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Session 4

The Marketing Management Process Produces Successful Marketing Decisions

Ranjan Chaudhuri, PhD 27 June 2013



In general terms, marketing refers to what an organization must do to create and exchange value with customers. In this sense, marketing has a major role to play in setting a firms strategic direction. Successful marketing requires both a deep knowledge of customers, competitors, and collaborators and great skill in deploying an organizations capabilities so as to serve customers profitably.

Marketing, thus defined, is a broad general management responsibility, not just a function delegated to specialists. Anyone with career interests that lead to the setting and the execution of the strategy of an organization, regardless of its type or size, will require marketing skills and insight.

THE CENTRAL ROLE OF MARKETING in the enterprise stems from the fact that marketing is the process via which a firm creates value for its chosen customers.

Value is created by meeting customer needs. Thus, a firm must define itself not by the product it sells, but by the customer benefit provided.

Having created the value for its customers, the firm is then entitled to capture a portion of that value through pricing. To remain a viable concern, the firm must sustain this process of creating and capturing value over time.

Within this framework, the plan by which value is created on a sustained basis is the firms marketing strategy. Marketing strategy involves two major activities: (1) selecting a target market and determining the desired positioning of the product in target customers minds and (2) specifying the plan for the marketing activities to achieve the desired positioning. In these activities, positioning is the unique selling proposition for the product.

There are five major areas of analysis underlie marketing decision making. Prior discussion dealt with analysis of the five Cscustomers, company, competitors, collaborators, and context. This leads first to specification of a target market and desired positioning and then to the marketing mix. This results in customer acquisition and retention strategies driving the firms profitability.


Initiating the Marketing Process

The Concept

The concept of market segmentation has been usefully applied to marketing decision-making for over twenty years. The goal of market segmentation is to partition the total market for a product or service into smaller groups of consumer (segments) based on their characteristics, their potential as consumers for the specific product or service in question, and their differential reactions to marketing strategies.

Definition of a market segment

A definition of a market segment that fits this concept is as follows: An identifiable group of customers with requirements in common that are, or may become, significant in determining a separate product strategy. 1

Note 1: David S. Hopkins, New Emphases in Product Planning and Strategy Development, Industrial Marketing Management, Vol. 6 (1977), pp. 41019.

Segmentation and Target Marketing

Market Segmentation:
Divide the market into segments of customers


Target Marketing:
Select the segment to cultivate

Marketing Strategy Development


Target Market Selection

Fords Model T Followed a Mass Market Approach

Figure: Basic Market Preference Patterns

The two key questions are:

1. Which potential buyers should the firm attempt to serve?

To answer this, the firm must first determine the most appropriate way to describe and differentiate customers. This is the process of segmentation.
2. How much customization should the firm offer in its programs, i.e., at which point on the continuum from Mass Market- Market Segments - Market Niches Individuals will the firm construct plans?


Although it is a very useful technique, segmentation is not appropriate in every marketing situation. If, for instance, a marketer has evidence that all customers within a market have similar needs to be filled by the product or service in question (an undifferentiated market), one mass marketing strategy would probably be appropriate for the entire market. In this case, market segmentation would be unnecessary.

In todays market environment, however, it is unlikely that one would find either an entirely homogeneous, or entirely heterogeneous consumer market. Much more often one would discover that there are clusters of consumers within the total market that are relatively homogeneous with regard to their perceptions of, evaluations of, needs for and behavior toward a type of product or service. Consumers within this cluster, then, would behave similarly (although not identically) toward the product or service and its attendant marketing strategy.

In a differentiated market, then, the marketer can profitably invest in research and analysis that defines the salient dimensions that characterize these segments because, in one sense, each different market segment could be thought of as having its own market demand curve. When the structure of the segmentation is understood,1 the marketer can either select the best target segment for his brand and ignore others, or develop different marketing strategies designed to reach and influence Note 1: Because differences among consumer groups logically exist before the segmentation different market segments.

analysis is done, in fact, the marketer does not truly segment the market in an active sense, but instead learns how it is segmented.

Criteria for Segmentation

What are the characteristics of a good market segment (that is, one that is useful for marketing decisionmaking)? Its obvious that one would not just select a randomly-chosen group of consumers and define them as a market segment.

