financial success that he could afford to take his act to television. In the 1960s he incorpo- rated Ronco, and its name became synonymous with gadgets like the smokeless ashtray and Mr. Microphone. Regardless of the product he is selling or the catchy pitch phrases he invents on the fly to sell them, Popeil is always sincere. “The easiest thing to do in the world is to sell a product I believe in,” he has said. “If I spent two years creating a product, conceiving it, tinkering with it, I can get up and sell it. Who can sell it better than the guy who invented it?” Len Green, a professor in entrepreneurship at Babson University, says, “Ron is one of a kind. He is different from the rest because he not only invents; he sells. Most entrepreneurs come up with a concept and then give it to others to manufacture or sell. He’s his own best salesman.” Though Popeil suffered his fair share of flops, like spray-on hair and a brief bankruptcy in 1987, he has always managed to bounce back. Returning from bankruptcy, he relaunched the popular food dehydrator in 1990, and eight years later he designed and sold his most successful product ever, the Showtime Rotisserie & BBQ Oven. Having sold over seven million units, for four installments of $39.95 each, the rotisserie alone has grossed over $1 billion in sales. During the taping of the infomercial for that product, the live studio audience was treated to yet another of Popeil’s catch phrases that has become part of the fabric of American speech. “Just set it and forget it!” is now used to sell all kinds of non-Popeil products, from VCRs and digital video recorders to ovens and coffee makers. Through the medium of television, Popeil was able to reach tens of millions of people. With an innate ability to invent or improve on everyday household products, his live product demonstrations captured the imaginations and dollars of generations of consumers. In 1976, he was even the subject of what was probably Dan Aykroyd’s most famous bit on Saturday Night Live. Parodying Popeil, Aykroyd hawked “Rovco’s Super Bass- O-Matic ’76,” which was capable of turning bass or any other “small aquatic creature” into liquid without any “scaling, cutting or gutting.” Having recently sold Ronco to an investment group for over $55 million, and accumulated a personal net worth of over $100 million, Popeil has had the last laugh. He will continue to serve as a product developer, pitchman, and consultant for the new company and already promises an even bigger hit than the Showtime Rotisserie. Having identified a market of over 20 million Americans who fry turkeys every year, Popeil says he has a new fryer on the way that will make it possible to safely fry a 20-pound turkey in 70 minutes – indoors. Given that he has created over 150 products and invented personal selling via the mass marketing medium, there is little reason to doubt him. As Barbara Gross, professor of marketing at California State University, Northridge, states, “His success speaks for itself; probably that has more to do with his personality. He’s comfortable and sincere. He comes across like he really believes in it. When you hear him talk, you never feel like he’s lying to you.”

SOURCES: “Ron Popeil, He of the Pocket Fisherman and Spray-On Hair, Has Perfected His Formula for Success: Invent, Market, and Sell with a Passion,” BusinessWeek Online, October 3, 2005; Brent Hopkins, “How Ron Popeil Invented Himself,” Knight-Ridder/Tribune Business News, August 31, 2005; Matt Myerhoff, “Infomercial King Sells Company, Ronco Goes Public for Ex pansion,” Los Angeles Business Journal, July 29, 2005, 1; http://snltranscripts.jt.org/75/75qbassamatic.phtml.

Discussion Questions: 1. What does Ron Popeil bring to personal selling that makes him so effective? 2. What trade sales promotion tools does he use? Why does he use that when he is selling direct to consumers? 3. Explain how Ron Popeil’s selling tactics allow him to achieve the desired objectives of sales promotions. 4. Do you think it is likely that America will ever see someone like Ron Popeil in the future? Why or why not? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 48

Quiz Questions: True/False 1. Ron Popeil’s sales pitches are targeted to members of the mar- 3. Ronco could offer customers who buy more than three Ronco keting channel, such as wholesalers and retailers. products a year the chance to join the “Ronco Buyer’s Club.” a. True Members could get a free product once a year and discounts on b. False other products as part of Ronco’s: 2. Ron Popeil has made millions of dollars capitalizing on the principle a. consumer focus group of sales promotion having more effect on behavior than attitude. b. buyer’s sweepstakes a. True c. sales and marketing campaign b. False d. loyalty marketing program 3. Because Ron Popeil has sold his products for over 30 years on tele- e. marketing ploy vision, many viewers have gotten to know him and feel he is being 4. When Ron Popeil shows how one of his products works during a sincere about his products’ benefits. Popeil has turned his long- Ronco infomercial, he is utilizing a trade promotion tool which is term familiarity with viewers into a form of relationship selling. similar to a(n): a. True a. one-to-one selling meeting b. False b. in-store demonstration 4. Ron Popeil has combined personal selling with advertising and c. personal-selling engagement sales promotion through his infomercials. d. online promotion a. True e. door to door salesman b. False 5. Selling products through television with memorable catch phrases such as “But wait, there’s more!” and “Operators are Multiple Choice standing by” has enabled Ron Popeil to turn advertising into: 1. Which type of buyer do you think would purchase one of Ron a. switch and bait selling Popeil’s products, such as the Veg-O-Matic? b. cold calling a. loyal customers c. personal selling b. competitor’s customers d. prospecting c. brand switchers e. a sales proposal d. price buyers 6. When a customer calls Ronco’s 800 number and orders a prod- e. All of the choices are potential customers for a Veg-O-Matic. uct, which step of the selling process are Ronco representatives 2. One goal of infomericals is to generate quick sales. Customers involved in? may be urged to purchase a Popeil Pocket Fisherman “in the next a. closing the sale 24 hours” in order to receive a free package of rubber worms. In b. approaching the customer terms of sales promotion tools, the rubber worms are a: c. handling objectives a. premium d. needs assessment b. rebate e. qualifying leads c. coupon d. discount e. raffle MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 49

PART 5 PROMOTION DECISIONS Case St udies

MARKETING MISCUES Burger King May Have Gone Too Far When it Sexualized Fast Food The summer of 2005 was a rockin’ time for Burger King, as the company launched its innovative new chicken strips. Introduced at various price points ($1.69 for six pieces, $2.69 for nine pieces, and $3.99 for a nine-piece Value Meal), BK Chicken Fries debuted with commercials featuring the company’s Coq Roq (pronounced “cock rock”) band and an interactive band Web site (http://www.coqroq.com). BK Chicken Fries were designed to meet consumers’ desire for great-tasting, high-quality chicken products that also offer value, portability, and fun. Burger King utilized all white meat chicken to meet the first two qualifications, with price set at a competitive level so that consumers would be getting good value for the money. The chicken fries were packaged in a container that had a built-in well for the dipping sauce and would fit into a car’s cup holder. These were not the attributes that made the chicken fries famous, however. Rather, it was the way that Burger King portrayed the fun aspect of its new product. Created by Miami-based Crispin Porter + Bogusky, the advertising campaign’s television commercial featured a heavy metal band of masked chickens. The remarkable resemblance to the costumed heavy metal band Slipknot prompted a cease-and-desist letter from the band’s attorney. According to the attorney’s letter, Crispin Porter + Bogusky had approached the band’s record label, Roadrunner, about Slipknot appearing in an unrelated Burger King ad—an offer that the band rejected because it did not want to be branded with burgers. The band claimed that Burger King’s advertising, utilizing Slipknot’s signature masks, was an effort to influence the Slipknot generation to purchase BK Chicken Fries. The general public, however, was more upset about Coq Roq’s interactive Web site. The site features videos showing the fictional chicken- headed band members, downloadable ring tones, and a photo gallery. While videos showing chickens with names such as “Fowl Mouth” and “The Talisman” trying to entice consumers to eat chicken are in questionable taste, the controversy centered on the photo gallery. When it debuted, the photo gallery hosted Polaroid-style photos of young women with handwritten captions such as “Groupies Love the Coq” and “Groupies Love Coq.” Within 24 hours, the captions had been erased, but Burger King refused to take any responsibility for the captions. Instead, the company blamed malfunctions in the Flash and XML programming for the captions appearing on the site and claimed it had no prelaunch knowledge of their presence. Burger King’s spokesperson also said that the captions were removed as part of the tweaking involved in any new Web site and not because the company had received complaints. The Coq Roq campaign was not Burger King’s first advertising campaign to wander off the traditional family-oriented path. Ads for the restaurant’s breakfast sandwiches depicted a masked BK mascot. In one spot, “Normal Joe” wakes up to find someone sharing his bed—the BK mascot, who then offers him a breakfast sandwich. In another commercial, the BK mascot peeks in Normal Joe’s window and offers him a breakfast sandwich. Promoting BK’s Tendercrisp Bacon Cheddar Ranch sandwiches, Darius Rucker (Hootie of Hootie and the Blowfish) sings a revamped “have it your way” song with lyrics such as “there’s a train of ladies coming with a nice caboose.” Historically, Burger King has presented itself as a family-oriented fast-food restaurant, with the slogan “Where Kids Are King.” Parents were encouraged to bring their children to Burger King, and the restaurant would even give the kids a crown. This family image may have been tarnished by the chicken fries campaign and its Coq Roq band. At the same time, however, the company announced that BK Chicken Fries were one of its most successful product launches in recent years.