1. are internally homogeneous (i.e., consumers within the segment will be more similar to each other in characteristics and behavior than they are to consumers in other segments), 2. are identifiable (i.e., individuals can be placed within or outside each segment based on a measurable and meaningful factor), 3. are accessible (i.e., can be reached by advertising media as well as distribution channels), and 4. have effective demand (i.e., the consumer group is large enough and has the necessary disposable income and ability to purchase the good or service).

The segmentation procedure involves an appraisal of consumer descriptors in order to 1) define the factors that would relate to significant differences in how the consumer would behave toward this product, 2) discriminate the major segments within the market, 3) choose the most promising segment(s), and 4) detail characteristics of the target

Segmentation Factor Geography

Class I: Consumer Background Characteristics

Some Examples of Variables Measured Region of product distribution Cultural differences in habits or taste Mobility of consumers Age Sex Household income/personal income Educational level Social status Life cycle Personality traits Perceptual styles Attitudes about such factors as self, family, society Reference groups Social roles -Correlation of demographic and psychographic variables Activities and Interests Comments Geographic segmentation is one of the oldest and most basic of market descriptors. In most cases, it alone is not sufficient for a meaningful consumer segmentation Also basic and included as a factor in most segmentation analyses. Demographic profiles of segments are important especially when making later advertising media decisions.



General Life-Style

Psychographic factors are useful because there is often no direct link between demographic and market behavior variables. These consumer profiles are often tied more directly to purchase motivation and product usage. Provides a rich, multi-dimensional profile of consumers that integrates individual variables into clearer pattern that describes the consumers routines and general way of life.

Segmentation Factor

Class II: Consumers Market History

Some Examples of Variables Measured Comments Frequency of brand/product use Brand loyalty Attitudes toward product By segmenting the market into heavy, medium, light and non users , gives good understanding of present situation in market.

Product Usage

Product Benefit

Expectations of product performance Needs product must fill Perceptions of brands Satisfaction (dissatisfaction measures)
Shopping patterns Media-use patterns Product information searches Sensitivities to price to distribution outlet to promotional offers

Very useful if the product can be positioned in a number of ways. Primary use of this factor segments the market into groups that look for different product benefits.


Use of this factor segments the market into price-/non-price sensitive, shoppers/impulse buyers, and other segments which characterize the market behavior of each group. It must be used in conjunction with analysis of consumer characteristics to allow identification of the individuals involved.

The seven factors listed above are all commonly observed and measured when doing market analysis for segmentation purposes. In most cases, the final definition of market segments will be most heavily based on the one or two factors (usually one describing the segments characteristics and the other their market behavior) that are most closely related to probable purchase of the specific product or service. Other factors, then, are used to support and enrich the segment profiles.

Behavioral Bases of Segmentation

The bases are general descriptors of consumers. Often, a useful segmentation of the market is derived by using segmentation bases which describe a customers behavior or relationship to a product, e.g., User Status: Non-User vs. User Usage Rate: Light, Medium, Heavy User Benefits Sought: Performance-Oriented vs. PriceOriented Loyalty Status: None, Moderate, Strong, Totally Loyal Attitude Toward Product: Unsatisfied, Satisfied, Delighted

Multifactor Segmentation

Effective Segmentation Criteria

Measurable Substantial

Differentiable Actionable

Target Market
Marketing strategy development begins with the customer. A prerequisite to the development of the rest of the marketing strategy is specification of the target markets the company will attempt to serve. Marketers have generally been moving from serving large mass markets to specification of smaller segments with customized marketing programs. Indeed, a popular phrase today is markets of one suggesting that marketing campaigns can and should be customized to individuals.

Key to target market selection

Ability to conceive and design Ability to produce (quality and quantity) Ability to market Ability to finance Ability to manage/execute

Effective Targeting Requires

Identify and profile distinct groups of buyers who differ in their needs and preferences. Select one or more market segments to enter. Establish and communicate the distinctive benefits of the market offering.

Positioning Statement

The answer should be formalized in a positioning statement specifying the position the firm wishes to occupy in the target customers minds1.

Note 1: Ries and Trout in Positioning: The Battle for Your Mind, 1st ed. (Revised, McGraw-Hill, 1986).

The absolute importance of target market selection and positioning is well conveyed in a bestselling marketing textbook1: The advantage of solving the positioning problem is that it enables the company to solve the marketing mix problem. The marketing mix - product, price, place, and promotion, is essentially the working out of the tactical details of the positioning strategy.