SOURCES: “Burger King Introduces Chicken Fries,” QSR Online, July 26, 2005, http://www.qsrmagazine.com; “Slipknot’s Burger King Beef,” http://www.thesmokinggun.com, August 17, 2005; Mark Hinson, “Put on the Commercial Brake, BK,” http://www.tallahassee.com, September 11, 2005; Joe Kovacs, “Fowl-Mouthed Slogans Too Hot for Burger King,” WorldNetDaily, July 28, 2005, http://www.worldnetdaily.com; Michael Paoletta and Susan Butler, “For Burger King and Slipknot, a Game of Chicken,” Reuters Wired News, August 29, 2005, http://www.wireservice.wired.com; Bruce George Wingate, “‘Foq’ Burger King: Does Burger King’s Coq Roq Ad Campaign Truly Shake Up the Establishment’s Old-Fashioned Chicken Mentality, or Are They Just Poultry Poseurs?” Lifestyles, Fairfield County Weekly, August 25, 2005, http://www.fairfieldweekly.com.

Discussion Questions: 1. While controversial, the Coq Roq Web site created considerable buzz for Burger King. Given this, was the controversy a mistake? 2. Some campaign opponents suggested that Burger King’s sexualizing of its chicken fries could lead to even greater obesity in the youth demographic. What is Burger King’s role in this social issue? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 50

Quiz Questions: True/False 1. Burger King’s Coq Roq Web site, while controversial, had a 3. Burger King used a heavy metal rock band of masked chickens direct influence on the sale of it’s Chicken Fries. to promote its Chicken Fries. This is an example of which execu- a. True tional style of advertising? b. False a. scientific 2. Burger King did not understand who its target audience was for b. demonstration Chicken Fries when it attempted to model it’s fictional band of c. spokesperson/testimonial masked chickens on the heavy metal band Slipknot. d. real/animated product symbols a. True e. lifestyle b False 4. By using a Web site to promote Chicken Fries, Burger King 3. Burger King utilized the growing interest in the Internet as an chose a______in which to promote their new product. advertising medium when it put up its Coq Roq Web site. a. channel control a. True b. medium b. False c. retailer 4. Burger King needed crisis management to control the negative d. product line publicity surrounding the Coq Roq Web site, in order to keep the e. supply chain launch of Chicken Fries from being ruined. 5. Coq Roq television advertising, the interactive Web site, photo a. True gallery, and sound clips together functioned as ______for b. False Burger King’s Chicken Fries. 5. An example of sales promotion for BK Chicken Fries would be to a. unified targeting strategy offer customers a 50 cents off coupon when they visit the Coq b. integrated marketing communication Roq Web site and click on the coupon icon. c. executional styles a. True d. creative feedback decisions b. False e. a new media schedule 6. When customers began to complain to Burger King about the Multiple Choice content on the Coq Roq photo gallery, it was an example of: 1. Burger King used its Coq Roq Web site as a(n) ______to a. decoding communicate the message about its new Chicken Fries. b. encoding a. marketing objective c. feedback b. online chat room d. pushback c. channel e. noise d. informational device e. personal selling tool 2. Which step in the AIDA concept of promotional goals was met by the controversial Coq Roq Web site? a. attention b. interest c. desire d. action e. The Coq Roq Web site was designed to fulfill all elements of the AIDA concept. MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 51

PART 5 PROMOTION DECISIONS Case St udies

CRITICAL THINKING CASE NASCAR Lifts Ban on Liquor Advertising Stock car racing is one of the most popular professional sports in terms of television ratings. NASCAR is broadcast in over 150 countries and ranks behind only the National Football League in television sports viewing in the United States (and NASCAR has double the viewer base of the National Basketball Association). The three largest NASCAR-sanctioned racing series are the NEXTEL Cup Series, the Busch Series, and the Craftsman Truck Series, and there are over 1,500 additional races sanctioned in North America. To reach the 75 million brand-loyal NASCAR fans (and possibly 75 million more “avid” fans) and an average of 125,000 spectators at each race, Fortune 500 companies sponsor NASCAR more than any other sport. It costs $15 million to $20 million a season to be a primary sponsor for one of the top racing teams. With a primary sponsorship, the sponsoring company gets to put company decals on the hood, the rear quarter panel, and the TV panel (above the rear bumper) of the race car. Sponsorship for a less successful racing team costs between $6 million and $10 million a season. With an associate sponsorship, which costs around $200,000 a season, the company gets to have one decal the size of an index card on the race car. Though the cost of sponsorship might seem high, the television visibility and sales to the loyal fan base are the payoff. According to Performance Research, the average race-attending NASCAR fan is male, married, and 42 years old; he owns a home with around three cars per household and is employed full-time with an annual income between $35,000 and $50,000. These demographics are changing rapidly, though, as more and more women are being drawn to the sport. The television viewing fan base is even broader. Of particular interest to marketers and sponsors is the fact that 71 percent of NASCAR fans “almost always” or “frequently” select a product from a NASCAR sponsor simply because of the sponsorship (compared to 52 percent for tennis and 47 percent for PGA golf). In the same study, 57 percent indicated that they put more trust in products offered by NASCAR sponsors (compared to 16 percent for Olympic sponsors and 5 percent for World Cup Soccer sponsors). From its beginning in 1949, NASCAR did not allow hard liquor sponsorship on its race cars. Though it accepted beer, cigarette, and chewing tobacco sponsors, there was concern that liquor sponsorships would be harmful to the sport’s family-oriented image. In November 2004, however, citing the need for more corporate sponsors to keep race teams on the track, NASCAR lifted its ban on liquor advertising. Naturally, the decision was controversial. Supporters of the long-standing ban on liquor advertising contended that liquor ads went against the association’s family-oriented image. The American Medical Association suggested that the fastest-growing NASCAR audience was the 12- to 18-year-old segment and that advertising liquor on the race cars would send the wrong message to these teens. Additionally, the ban was consistent with network television’s pro- hibition on liquor spots. On the flip side, however, was the fact that NASCAR allowed cars to be sponsored by beer companies (e.g., Dale Earnhardt Jr. was sponsored by Budweiser), even though one study had found that underage drinkers were nine times more likely to drink beer than other alcoholic beverages. Another study reported that less than 1 percent of teens consumed alcohol because of advertising. NASCAR felt that attitudes toward liquor companies had changed as the companies had developed reputations for responsible advertising and that this changing attitude was being reflected in television advertising. In 2004, more than 600 local and cable broadcast stations had begun running liquor spots to the tune of more than $100 million in advertising revenue. NASCAR insisted that all advertising related to liquor sponsorship must have a strong responsible drinking component. For example, the race car and driver’s attire sponsored by Jack Daniels said, “Pace Yourself, Drink Responsibly.” Similarly, Crown Royal’s sponsorship said, “Pacing is everything, especially when drinking.” Additionally, merchandise bearing liquor sponsorship brands was not to be targeted to underage consumers. For example, miniature cars, which are popular among NASCAR fans, would only be marketed as collectors’ items, and clothing items would not be available in child sizes. Purchasers would have to be of legal drinking age to buy merchandise carrying the liquor sponsor’s brand name. On February 10, 2005, the first liquor logo crossed the finish line at a NASCAR race.

SOURCES: Rebecca Gladden, “When the Spirits Move Them,” Insider Racing News, November 14, 2004, http://www.performanceresearch.com/; David Kiley, “A Green Flag for Booze,” BusinessWeek, March 7, 2005, 95; Al Levine, “NASCAR Gets in the Spirit,” Atlanta Journal-Constitution,February 20, 2005, 1A ; Performance Research, “Loyal NASCAR Fans Please Stand Up,” 2005, http://www.performanceresearch.com; Ben VanHouten, “The Need for Speed,” Restaurant Business, March 15, 2005, 34+.

Discussion Questions: 1. Is NASCAR sending a mixed message to the public as it positions itself as a family-oriented sport sponsored by hard liquor companies? 2. Is liquor advertising a good fit with the NASCAR audience? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 52

Quiz Questions: True/False 1. The receiver of a message (advertisement) for hard liquor on a 3. Liquor sponsors’ ads on NASCAR race cars carry a strong NASCAR stock car would be the driver of the car. responsible drinking message, such as Jack Daniel’s “Pace a. True Yourself, Drink Responsibly.” This is a form of: b. False a. pioneering advertising 2. NASCAR’s changing target audience, which is including more b. comparative advertising women and 12-18 year olds, are the perfect fit for a hard liquor c. unique selling proposition purveyor such as Jack Daniel’s. d. advocacy advertising a. True e. media planning b. False 4. If a liquor retailer like Seagrams adds advertisements on 3. A NASCAR fan’s negative attitude toward hard liquor could be NASCAR race cars to its media planning, along with magazine, changed into a positive one as a result of seeing an advertise- radio, and newspaper ads, the ad on the car would be consid- ment for whiskey on a NASCAR race car. ered what type of media? a. True a. mass media b. False b. alternative media 4. Despite NASCAR’s positive image among its fans, the high cost c. mixed media of corporate sponsorship has deterred advertisers from placing d. institutional ad company decals on race cars. e. non-print ad a. True 5. An example of a point-of-purchase promotion for Jack Daniel’s b. False whiskey that would tie in with the company’s NASCAR sponsor- 5. An example of a contest would be a Crown Royal-sponsored ship is: weekend getaway to Charlotte, NC, to see the Winston Cup, a. a Jack Daniel’s ad in a racing magazine. drawn from entry forms posted at liquor stores. b. a “Drink Responsibly” radio spot a. True c. a Jack Daniel’s Internet ad banner b. False d. a press release about responsible drinking e. A Jack Daniel’s/NASCAR display at a liquor store offering a Multiple Choice free NASCAR race ticket with the purchase of their whiskey. 1. If a company like Jim Beam decided to advertise their whiskey on the hood of a NASCAR race car, in addition to handing out tee shirts at races and placing an ad in a race day program, the company would be using a combination of strategies called the: a. AIDA concept b. promotional mix c. communication process d. push-pull strategy e. continuous media schedule 2. An example of “noise” associated with a NASCAR race car being used as an advertising medium is: a. too many competing ads on a car b. the race announcer talking too much c. commercial breaks on TV d. a competitor’s commercial e. loud race car engines MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 53

PRICING CONCEPTS Case St udies

17 CASE ASSIGNMENT: HDNet HDNET Aims to Redefine Television If billionaire entrepreneur Mark Cuban had his way, the future would be today. The Web broadcasting pioneer earned nearly $2 billion when he and his partner sold their Broadcast.com business to Yahoo! for the princely sum of $5.7 billion at the height of the Internet frenzy in 2000. While looking to spend some of his newly found wealth on the latest and greatest in home entertainment systems, Cuban had his first experience with high-definition television. High-definition TV is a digital format that produces a picture resolution that can be up to ten times sharper than that of standard TVs (depending on screen pixel count), and it is typically presented in a wide-screen format along with digital surround sound. Cuban was so captivated by the amazing resolution on his new 100-inch projection set that he decided to start his own high-definition television network. With a $100 million investment from Cuban, HDNet—the first-ever all-high-definition network—was off and running less than a year later. Three years later, HDNet boasts over 1,200 hours of original programming. In addition to the shows it produces, it has licensing contracts that double its programming inventory. HDNet also has broadcasting agreements that allow it to carry live sporting events from the National Hockey League, Major League soccer, and the NCAA. The company also operates HDNetMovies, which has scored deals with several major movie stu- dios to convert their 35-millimeter films to a high-definition format. Though HDNet’s current subscriber base is estimated at around 1 million, industry statistics suggest that 60 million U.S. homes have television sets capable of delivering high-definition programming. With prices that started near $5,000 a couple of years ago, the prohibitive cost of the special television sets required to transmit high-definition programming was one of the company’s major early hurdles. The other was the lack of available programming. High-definition shows must be produced on special equipment, and only a few major networks, such as NBC, CBS, ABC, HBO, Showtime, and the Discovery channel, have made the investment to do so. Cuban has stayed the course, patiently waiting for prices of high-definition TV sets to drop to where they would have mass-market appeal. As with his Internet business, his timing appears to be perfect. Electronics retailer Best Buy now sells 27-inch high-definition TV sets for as low as $500. Of course, the discerning customer can spend as much as $9,000 in the same store for a top-of-the-line 60-inch model; but now that the television sets are affordable, adoption rates could be on the verge of exploding. Cuban, therefore, has turned his attention to securing distribution deals with major cable operators and satellite programmers. His company has already locked in deals with all but three of the nation’s largest cable television providers and with satellite broadcasters DIRECTV and DISHNET. Both satellite programmers and the heavyweight cable-operating trio of Time Warner, Charter Communications, and Adelphia have begun to sell subscriptions to HDNet, which comes packaged with HDNet Movies. Those companies pay an as yet undisclosed amount of money back to Cuban for the rights to carry the channel and license HDNet’s exclusive content. To reduce some of the technical con- fusion for customers, the satellite companies offer subscribers package deals. DIRECTV’s includes a dish, a high-definition receiver (required to transmit the signal to the high-definition TV), professional installation, and a year’s worth of high-definition programming for $399. DISHNET offers a similar package, but throws in a TV for a total start-up cost of $1,000. Its subscriptions are priced separately and start at $110 per year. Cable operators charge a premium for HDNet and include it only with their high-end digital offerings, which generally cost around $100 per month. To entice skeptical consumers into signing up, some cable companies are offering 30-day free trials. Mark Cuban truly believes that the story of high-definition television services will someday mirror that of FM radio or basic cable television. Of course, only time will tell if he is right, but one thing is for sure—with high-definition television, the future certainly appears brighter.

SOURCES: http://www.hd.net/; http://www.DirectTV.com; http://www.Adelphia.com; http ://www.timewarner.com; Leigh Gallagher, “The Big Picture,” Forbes, March 1, 2004, 78; Allison Roman, “All HD All the Time: Mark Cuban’s HDNet Is Typically Offered on Operators’ Premium Tier,” Broadcasting & Cable, January 26, 2004, 20; Meredith Amdur, “New Definition at TW; Cuban’s HDNet Lands Carriage with Cabler,” Daily Variety, December 18, 2003, 6.