Note 1: P. Kotler, Marketing Management: Analysis, Planning, Implementation and Control, 8th ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1997), p. 310.


A concept so simple, people have difficulty understanding how powerful it is!


Positioning is owning a piece of consumers mind Positioning is not what you do to a product
Its what you do to the mind of the prospect

You position the product in the prospects mind

Its incorrect to call it Product Positioning Ries & Trout


Colgate Lux

is is

Protection Glamour



Sexual Attraction

The assault on our mind
The media explosion The product explosion The advertising explosion

So little message gets through that you ignore the sender and concentrate on the receiver


The easy way to get into a persons mind is to be first

Xerox, Kodak, Polaroid

If you didnt get into the mind of your prospect first, then you have a positioning problem
Better to be first than be best

In the positioning era, you must, however, be first to get into the prospects mind


The basic approach is not to create something new or different, but manipulate whats already in the mind To find a unique position, you must ignore conventional logic Conventional logic says you find concept inside product
Not true; look inside prospects mind

You wont find an uncola idea inside 7-up; you find it inside cola drinkers head

You concentrate on the perceptions of the prospect, not the reality of the product - Al Ries & Jack Trout

Its difficult to change behaviour, but easy to work

with it - Paco Underhill


Start by looking not at the product but at the position in the market that you wish to occupy, in relation to competition Think about how the brand will answer the main consumer questions
What will it do for me that others will not? Why should I believe you?

Try to keep it short and make every word count and be as specific as possible
Vagueness executions opens the way to confused


Keep the positioning up-do-date

Give as careful consideration to change as you did to the original statement

Look for a Key Insight!

An Accepted Consumer Belief

What is key insight?

Key Insight is seeing below the surface / seeing inside the consumer Insight expresses the totality of all that we know from seeing inside the consumer An insight is a single aspect of this that we use to gain competitive advantage By identifying a specific way
That the brand can either solve a problem or Create an opportunity for the consumer

Key Insight I wish to get married to a handsome prince

Key Insight
Soap leaves my skin feeling dry and tight

The 3Cs of positioning


Crystal clear

Be Consumer-based
Be relevant and credible to the consumer Write in consumer language and from consumers view point

Be Competitive
Be distinctive Focus on building brand elements into powerful discriminator Be persuasive Be sustainable

The Marketing Mix

Curtain Raiser

Session Highlight: The objective of this session is to look at marketing mix as an integrated whole and to provide tools that will explain why some marketing programs prosper and others fail.

Creating Value
The Marketing Mix

What is Marketing Mix?

The 4Ps/5Ps/7Ps?

Do you find it confusing?

Cosmetics in India, for example, are sold in a myriad of ways. Avon has a direct sales force of several hundred thousand people who call on individual consumers. Este Lauder use selective distribution through department stores. Ponds and Lakm market their products in chain drugstores and other mass merchandisers. Garnier does a great deal of advertising, while Amway emphasizes personal selling and promotions, and Shenazs products sells exclusively through beauticians. Olays strategy encompasses a wide variety of approaches.

How do we understand all these variations?

Marketing Mix
Neil Borden1 of Harvard Business School used the term marketing mix to describe the set of activities comprising a firms marketing program. He noted how firms blend mix elements into a program and how even firms competing in a given product category can have different mixes atDolan, work. Note 1: dramatically N.H. Borden, The Concept of the Marketing Mix. Reprinted in R.J. Strategic

Marketing Management (Boston, Mass.: Harvard Business School Press, 1991)

The components of marketing mix

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

MerchandisingProduct Planning Pricing Branding Channels of Distribution Personal Selling Advertising Promotions Packaging Display Servicing Physical Handling Fact Finding and Analysis Market Research

4Ps: marketing mix

Over time, an aggregation and regrouping of these elements has become popular. The 4 Ps of Product, Price, Promotion and Place are often used to set out the marketing mix in an easy to recall way. Lets now discuss the major issues in setting the 4 Ps in the following sequence: 1. Product 2. Place (Channels of Distribution) 3. Promotion (Communications Strategy)

Role of Marketing Mix

Developing a product that satisfies customers wants and needs Designing a promotion program that conveys the value of that product to customers Choosing a distribution program (i.e., place) that makes that product readily available Designing a pricing strategy that simultaneously creates a consumers incentive to buy that product and the firms incentive to sell that product