Discussion Questions: 1. Based on how resellers are pricing HDNet for their subscribers, how would you characterize HDNet’s pricing objectives? 2. How will demand and supply trends in the high-definition industry affect the price for HDNet’s programming? 3. From what you can discern about its stage in the product life cycle, competition, distribution, resellers’ sales promotion strategies, customer demands, and perception of quality, submit a projection of what you think HDNet should charge carriers for access to its channels and original programming. Defend your answer. MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 54

Quiz Questions: True/False 1. Mark Cuban is counting on HDNet’s market share in the televi- 4. Mark Cuban is counting on more consumers subscribing to sion industry increasing if the price of high-definition televisions HDNet as the price of high-definition television sets becomes stays fixed. more affordable. He is counting on what determinant of price? a. True a. supply b. False b. demand 2. HDNet may have to consider status quo pricing if another high- c. competition definition television network enters the market. d. fixed costs a. True e. baby boomers’ buying power b. False 5. A factor that could affect the elasticity of demand that HDNet 3. The supply of HDNet subscriptions offered to the market is not has is: affected by the price cable and satellite television providers a. availability of substitutes (other networks) charge for the service, only by the number of broadcasters will- b. price relative to purchasing power ing to sign agreements with HDNet. c. product durability a. True d. product’s other uses b. False e. all of these 6. HDNet could utilize what pricing tool to help them know when to Multiple Choice adjust prices to maximize their revenues and fill unused capacity 1. Mark Cuban of HDNet counted on the cost of high-definition tel- (in this case, subscriptions)? evision sets dropping to stimulate demand for his network. This a. penetration pricing is an example of: b. SWOT analysis a. inelastic demand c. yield management systems b. elastic demand d. ROI c. supply and demand e. market research study d. switch and bait tactics 7. Based on the prices that cable and satellite broadcasters are e. on-demand television charging for HDNet’s subscription service, at what stage in the 2. By charging customers a premium for HDNet and grouping it product life cycle would HDNet be? with their high-end digital channel offerings, cable and satellite a. introductory providers are taking advantage of what type of pricing strategy? b. growth a. prestige pricing c. maturity b. best price strategy d. decline c. price point e. sustained d. inflated pricing e. bait pricing 3. If HDNet used target return on investment as its pricing objective, what would its return on investment be, given that Cuban made a $100 million initial investment and projecting that they will make a net profit of $10 million in their first year. a. 10% b. 100% c. 99% d. 0% e. They would lose money. MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 55

SETTING THE RIGHT PRICE Case St udies

18 CASE ASSIGNMENT: CABLE TV PRICING Disconnecting Cable Channels from Pricing Bundles When people go shopping, the grocery store doesn’t make them buy broccoli if they are buying milk. Why then do cable and satellite TV companies make people pay for channels they don’t watch, for example, highly targeted channels like Home and Garden Television (HGTV), Spike, and ESPN? Congressional lawmakers are interested in the cable industry’s answer to this question. Several lawmakers are pushing for legislation that would prevent the cable industry from forcing consumers to buy a prix fixe menu of channels and would require the industry instead to offer á la carte service, or individual channels, in lieu of traditional packages. And the idea is gaining popularity. This idea, and complaints about cable television service and rising rates, emerged at a Senate subcommittee hearing where legislators pilloried the cable industry for being unresponsive to consumers. One senator went so far as to say that cable subscribers “are being force-fed channels and features they don’t want,” and encouraged the industry to give consumers a choice. Another warned, “Do something about your rising rates or you’re going to have trouble.” The senators aren’t alone in their frustration. Bipartisan members of the Federal Communications Commission have also signaled support for more personalized cable options. The industry, however, insists that such options will end up costing consumers more. Fueling the debate is the spiraling price of cable TV service. According to a recent General Accounting Office study, cable programming rates jumped at least 34 percent during a recent three-year period, far outpacing the general rate of inflation. The report attributed higher cable rates at least partially to billions of dollars of investments made by cable companies in original programming and upgraded technology. Cable companies are also paying more for sports programming; such fees rose 59 percent during the same period because of the higher prices being paid to sports teams and leagues to carry games. Unbundling cable channels appeals to some consumers who hope it would lower monthly bills and give them more control over what their families are watching. Besides, the idea of paying for an individual channel isn’t altogether new in the cable industry: plenty of consumers already pay extra for commercial-free channels such as HBO and Showtime. Proponents of the á la carte plan say most cable subscribers watch the same channels all the time, so why should they pay for all the others? “The average household watches no more than a dozen to 17 channels,” says Gene Kimmelman, head of Consumers Union, citing a report compiled by the FCC. The movement to change how cable service is priced alarms the industry. Both programmers and operators say offering personalized selections to more then 70 million cable subscribers would shatter the economics of their business, forcing less popular channels out of business and potentially costing consumers more. Cable operators say their entire business model is predicated on packaged offerings. That setup affords cable networks two revenue streams; advertising revenue and per-subscriber license fees from cable and satellite operators that distribute the programming. Any change in audience figures for a cable channel after it was removed from a package would severely hamper both revenue sources, they say. Furthermore, some industry members contend that an á la carte plan would severely limit individual networks’ ability to generate original programming. This is a serious concern for companies like Scripps Networks, parent of the Food Network and HGTV, and Viacom, parent of Nickelodeon. For example, if Nickelodeon, which is available in 88 million homes including satellite customers, saw its distribution drop dramatically because of an á la carte system, the network would be making less money to put back into programming. Unbundling cable packages could have some serious unforeseen consequences. “It could really destroy a business that is monumentally successful,” adds Andy Heller, president of distribution for Time Warner’s Turner Broadcasting, parent of TNT, the Cartoon Network, and CNN. He notes that the average monthly cable bill is less than the cost for a family of four to go to a baseball game nowadays. Ironically, a cable operator in the New York City area tried to offer a channel on an á la carte basis but was not allowed to do so. An arbitra- tion panel ruled against Cablevision Systems Corporation’s effort to offer the New York sports channel YES individually to subscribers. YES chal- lenged Cablevision’s original decision not to bundle the channel with its basic service. The cable operator had said the YES channel, which carries Yankees games, was too costly. Cable operators also say that selling channels separately presents technological problems. Only one-third of the country gets digital cable. The rest of the nation has older, analog systems in which it is more difficult to break down individual channel signals for each household. Given the technological costs of implementing an individualized system and the likelihood that fees would increase to make up for lost subscribers, subscribers could end up getting only a dozen or so channels for the same price they currently pay for a bundle.

SOURCES: Anne Maria Squeo and Joe Flint, “Should Cable Be à la Carte, Not Flat Rate?” Wall Street Journal, March 6, 2004, B1. Used with permission.

Discussion Questions: 1. What other pricing strategies could cable operators use that would maintain their revenue stream and check the escalating price of cable service? 2. Is it legal for the government to intervene in industries whose prices outpace inflation? Is it appropriate? 3. What would happen to the cable industry if it was deregulated in the same way as the telecommunications industry? 4. Would you prefer an à la carte or bundle pricing strategy for your cable service? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 56

Quiz Questions: True/False 1. The fixed-price menu of channels that cable and satellite TV 5. To make money under an à la carte pricing system, cable com- companies force their customers to buy is considered value- panies might consider having subscribers sign contracts. If a based pricing. subscriber canceled a contract before the term of the agree- a. True ment, the cable company could use ______to make up for b. False the lost revenue. 2. If DIRECTV charged $10 a month less than DISHNET for a com- a. assessment fees parative channel package in order to capture a larger share of b. retention fees the market, DIRECTV would be using price skimming. c. pricing penalties a. True d. contract-obligation fees b. False e. consumer penalties 6. A cable company could add several more channels to its pack- Multiple Choice ages and actually increase subscriptions, despite criticism of 1. Currently, the cable industry uses price bundling as their pricing forcing unwanted channels on consumers. During what type of strategy. If the government passes legislation allowing cus- economic trend is this kind of bundling most effective? tomers to choose only which stations they want (à la carte pric- a. strong economy ing), what could happen to the cable industry? b. recession a. competition among channels would drive up quality of pro- c. bull market gramming and revenues d. bear market b. individual networks would have less money to put back into e. stock market crash programming 7. Suppose marketing managers from two small regional cable c. cable networks would see increased viewership operators met and agreed that company A would charge a d. cable companies would be forced to enter bidding wars for lower price for its premium cable package, but company B their customers would charge a proportionally lower price for its basic cable e. all of these package. This is an example of: 2. If the cable industry were forced by the government to offer à la a. status quo pricing carte pricing to its customers, what step would a cable com- b. joint demand pany need to take to set the right price for each of the networks c. countertrade it offered? d. price fixing a. establish pricing goals e. derived demand b. estimate demand, costs, and profits 8. Suppose a cable company removed several channels from each c. choose a price strategy to help determine a base price of its 3 sports packages (because of the increasing costs associ- d. fine-tune the base price with pricing tactics ated with paying sports teams and leagues to carry their games) e. all of these and then charged subscribers a separate fee to add the chan- 3. The general price level that a satellite TV company expects to nels back into the package. The cable company would be utiliz- sell its subscription packages at is its: ing what price tactic? a. base price a. value-based pricing b. functional price b. unbundling c. arbitrary price c. loss-leader pricing d. non-negotiable price d. price gouging e. pricing tactic e. keystoning 4. If a cable TV company offers subscribers its 20-channel package 9. If a cable company charges subscribers in the suburbs more for $24.95 and a 35-channel package for only $5 more, the com- than subscribers who live in the city limits, the company is prob- pany is utilizing: ably using: a. flexible pricing a. demand-oriented pricing b. a media schedule b. zone pricing c. a quantity discount c. fob pricing d. marketing objectives d. basing-point pricing e. a promotional strategy e. price lining MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 57

PART 6 PRICING DECISIONS Case St udies

MARKETING MISCUES Pricing Execution Error at Dell In a rare slip at Dell, Inc., a company known for its low-cost business model and close attention to operational detail, poor management of the average selling price resulted in a revenue shortfall in the second quarter of 2005. Basically, the company priced its computers too low. Though it shipped an industry-record 9.1 million computers during the quarter, the company failed to meet its quarterly revenue target. According to Dell’s Web site, the company’s climb to market leadership has been the result of a persistent focus on delivering the best possible customer experience by the direct selling of computer products and services. The company was founded in 1984 by Michael Dell, and its corporate headquarters are in Round Rock, Texas. A worldwide supplier of computer systems, Dell manufactures computers in the United States, Brazil, Ireland, Malaysia, and China. The company holds the number one market position in the United States, the number three position in the Asia Pacific/Japan market, and the number two position in Europe. Worldwide, the company employs about 64,000 people. Dell’s products include servers, storage, printing and imaging systems, workstations, notebook computers, desktop computers, networking products, and software and peripheral products (e.g., plasma TVs, MP3 players, handhelds). Dell’s service offerings include managed, professional, deployment, support, and training and certification services. Dell’s pricing miscalculations occurred in its computer lines. In 2005, personal computer makers were facing a mature market where continued growth was difficult. Worldwide PC sales were expected to grow 12.7 percent in 2005, but revenues were expected to grow only 0.5 percent. Such tepid growth prospects were squeezing PC makers from large (Dell) to small (Gateway). Desktop pricing was being forced down to new levels. Additionally, the notebook marketplace, which tends to generate higher margins, was experiencing price declines faster than anticipated. According to one industry expert, the quest for growth was forcing companies to test the limits of PC price elasticity. During the second quarter, Dell’s average selling price for its consumer computers dropped 13 percent, and the company experienced an average price decrease of 8 percent across all products and markets. Essentially, Dell was advertising its super-cheap machines and offering revenue-draining promotions on the low-end machines (e.g., giving away printers with the purchase of even cheap computers). Dell would have met expectations if it had priced the 9.1 million computers it sold in the second quarter just $10 to $15 higher. But the company was operating in a share-building model of growth and was not focusing on selling the more profitable machines. This was considered an unusual marketing strategy for the industry leader—a leader that did not need to slash prices to remain competitive with rival offerings. Thus, Dell’s second quarter unit volume was high, but it undermined revenue growth. Though Dell executives insisted that these were onetime, easily fixable pricing problems, industry analysts wondered whether Dell was losing its tactical edge. In their view, the company needed to return to selling higher-end, more profitable systems and be less aggressive in the battle for market share. In a marketplace where PC pricing had become more and more competitive, with low-end desktops priced as low as $299 and notebooks dipping below $500, there was concern that the company had not been able to quickly adjust its pricing model to drive revenue and meet expectations. With competition heating up among notebook competitors (e.g., Hewlett-Packard, Gateway, Averatec), analysts expected that margins in the notebook market would be driven down. Though Dell had met industry expectations for profit margins on its notebooks, the analysts were concerned about its future profit margins in that sector. If they were to decline, Dell would be under additional pressure to get its pricing model back in line, while steering customers toward its more expensive computer products. Although the pricing error was a rare slipup for the company, it brought considerable attention to the operational detail required by a company as large as Dell.

SOURCES: www.dell.com; Louise Lee, “Dell’s Shortfall, Dell’s Challenge,” BusinessWeek Online,www.businessweek.com, August 16, 2005; Scott Morrison, “Pricing Pressures Squeeze Profits on PCs Computers,” Financial Times, London Edition, August 23, 2005, 21; Richard Waters, “PC Pricing Mistake Hits Dell Revenues,” Financial Times, London Edition, August 12, 2005, 28; Dan Zehr, “Dell’s Profit Rises, but Sales Fall Short,” The Austin American Statesman, August 12, 2005, D1.

Discussion Questions: 1. What type of marketing strategy was Dell pursuing? What was the role of pricing in this strategy? 2. How important are pricing decisions to the overall welfare of a company such as Dell, Inc.? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 58

Quiz Questions: Multiple Choice 1. Dell earned $799 million in the second quarter of 2005, yet it did 7. After Dell’s poor profit performance in the second quarter of not reach its goals. However, if Averatec, a much smaller com- 2005, industry analysts criticized Dell for engaging in puter manufacturer recorded the same profits in the second ______, or sacrificing profits to seek market share. quarter, it most likely would far surpass its target profits. This a. price skimming can be explained by which of the following principles? b. predatory pricing a. return on investment c. keystoning b. predatory pricing d. penetration pricing c. elasticity of demand e. leader pricing d. yield management 8. Dell underperformed in the second quarter of 2005 largely e. leader pricing because it sold far more inexpensive low-end computers than 2. According to the article, Dell was the leader of which of the fol- pricey high-end computers. This information suggests that Dell lowing in the second quarter of 2005? engages in the practice of: a. return on investment a. flexible pricing b. market share b. two-part pricing c. elastic demand c. predatory pricing d. leader pricing d. price lining e. keystoning e. selling against the brand 3. Because of the perceived quality attached to Dell’s brand name, 9. When Dell includes a free printer with the purchase of a com- Dell might have been able to increase prices on all its products puter, it is offering a ______. by $10 or $15 without suffering a noticeable loss in demand. a. bundled price This means that Dell has which of the following? b. promotional allowance a. unitary elasticity c. rebate b. high elasticity d. functional discount c. inelastic demand e. quantity discount d. price equilibrium 10. Dell failed to meet its revenue goals in the second quarter of e. low price relative to purchasing power 2005 largely because it sold a great number of low-end comput- 4. Direct channel marketing enables Dell to avoid which of the fol- ers. This was bad for the company because: lowing? a. of leader pricing a. price lining b. of price shading b. markup pricing c. of escalator pricing c. price skimming d. its computers are complementary to one another d. price fixing e. its computers are substitutes for one another e. predatory pricing 5. Which of the following is most likely a variable cost for Dell? a. executive salaries b. executive vacation benefits c. Web site maintenance d. factory worker salaries e. shipping 6. Which stage of the product life cycle is Dell’s personal computer in? a. introductory b. growth c. maturity d. decline e. inefficient MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 59