Role of Marketing Mix

The first three of these marketing mix variables represent costs to the firm. The role of pricing in the marketing mix is to tap into the value created and generate revenues1: (1) to fund the firms current value-creation activities, (2) to support research that will lead to future value creation, and (3) to generate a profit from the firms activities. Note 1: Robert J. Dolan and John T. Gourville, Principles of Pricing, Class Note 9-506
021 (Boston: Harvard Business School Publishing, 2005)

Decisions Within the Four Elements of the Marketing Mix

Quality Style Features Options Brand name Packaging Guarantees/warranties Services/spare parts

Numbers and types of middlemen Locations/availability Inventory levels Transportation

The target market

Discounts Allowances Credit terms Payment period Rental/lease List price

Advertising Personal selling Sales promotion Point-of-purchase materials Publicity

The marketing mix is the combination of controllable marketing variables that a manager uses to carry out a marketing strategy in pursuit of the firms objectives in a given target market.

The Marketing Process


Product Definition
Product decisions start with an understanding of what a product is, viz. the product offering is not the thing itself, but rather the total package of benefits obtained by the customer. This idea has had a number of names, e.g., the total product concept, the augmented product, or the integrated product.

The role of product in delivering value

For marketing strategy development purposes, the product has to be considered from the point-of-view of value delivered to the customer. Value can be delivered simultaneously by a number of vehicles, e.g., 1. the physical product itself 2. the brand name 3. the company reputation 4. pre-sale education provided by salespeople 5. post-sale technical support 6. repair service 7. financing plans 8. convenient availability 9. word-of-mouth references provided by earlier adopters of the product 10. reputation of outlet where purchased

For example, a Sony Cybershot purchased from the Hypercity Argos Catalog in India is not just a digital camera but one shipped within 24 hours of order and unconditionally guaranteed.

This broad conception of a product is key to seeing possible points of differentiation from competitors1.

Note 1: Regis McKenna Marketing in an Age of Diversity, Harvard Business Review, September-

Product Line Planning Decisions

Product Line Breadth

A desktop computer manufacturer considers also selling laptops; a maker of mens golf attire considers adding a womens line; an automobile manufacturer considers a mini-van or sport utility vehicle. Product line breadth decisions are how many different lines will the company offer. A guiding principle in answering breadth questions is the companys position on desired consistency or similarity between the lines it offers. Some firms focus, e.g., we market only products which draw on our skills in small motor technology while others are more broad: we sell products which draw on our superior consumer products marketing skills.

Product Line Length

A beer producer in the mass part of the market is considering if it should develop an entry in the premium segment; the high-end computer manufacturer considering the product line breadth issue above also has to decide if it wants to compete in the emerging under 25000 INR market sector. These are product line length decisions, i.e., how many items will there be in a line providing coverage of different price

Product Line Depth

The mens golf attire manufacturer considers whether to offer its INR 2500 crew neck sweater in five colors or just three. Thus, a product line depth decision, i.e., how many types of a given product?

Product Mix

Unilevers Product Mix

P Product Line Length

Dove Liril Rexona Pears Lifebuoy Hamam Etc.

Product Line 1 Bath Soaps

Product Line 2 Fabric Wash Surf Rin Wheel Sunlight Etc.

Product Line 3 Beverages Bru Brooke Bond Red Label Taaza Taj Mahal Lipton Green Label Etc.

Product Line Planning Decisions

Does the product satisfy target customer wants in a way that is profitable for the firm? Does it offer opportunity for differentiation from competitors when the product is appropriately viewed as the total set of benefits delivered to consumers? What is the impact of this product on the rest of the line? Will it be a complement to other products, enhancing their value to the customer (e.g., a color-coordinated sweater enhancing the value of the matching golf shirt) or will it be a substitute possibly cannibalizing sales (e.g., an entry in the low end of the personal computer machine taking sales from the same manufacturers highend, higher-margin items)? What is the impact of the items on the brand and companys reputation? The brands equity is often a key asset and the product may enhance it or it may detract from it. A key issue is whether there would be damage to the brand, e.g., did Wheel Detergent detract from the equity of Unilever as a quality detergent manufacturer, did Sams Club hurt Walmarts retail operations?