PART 6 PRICING DECISIONS Case St udies

CRITICAL THINKING CASE Yahoo Music Unlimited’s Aggressive Pricing In May 2005, Yahoo! Inc., introduced its Music Unlimited service for a low introductory price of $60 for a year’s subscription or $7 for a month. For this fee, subscribers would receive unlimited listening access to a library of more than one million tracks. Subscribers who wanted to own a song, instead of just renting it, would pay 79 cents a song. A free seven-day trial of the service was included in the introductory offer. At the time of the introduction, there were two product segments in the marketplace: the pay-per-download segment and the subscription services segment. Probably the best-known pay-per-download segment was Apple’s iTunes, which charged 99 cents for a music download. Analysts believed that iTunes was the leading download service because of its relationship to the iPod. Although the average iPod owner purchased only around 25 songs, there were over 17 million iPod owners in 2005, and that number was expected to increase by another 5 million in 2006. Yahoo Music Unlimited’s competitors in the subscription services market were RealNetworks’ Rhapsody and Napster. They charged about $10 a month for basic subscription and $15 a month for a portability subscription. One critical question for all three competitors was whether online music providers could change consumer behavior: Would music listeners readily switch from buying music to renting music? Would subscription services replace or even change the entire music purchasing experience? Another critical question was whether online music providers could actually make money on subscriptions: Could the online providers attract a sufficient number of subscribers to survive, given that the providers had to pay the music label about $6 per person a month for a subscription that allowed users to listen to music only on their PC? For subscriptions that allowed downloads to portable players, label fees were around $8 per person per month. The music subscriber base was only 1.5 million in 2004, but that was twice as many as in 2003. Competitively, Yahoo Music Unlimited had its advantages and disadvantages. For one thing, Yahoo was not relying solely on Music Unlimited for cash flow. Yahoo was a widely diversified company, with a potential audience of 370 million visitors a month via its network of Web portals. Music Unlimited offered features that linked with many of Yahoo’s other services. These features included: Yahoo Music Engine, Large Music Library, Yahoo Messenger Integration, Personalization & Community, Music Portability, Instant Playlists, LAUNCHcast Integration, Access From Any PC, and Download Purchases. In contrast, the music service was the only business at Napster, and online subscriptions made up about 30 percent of RealNetworks’ revenue. Yahoo Music Unlimited could work on 10 different portable MP3 players. It was not compatible with Apple’s iPod, however, and Apple had no incentive to make the iPod compatible with subscription service offerings. With online music representing approximately 2 percent of total music sales, there was room for growth. According to data collected by Nielsen/NetRatings, almost 62 million people visited an online music site in April 2005. Male visitors slightly outnumbered female visitors; approximately 60 percent of the visitors were under the age of 45; and the majority had a household income of over $50,000. Some projections even suggested that downloads and subscriptions would make the online music industry a $1 billion business in the United States by 2007. Would Yahoo be a major player in the subscription services marketplace? Would the fact that the costly infrastructure (e.g., servers, credit card fees) was already in place at Yahoo help the company move to the top of the online music industry? Or, was Yahoo Music Unlimited’s low introductory price essentially de-valuing music, and, if so, would this spark more battles with the music labels? Was the company also starting a price war with RealNetworks and Napster? If so, how long would this introductory price have to remain in place? Was this a sustainable business model for any company in the online music industry?

SOURCES: Peter Burrows, Ben Elgin, Ronald Grover, Jay Greene, Heather Green, & Tom Lowry, “Online Music: Rewriting the Score,” BusinessWeek, May 30, 2005, 34+; eMarketer, “New eMarketer Report Finds Digital Music Advances Substantially Changing Music I ndustry Landscape,” Market Wire, www.marketwire.com, July 14, 2005; Gale Group, Inc., “Yahoo Shakes up Music Subscription Market,” Business and Industry Online Reporter, May 14, 2005, 1; Scott Kessler (interview), “ Yahoo’s Music Rivals Sing the Blues,” BusinessWeek Online, www.businessweek.com, May 12, 2005.

Discussion Questions: 1. What pricing objective is driving Yahoo Music Unlimited? 2. What is the company’s pricing strategy? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 60

Quiz Questions: Multiple Choice 1. Calculate Yahoo’s revenue from a one-month subscription to 7. If Yahoo discovered that it was actually losing money on every Yahoo Music Unlimited at the introductory fee? Music Unlimited subscription, but decided to maintain the low a. $1.00 introductory fee on the principle that Music Unlimited attracts b. $6.00 customers to Yahoo’s other services, this would be an example c. $7.00 of ______pricing. d. $60.00 a. bait e. $1.17 b. penetration 2. Which of the following is the main reason that music subscrip- c. predatory tion services are likely to have elastic demand? d. leader a. low price relative to purchasing power e. status quo b. high availability of substitutes 8. If Yahoo Music Unlimited and competitors RealNetworks’ c. the product’s other uses Rhapsody and Napster all suddenly raised their music subscrip- d. product durability tion fees to $20 per month, they might be charged with: e. price equilibrium a. price skimming 3. Which of the following is the $6 per person per month fee for b. unfair trade practices Yahoo Music Unlimited? c. price fixing a. revenue d. bait pricing b. marginal revenue e. price discrimination c. profit margin 9. Because of its low price in comparison to its competitors, Yahoo d. a variable cost Music Unlimited would likely be ranked first in: e. cash discount a. leader pricing 4. Yahoo Music Unlimited’s year-long subscription for $60, in rela- b. flexible pricing tion to its $7 month-long subscription, is an example of which of c. product line pricing the following? d. a yield management system a. a cumulative quantity discount e. a shopping bot list b. a noncumulative quantity discount 10. If the break-even quantity for Yahoo Music Unlimited is 1 million c. price discrimination one-month subscriptions, and Yahoo’s profit margin is $80,000 d. flexible pricing after 1.1 million one-month subscriptions have been sold, what e. product line pricing is the average variable cost for the first 1.1 million subscriptions 5. If Yahoo offered a second service, Yahoo Music Unlimited Plus, sold (assuming the marginal cost remains the same for the first which included more features, such as the ability to buy songs 1.1 million units)? for 49 cents instead of 79 cents, but charged $14 a month and a. $6.93 $120 a year for subscription, this would be an example of b. $6.20 ______pricing. c. $6.82 a. product line d. $6.92 b. markup e. $6.40 c. flexible d. escalator e. predatory 6. Yahoo Music Unlimited entered the market with which of the following price strategies? a. price skimming b. price shading c. predatory pricing d. flexible pricing e. penetration pricing MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 61

CUSTOMER RELATIONSHIP MANAGEMENT (CRM) Case St udies

19 CASE ASSIGNMENT: Kroger They Should Have ‘DUNN’ This Much Sooner! U.K. Firm Leads Kroger Turnaround Supermarkets have long engaged in an intense struggle to interpret the mountains of data they compile from customer loyalty and frequent buyer cards. Though many are good at collecting information, few are actually effective at targeting appealing promotions based on what they learn from those cards. Falling behind on this important aspect of such a marketing-driven business almost cost Kroger its business life. Thankfully, little-known, London-based, relationship marketing specialist DunnHumby was willing to come to the rescue. Founded in 1989 by husband-and-wife team Edwina Dunn and Clive Humby, the firm gained acclaim for the work it did with cutting-edge U.K. grocer Tesco. The key to their success was the Tesco Club Card program that DunnHumby created. The program boasts a reach of 10 million U.K. households and drives 85 percent of weekly store sales. Amazingly, the coupons Tesco sends to customers through the card program redeem at rates in the 20 to 40 percent range, compared to 1 to 2 percent for mass-marketed coupons. Inspired by the DunnHumby/Tesco success story, Kroger, the second largest U.S. retailer, convinced DunnHumby to enter a joint venture based in the United States. In 2003, the two launched DunnHumbyUSA in an office down the street from Kroger’s world headquarters in Cincinnati, Ohio, and immediately began the monumental task of trying to analyze the data from every transaction made on a Kroger Plus card. Kroger claims that of the 42 million households that shop at its stores, more than 40 million have Kroger Plus cards. However, just 6.5 million of those provide over 50 percent of the company’s sales. About 100 DunnHumbyUSA marketing strategists and mathematicians crunch Kroger’s data on a daily basis, examining 27 sample products and developing categories by which to segment the top 15 percent of Kroger’s customer base. Considering when and how they buy products from that special group, DunnHumby develops what it calls a shopper’s “DNA.” Cardholders are then placed in one of seven segments. The Traditional Homes group is so named for its members’ affinity for scratch cook- ing and conventional fare; Budgeters are value-conscious shoppers; and the Finest category includes customers who frequently purchase gourmet, fresh, and imported foods. Adding yet another level of sophistication, DunnHumby cross-references the original seven groups by another seven interest groups with names such as Family Care, Home Living, and Specialty Tastes shoppers. Organizing shopper data into much more focused and detailed categories allows Kroger to send its core customers more relevant product offers. Instead of blasting them with weekly mailers, Kroger now issues just four two-piece mailers a year. The first piece is a letter to the shopper with several targeted coupons aimed at increasing spending in the store. The second is a brochure designed especially for the interest group that the household belongs to. It contains a vendor-sponsored page and a few more branded coupons based on the customer’s second set of segmentation characteristics. DunnHumbyUSA provides Kroger with more than analytics, however. Its U.S. office houses graphic designers and packaged goods specialists who work together with the technical staff to convert data tables into targeting strategies, in-store promotions, and carefully chosen product selections. DunnHumbyUSA assists Kroger in working better with its suppliers, too. The grocery giant has introduced its strategic partners to critical vendors such as Coca-Cola, Hershey, and General Mills. The close interaction between Kroger and its largest vendors allows all parties involved to review more data and react quicker to developments in the marketplace so that they can create more value for the customer. DunnHumby doesn’t stop there, either. The firm’s specialists coach Kroger’s upper management to develop a strong customer focus, offer guidance in enhancing the effectiveness of Kroger employees, and supervise Kroger’s development of its employee rewards program. DunnHumby’s work is clearly paying off. After a miserable 2004, when Kroger lost over $100 million, the struggling supermarket experienced a dramatic reversal of fortune. Its 2005 net income tally was an astounding $958 million, and the company paid out is first dividend since 1988.