Individual Item Decisions

delete an item from the line reposition an existing product within the line improve the performance of an existing product to strengthen its positioning introduce a new product within an existing line introduce a product to establish a new line

The New Product Development Process1

Opportunity Identification Design Testing Product Introduction Life Cycle Management

Note 1: G.C. Urban and J.R. Hauser in Design and Marketing of New Products, 2nd ed. (Englewood Cliffs, N.J.: Prentice Hall, 1993).

Opportunity Identification
In the Opportunity Identification stage, the firm identifies a customer problem which it can solve. In addition, it identifies the concept for a product to ensure both a product/market fit (the product fits the needs of the customer) and a product/company fit (it fits with the manufacturing and operational skills of the firm).

Design and Testing

The next two stages of Design and Testing are linked in an iterative process. For example, the firm might first embody the product idea in a concept statement which is tested via presentation to potential customers. Given a favorable reaction, the concept could then be developed into a mock-up to permit more effective communication of what the product would look like when actually marketed. An unfavorable reaction from consumers in any testing results in an iteration back to the design stage.

Design and Testing

Testing with consumers can be done via a number of procedures,1, 2 e.g., surveys, taste tests, simulated test markets (in which mock stores are set up and consumers recruited to shop in the mock store environment), and actual test markets for consumer goods and beta tests for industrial goods. Testing is appropriate not only for the product itself but also for the supporting elements of the marketing mix, such as the communication strategy and price.Ill.: Irwin Note 1: C.M. Crawford, New Product Management, 5th ed. (Homewood,

1997); Note 2: R.J. Dolan, Managing the New Product Development Process (Reading, Mass.: Addison-Wesley, 1993).

Product Introduction
After the firm settled on the product and a supporting plan, it reaches Product Introduction. Decisions at this stage involve the geographic markets to which the product will be introduced and whether markets will be approached at the same time or sequentially over time (e.g., a regional rollout).

Product Life Cycle Management

After introduction, a process of Product Life Cycle Management begins. First, the firm should continually be learning more about consumers from their reactions to the introduced product. This added learning may suggest product repositioning or marketing mix changes. Second, the marketing environment is always changing. For example, customer wants are not static; market segment sizes change; competitive offerings change; technology impacts the firms capabilities and costs. Thus, managing the product line is a dynamic process over time.

Place (Marketing Channels)

Place definition
The marketing channel is the set of mechanisms or network via which a firm goes to market, i.e., is in touch with its customer for a variety of tasks ranging from demand generation to physical delivery of the goods. The customers requirements for effective support determine the functions which the members of the channel must collectively provide.

Channel Functions

1. 2. 3. 4. 5. 6. 7. 8.

Kash Rangan1of Harvard Business School has identified eight generic channel functions which serve as a starting place for assessing needs in a particular context: Product Information Product Customization Product Quality Assurance Lot Size (e.g., the ability to buy in small quantities) Product Assortment (refers to breadth, length, and width of product lines) Availability After-Sale Service Logistics

Note 1: V.K. Rangan, Designing Channels of Distribution, HBS No. 594-116

The Myth
The popular phrase weve cut out the middleman and passed the savings on to you

The Reality
One can eliminate a layer in the chain but not the tasks that layer performed. There is little truth in the statement that the middleman represent all costs but no valueadded. The functions done by the middleman now have to be done by someone else. Thus, the recommended approach is to develop customer-driven systems assessing the channel structure and management mechanisms that will best perform the needed functions.1

Note 1: L.W. Stern, A.I. El-Answry and A.T. Coughlan, Marketing Channels, 5th ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1996)

Channel Decisions
The two major decisions in channels are: (i) channel design which involves both a length and breadth issue (ii) channel management i.e., what policies and procedures will be used to have the necessary functions performed by the various parties.

Direct or Indirect Distribution?

Through the 1960s, the conventional wisdom was that a firm should either go to market direct or indirect, but not both because of the channel conflict which would result. The bias was toward going direct as soon as sales volume justified it, because it provided more control and direct contact with customers.

Dual Distribution

By the early 1980s, more firms began simultaneously serving different target markets, each requiring different channel functions (e.g., one segment needed intense pre-sale education; another did not). Thus there came a need to manage dual distribution wherein different systems are used to reach each market segment efficiently and effectively. A firm sales force served some segments; a distributor served others. This move away from only one method of going to market has accelerated. Now a firm may sell through retail outlets and via direct mail; use its own sales force to call on some accounts; rely on distributors to call smaller ones; and rely on other customers to find the companys toll free number, Web site, or submit an order directly to the firm through some Electronic Data Interchange System.