SOURCES: Laura Baverman, “Kroger’s Card Sharks,” Cincinnati Business Courier, November 4, 2005, 1, 46; Lucia Moses, “Diving for Data; With DunnHumby’s Loyalty Marketing Know-How, Kroger Hopes to Unlock Valuable Secrets of Its Loyalty Card Data,” Supermarket News, September 26, 2005, 72; “Kroger Ups 2005 Earnings; Will Pay Dividend,” Columbus Business First, March 6, 2006, 11; Steven Gray, “Kroger Fights Goliath, and Investors Freeze,” Wall Street Journal, June 14, 2006, C1.

Discussion Questions: 1. Describe the CRM system, including each of its components, that DunnHumbyUSA has implemented with Kroger. 2. What type of list does DunnHumbyUSA interpret to better its Plus Card program? 3. Describe DunnHumbyUSA’s approach to data mining. 4. How does DunnHumbyUSA leverage customer information? What other opportunities do you think exist for them to explore in the future? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 62

Quiz Questions: Multiple Choice 1. The customer relation management system that DunnHumby 7. If Kroger decided not to collect its own information but rather to created for Kroger can best be described as: purchase a list of potential customers from a large list company, a. empowerment the information Kroger would buy would most likely be a: b. interaction a. data warehouse c. customer-centric b. compiled list d. touch point c. response list e. point-of-sale d. customer relations management system 2. The DunnHumbyUSA marketing strategists who analyze the e. predictive model Kroger customer base are creating: 8. Kroger’s strategy of dividing shoppers into groups like a. knowledge management “Traditional Homes” and “Budgeters” is a form of: b. a data warehouse a. compiled listing c. interaction b. response listing d. empowerment c. predictive modeling e. a campaign d. customer segmentation 3. Collecting comments from drop boxes in Kroger stores would be e. campaign management an example of: 9. When Kroger managers send specifically designed brochures to a. learning each of the company’s interest groups, the managers are b. knowledge management engaging in: c. an interaction a. knowledge management d. empowerment b. campaign management e. campaign management c. customer segmentation 4. If Kroger gave every employee the authority to refund badly d. predictive modeling packaged food, the company would be engaging in employee: e. response listing a. interaction 10. If Kroger sends out a mailing containing coupons for P&G laundry b. knowledge management products to only certain groups of Plus Card customers, Kroger is: c. complaint prevention a. cross-selling d. quality control b. data mining e. empowerment c. managing knowledge 5. The interaction that occurs when a customer swipes her Kroger d. pirating Plus card at the checkout line after buying yogurt, granola, and e. modeling fresh fruit, is best described as: a. empowerment b. delegation c. response listing d. point-of-sale e. campaigning 6. If Kroger made a list containing names and address of every shopper who registered for a Plus card, that information might be called a: a. data warehouse b. compiled list c. response list d. customer relations management system e. predictive model MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 63

PART 7 TECHNOLOGY-DRIVEN MARKETING Case St udies

MARKETING MISCUES Game Code Violates Industry Rating According to the Entertainment Software Association (ESA), the five top-selling video games by units sold in 2004 were Grand Theft Auto: San Andreas, Halo 2, Madden NFL 2005, ESPN NFL 2K5, and Need for Speed: Underground 2. Total video game sales in the United States in 2004 amounted to $6.2 billion or an estimated 203 million units. Demographically, 75 percent of heads of households play computer or video games. Approximately 35 percent of gamers are under 18 years old, 45 percent are 18 to 49 years old, and 20 percent are 50 or older. The average age of a gamer is 30. The ESA was formed in 1994 to serve the business and public affairs needs of video and computer game companies. It has 25 game company members, including such well-known names as Activision, Electronic Arts, Konami, Microsoft, Nintendo, SEGA, Sony, Take-Two, Vivendi, and Warner Brothers. The ESA established the Entertainment Software Rating Board (ESRB) in 1994. The board’s purpose is to apply and enforce ratings, advertising guidelines, and online privacy principles adopted by the computer and video game industry. In essence, the ESRB serves as a self-regulatory body for the interactive entertainment software industry. Unfortunately, in the summer of 2005, the ESRB had to slap the potentially crippling Adults Only (AO) rating on a member’s game—the game that was the hottest-selling video game in 2004, Grand Theft Auto: San Andreas. The ESRB has a two-part rating system. Appearing on a game’s front cover is a rating symbol that indicates ages for which the game is appropriate: EC (Early Childhood, ages 3+), E (Everyone, ages 6+), E10+ (Everyone 10 and older), T (Teen, ages 13+), M (Mature, ages 17+), AO (Adults Only, ages 18+), and RP (Rating Pending). On a game’s back cover is the content descriptor rating, which indicates content- specific elements of the game that led to a particular rating (e.g., alcohol, blood, crude humor, drugs, language, nudity, sexual violence, sexual content, violence). The ESRB rates more than 1,000 games a year. Approximately 54 percent of the games receive one of the Everyone ratings, 33 percent the Teen rating, and 12 percent the Mature rating. In 2004, less than 1 percent of reviewed games received the Adults Only rating, which is reserved for titles with prolonged scenes of intense violence or graphic sexual content or nudity. Ratings are issued before a game enters the market, but the ESRB took the unprecedented step of changing the rating of Grand Theft Auto: San Andreas from M to AO after the game had been on store shelves for nine months. The problem was the game’s sexual content. The board’s reviewers had not made an error in rating the game. In fact, the reviewers did not know that the sex scenes were in the game. Apparently, a gamer was able to crack the game’s code and unlock information hidden in the program. This hidden code, referred to as the “hot coffee mod” (modification), allowed players to access sexually explicit minigames via an Internet download. Initially, Take-Two Interactive Software, the parent company of the game’s publisher Rockstar Games, denied that the explicit material existed on the game discs prior to modification, insisting that the material was the work of hackers. Eventually, the company took responsibility for the sex scenes, acknowledging that the scenes were created by internal developers and included on final copies distributed to retail outlets. Supposedly, the scenes were the result of dead code that did not make the final cut for the game but were too labor intensive to delete completely. Instead, the code was pro- grammed to be inaccessible to gamers. Take-Two Interactive Software develops and publishes games through its wholly owned labels, Rockstar Games and Global Star Software. The Grand Theft Auto game series is one of its most popular brand franchises. The rating change cost the company an estimated $40 million to $50 million in sales because it drastically reduced the number of outlets that would carry the game. Wal-Mart, which controls around half of the video game market in the United States, refuses to sell AO-rated games, as does Best Buy. Other video game retail outlets including Target, Blockbuster, and Hollywood Video pulled the game from their shelves and were uncertain as to the game’s future in their stores. Not only did Take-Two suffer financially, but the U.S. House of Representatives passed a resolution to launch an investigation into whether Rockstar Games knew about the sex scenes prior to release of the game.