Account Concentration

If a few customers represent the bulk of sales opportunities (e.g., jet engines), a direct selling approach can be cost effective. If the target group is larger in number and more diffuse (e.g., toothpaste), then the services of someone like a retailer who can spread the costs of an account relationship over many products is warranted.

Degree of control and importance of direct customer contact

One reason to go direct may be the lack of intermediaries from whom the firm could secure adequate attention, i.e., the firm lacks the power to gain some control over the intermediaries to ensure the necessary tasks are performed. Also, direct customer contact may be seen as a critical way to gain market understanding as an input to future product development efforts.

Channel Breadth
How intense should the firms presence be in a market area? Does the firm wish to intensively distribute its product, making for maximal customer convenience (e.g., placing the product within arms reach of desire, as Coca-Cola terms it,) or does it wish to be more selective?

More selectivity may be warranted if there is a market education or development task to be done. Thus, some automobile manufacturers, typically high-end (e.g., Mercedes), limit the number of dealers in an area to reduce the dealers concern that the benefits of developing potential customers in a given area would accrue to another dealer free riding on these efforts.

In general, the strength of the argument for limiting distribution to selective or exclusive levels increases with the customers willingness to travel and search for the good, the unit cost of stocking the good, the amount of true selling or market development which needs to be done.

As a product becomes more well known, there is a tendency to become less selective in distribution. For example, personal computers moved from computer specialty stores to mass merchants and websites over time as customer education requirements decreased. Thus, the right channel structure changes over time. This presents a significant challenge as the firm seeks to maintain flexibility in channels while complex legal and other relationship elements tend to cement distribution arrangements.

Channel Management

Channel conflict
Conflict between partners in a distribution system is not uncommonmore than a few litigations have been filed over issues like: we provided a great product, but they never sold it the way they agreed to we developed the market, but they were never able to supply the product on a reliable basis they began distributing through a discounter right in the middle of the territory we spent years developing

Many conflicts do not result in litigation but color the relationship, e.g., a beer distributor lamenting somehow their [the manufacturers] view is that every time sales go up, its their great advertising; when sales go down, its our lousy sales promotion. In a general sense, all parties in the marketing system want the product to do well.

Causes for conflict

1. Lack of congruence in goals, e.g., the manufacturers #1 priority may be to build the consumer confidence, while the distributors is to make money this quarter. 2. Lack of consensus on who is doing what, e.g., who is to perform certain functions such as after-the-sale service; who handles small accounts; who handles global or national accounts when assignments were originally made along a smaller geographic basis.

Trouble shooting
Attention to proper design of contracts and other explicit understandings can help to reduce the potential for conflict. Good communications, e.g., through dealer panels, can help facilitate development of understanding and trust which will almost always be necessary to resolve issues since contracts cannot typically anticipate all the situations which may arise.

Promotion: Marketing Communications

Marketing Communications
The next element of the marketing mix is deciding the appropriate set of ways in which to communicate with customers to foster their awareness of the product, knowledge about its features, interest in purchasing, likelihood of trying the product/and or repeat purchasing it. Effective marketing requires an integrated communications plan combining both personal selling efforts and non-personal ones such as advertising, sales promotion, and public relations.

Tasks and Tools

A useful mnemonic for the tasks in planning communications strategy is the 6 Ms model: 1. Market to whom is the communication to be addressed? 2. Mission what is the objective of the communication? 3. Message what are the specific points to be communicated? 4. Media which vehicles will be used to convey the message? 5. Money how much will be spent in the effort? 6. Measurement how will impact be assessed after the campaign?

The marketing communications mix is potentially extensive, e.g., including non-personal elements such as: advertising, sales promotion events, direct marketing, public relations, packaging, trade shows, as well as personal selling.1
Note 1: P.W. Farris and J.A. Quelch in Advertising and Promotion Management: A Managers Guide to Theory and Practice (Chilton, 1983)

Decision Making Unit

A key to developing an effective communications strategy is understanding of the people involved in the purchase decision making, the roles they play, and their current perceptions of the situation. Those involved, the so-called DecisionMaking Unit (DMU) for a product, can vary from very few (even just the user himself or herself) to many. Hundreds may be involved in major industrial purchases.

Non-personal Vehicles
Advertising in media is particularly effective in: creating awareness of a new product describing features of the product suggesting usage situations distinguishing the product from competitors directing buyers to the point-ofpurchase creating or enhancing a brand image

Advertising is limited in its ability to actually close the sale and make a transaction happen; sales promotions may be an effective device to complement the favorable attitude development for which advertising is appropriate.1
Note 1: D.A. Aaker, R. Batra, and J.G. Myers, Advertising Management, 4th ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1992)

Sales promotions
Sales promotions includes things such as samples, coupons, and contests. These are usually most effective when used as a short-term inducement to generate action.

Types of sales promotions




The three major types of sales promotions are:1 Consumer promotionsused by a manufacturer and addressed to the end consumer, e.g., a cents-off coupon sent in the mail or contained in print media or a continuity program such as collecting proofs-of-purchase to redeem for a gift. Trade promotionsused by the manufacturer and addressed to the trade, e.g., cooperative advertising allowances. Retail promotionsused by the trade and addressed to the end consumer; often this is stimulated by a trade promotion. Examples include offering a discount and displaying or advertising the brand.
Note 1: R.C. Blattberg and S.A. Neslin, Sales Promotion: Concepts, Methods, and Strategies (Englewood Cliffs, N.J.: Prentice-Hall, 1990)

Public relations

Public relations refers to non-paid communication efforts, such as press releases, speeches at industry seminars, appearances by firm executives on radio or TV programs. These efforts do entail a cost to the firm, but generally are distinguished from advertising by virtue of the fact that the firm does not pay for space in the media vehicle itself. For example, in some industries, new product reviews in the trade press are very influential with consumers. However, the output of public relations activities is somewhat less controllable than is the case with either advertising or sales promotion.

Personal Selling
A salesperson as the communication vehicle presents the advantage of permitting an interaction to take place between the firm and a potential customer rather than just the broadcast of information. The salesperson can develop an understanding of the particular customers perceptions and preferences and then tailor the communications message to the particulars of the situation. The importance of personal selling in the communications mix typically increases with the complexity of the product and the need for education of potential customers.

Constructing the communications mix

The proper allocation of dollars across the various media vehicles varies greatly depending upon the market situation. A fundamental decision is whether to focus on a push or pull strategy. In a push strategy, focus is on inducing intermediaries, such as a retailer, to sell the product at retail. Advertisings job may be to make the consumer aware of the product, but the closing of the deal is left to the intermediary. Alternatively, a pull strategy means the end consumer develops such an insistence on the product that he or she pulls it through the channel of distribution, and the retailers role is merely to make the product conveniently available.


The worth of a thing is the price it will bring.

Pricing definition
To a large extent, the combination of the 3 Ps product, place (channel), and promotion (communication mix)determine the target customers perception of the value of the firms product in a given competitive context. Conceptually, this perceived value represents the maximum price which the customer is willing to pay. This should be the primary guide to pricing the product. Once the firm has created value for customers, it is entitled to capture some of that value for itself to fund future value-creation efforts. This is the role of effective pricing.1

Note 1: R.J. Dolan and H. Simon, Power Pricing (New York: Free Press, 1996).

The 1% rise in price magic!

If Coca-Cola, for example, could increase its prices by an average of 1 percent without affecting demand for its products, it would increase its net income by 6.4 percent. Thus, an average price increase of less than $0.01 on a can of cola would translate to an increase in net income of about $300 million.

Price Magic!
Similar 1 percent price increases, if they did not negatively impact demand, would lead to increases in net income of 16.7 percent for Fuji Photo, 17.5 percent for Nestl, and 26 percent for the Ford Motor Company. In fact, an average price increase of 1 percent would boost the net income of the typical large U. S. corporation by about 12 percent1.

Note 1: R. J. Dolan and H. Simon, Power Pricing (New York: Free Press,1997)

Deriving the Price Formula

Lets try this simple mathematics!

Suppose we know a firms unit cost C and its percentage margin M. Let P = price it receives. By definition of the percentage margin we know: [ M/ 100] = (P C)/P (1) We want to take equation (1) and solve it for P. P [M / 100] = P C (2)

Subtract P from both sides: P [M / 100] P = C (3) Factor out the P on the left-hand side: P[M / 100 1] = C (4) Multiply both sides by: -1/[M / 100 - 1]

P = C/[1 M/100] (5)

The Economic Perspective

Consumers Buy When Perceived Value Exceeds Price Consumers should purchase an item whenever the perceived value of that item exceeds its actual price [i.e., whenever (Perceived Value Actual Price) > 0

Willingness to Pay is Impacted by Salient Reference Prices

In determining her willingness to pay, a consumer will consider her economic utility from the transaction [i.e., perceived value actual price] and the consistency between the actual price and a salient reference price [i.e., actual price reference price].