SOURCES: “Sex Scenes? Now, That’s Going Too Far . . . ,” The News Tribune, July 22, 2005, B06; Entertainment Software Association, http://www.theesa.com; Entertainment Software Rating Board, http://www.esrb.org; Victor Godinez, “Hidden Sex Scenes Bump Up New Grand Theft Auto Game to Adults Only,” Dallas Morning News, July 21, 2005; Rachel Sa, “Grand Theft Auto Slapped with Severe AO Rating: Future Shop and Best Buy Will Pull Sexually Explicit Game from Shelves,” National Post (Canada),July 21, 2005, A6; Anna Zaijka, “Explicit Video Game Vanishes from Shelves,” Vallejo Times-Herald, July 28, 2005.

Discussion Questions: 1. Describe the marketing relationships that may have been damaged by technology’s role in product development. 2. What could the rating fiasco do (if anything) to the ESRB’s image? MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 64

Quiz Questions: True/False 1. An entertainment-based company like Take-Two would not bene- 4. If a Take-Two customer support representative received a com- fit by implementing a customer relationship management (CRM) plaint from a 17-year-old customer who can’t buy Grand Theft system. Auto: San Andreas because of its new AO rating, and then a. True offered the customer a $5 off rebate on a comparable game b. False with an M rating, the customer service rep has used her 2. If Take-Two marketers gather data and then generate a computer ______to solve the customer’s problem. file about each customer that is available through their customer a. Internet training support center and their Web site, they are utilizing knowledge b. customer service management. c. empowerment a. True d. persuasion b. False e. phone skills 3. Recency-Frequency-Monetary Analysis (RFM) would enable a 5. A touch point for Take-Two would be: company like Take-Two to project the future value of the cus- a. a customer buying a competitor’s video game tomer over a period of years. b. a customer registering a complaint on the Take-Two Web site a. True c. a magazine article about the rating change on Grand Theft b. False Auto d. a recall of one of Take-Two’s games Multiple Choice e. None of the these are touch points. 1. Take-Two Interactive Software has honed in on video game play- 6. If Take-Two developed a new video game based on its best-sellers who are approximately 30 years old and enjoy intense, ing games, as well as customer feedback from callers and the action-filled video games. Being able to identify such a precise company Web site, Take-Two marketers would probably utilize target market shows that the company is poised to capitalize on ______to achieve that. what marketing trend? a. campaign management a. market penetration b. innovation b. customer relationship management c. market segmentation c. electronic distribution d. optimizers d. co-branding e. retailing e. marketing myopia 7. If Take-Two used the problem it experienced with the ratings 2. If Take-Two implemented a CRM system to enhance its cus- change in the Grand Theft Auto game to help identify which customer relationships, what key point would the company need to tomers would only buy games with M ratings or lower, the com- take into account? pany would be engaging in a process called: a. customers take center stage in the organization a. market planning b. company profitability is a priority b. AIDA c. employees come first c. consumer decision-making process d. the need to drive out the competition d. product differentiation e. customers are not to be trusted e. modeling 3. If Take-Two hosted a Web site for its customers with new games to try, a message board to talk to other gamers, customer support, and news and events in the video game industry, the company would have a ______focus. a. strategic b. marketing c. global d. customer-centric e. value-based MKTG2_CasesQues_01-66.qxp 7/15/08 12:38 PM Page 65

PART 7 TECHNOLOGY-DRIVEN MARKETING Case St udies

CRITICAL THINKING CASE Scripps Provides E-Offering With HGTVPRO.COM By 2005, more than 10 million households in the United States had selected television programs by using video-on-demand services, and this number was expected to quadruple by 2010. Nevertheless, programmers and cable operators have had difficulty finding a business model that satisfies all parties in the video-on-demand relationship, including networks, distributors, advertisers, and viewers. Now, however, E. W. Scripps Company may have found the solution—video-on-demand online. Headquartered in Cincinnati, Ohio, E. W. Scripps was founded in 1878 with a newspaper called The Penny Press. The newspaper’s target audience was the emerging mass market of urban workers. The company grew to become a diverse media corporation with expertise in newspaper publishing, national lifestyle television networks, broadcast television, interactive media, and licensing/syndication. Today, Scripps operates daily and community newspapers in 18 markets and has ten broadcast television stations and five cable/satellite programming networks. Additionally, the company owns the Shop at Home Network, a television retailing offering, and Shopzilla, an online comparison shopping service. In early 2005, E. W. Scripps set out to create a new television network without the television and without the cable. To do this, it used broadband, which allows viewers to access information via personal computers and cell phones. With an estimated 55 percent of homes having access to the Internet and 85 percent of offices having high-speed broadband, Scripps believed that the time was right to enter the world of broadband. It did this through Scripps Networks, its lifestyle network subsidiary, which is available in 95 countries on six continents. Already one of the biggest producers of cable content, Scripps Networks was the first major programmer to move into broadband with original content, taking content from its popular television brands into broadband channels. Because it was already producing 3,000 hours of content annually and thousands of Web-based video projects (with an average of 12 million visits a month), Scripps Networks could move into broadband channels at a relatively low cost. Initially, Scripps’s move into broadband focused on the Home & Garden Television network (HGTV) with HGTVPro.com. Scripps planned to follow this with Fine Living and the Food and DIY (do-it-yourself) networks. The company owns a library of 25,000 hours of television programming that enabled it to quickly harness the broadband initiative. To get the broadband channels up and running, it reformatted this existing programming for broadband viewing. Unlike half-hour programs on cable television, however, for broadband viewing the informative content has to be condensed into three to five minutes of streaming video. The broadband capability also gives viewers access to content beyond the video in case they need more help for a particular project. For example, video viewers can access the “Best Practices” section of the Web site to sup- plement the streaming video. Viewers can also subscribe to HGTVProFile, the company’s construction-related newsletter. In its new venture, Scripps has had to deal with several issues related to advertising. The introduction of HGTVPro.com was supported by advertising, and users were not charged a fee for access. Although Scripps Networks does not allow product placement in its shows, it does permit online advertising on the Web site. GMC Truck, Lending Tree.com, and Whirlpool were three of the initial advertisers on the broadband Web site. Scripps recognizes that it needs to develop links for advertisers to reach viewers in a more efficient, relationship-oriented manner. Thus, it is considering a subscription model for its broadband channels. Subscribers would pay a fee to join an affinity group or club. Members would then be entitled to more extensive Web site access on the channel as well as to discounts from the advertisers. Another issue is that advertisers are demanding far greater broadband inventory than is available. Knowing this, Scripps does not want to lose potential advertising clients to its competitors. By the end of 2004, three other companies had made potentially threatening moves into the Internet mass communications marketplace: Dow Jones & Co. had acquired online financial publisher MarketWatch, Inc.; the Washington Post Company had purchased the online magazine Slate; and the New York Times Company had purchased About.com, which offers a diverse network of Web sites from food to sports. Although not all of these issues have been resolved, Scripps’s initiative appears to be successful. In its first 19 days of existence, there were 380,000 unique visits to HGTVPro.com. Within three months, more than 110,000 contractors and over one million consumers had registered for the free electronic newsletter. Thus, HGTVPro.com has allowed Scripps Networks to build on its recognized strength with the enormous success of its HGTV brand and maintain a competitive lead in the new video-on-demand online marketplace.

SOURCES: http://www.hgtvpro.com; http://www.scripps.com; Bill Brewer, “Scripps Is Going Broadband,” Knoxville News-Sentinel, May 16, 2005, C1; Allison Fass, “Advertising on Demand,” Forbes, July 25, 2005, 72; Jon Lafayette, “Broadband on Scripps’ Menu,” Television Week, May 16, 2005, 1+; Duncan Mansfield, “Scripps Takes Latest Channel Direct to Web,” BusinessWeek Online, March 21, 2005; Linda Moss, “Raging Debate on VOD Still Hasn’t Delivered the Hits,” Multichannel News,April 11, 2005, 1.

Discussion Questions: 1. Should HGTVPro.com allow product placement in its streaming videos? Why/why not? 2. What risks would be posed by moving to a fee-based subscription service?