Who Pays?
Some products are paid for by the customer. Some are not. In the case of an automobile for personal use, for instance, the user of the car is also the payer. When the car is a company car, however, the user may bear none of the cost of that car. And in some situations, the user of the product pays some, but not all, of the cost of a good, as is often the case with health insurance, where the employee pays some portion of the insurance and the company pays the remainder. Not surprisingly, to the extent that the user is responsible for the costs, the greater is their price sensitivity.

Application of Marketing Mix

The concept of the marketing mix can provide a powerful tool to view competitors as they compete with one another by emphasizing different elements and mixtures of those elements. A useful way to visualize alternative action/reaction patterns is the competitive-response matrix.

Application of Marketing Mix

A simple matrix might include two companies and three sub elements of the marketing mix, such as price, product quality, and advertising. The matrix would look like this:
Company A Price Product Quality Advertising

Product Quality Advertising




Company B




Explanatory Notes 1
The coefficients (the Cs of the matrix) represent the probability of Company B responding to Company As move. Thus the coefficient Ca,p represents the probability of Company B responding with a price cut (top row of matrix) to Company As increase in advertising (right-hand column of matrix). The diagonal (Cp,p, Cq,q, Ca,a) represents the likelihood of Company B responding to a move by Company A with the same marketing tool (e.g., meet a price cut with a price cut). The coefficients can be estimated by the study of past behavior and by management judgment.

Explanatory Notes 2
The competitive response matrix is a flexible, analytical approach. For example, one can include many marketing tools and add more rows for delayed responses (e.g., will they cut price immediately or wait a month or a quarter?) and additional competitors. The competitive response matrix can help develop a distinctive approach to the market by enabling a company to see how it can differentiate its program from the marketing program of competitors. Such competitive analyses have proven useful to many companies and are particularly important for making major irreversible capital commitments.

Like most concepts, the marketing mix is an abstraction, and real marketing programs do not always fit perfectly the product, price, communication, and distribution paradigm. Promotion, which is defined strictly as shortterm price cuts to the trade and consumer incentives such as coupons, contests, and price allowances, actually shares characteristics with both price and communication. Brand, which is often viewed as an aspect of product, is clearly also part of communications and can serve to help coordinate product policy and communication.

Appendix: Models for MM



A few moments please

Concluding Thoughts on Marketing Mix

Session Objectives

Understanding how customers differ in economic value Knowing where to focus customer acquisition and retention resources Identifying the sources and causes of customer defections Gaining a greater share of the wallet

On Pricing

It is important for a firm to get its pricing right.

Any firms ability to optimally set product prices is governed by many factors. Some of these factors are well understood and are routinely incorporated into a firms pricing decisions. These factors tend to be heavily weighted toward those economic factors that are easily obtained by a firm, including their own variable and fixed costs of production, the market price of competitors products and the firms internal assessment of the value that their product delivers to the intended consumer.

However, optimal product pricing also hinges on a consumers willingness to pay and on a consumers response to price changes.

Research has shown that a consumers willingness to pay is often influenced by psychological or behavioral variables that typically are not considered when setting price. Specifically, consumers often are as concerned with the behavioral question of how fair a deal am I getting as they are with the economic question of how good a deal am I getting.

Value Pricing

The traditional economic approach to product pricing is driven by a small handful of factors. One of these factors is the objective value the product delivers to the consumer.1 This is a measure of the benefits that the product delivers to the consumer, regardless of whether the consumer recognizes those benefits. When 61% of managers claim they are well informed on the value of their product to the consumer, they are most likely referring to this objective value.

Note 1: Corey, Note on Pricing [HBS Note #580-091] and Dolan, Pricing Policy [HBS Note #585-044].

A second factor in the economic approach to pricing is the perceived value of the product to a consumer. Perceived value is the value the consumer understands the product to deliver. Sometimes, a products benefits are readily apparent to the consumer and perceived value approaches objective value with little effort by the firm. Other times, a products benefits are less obvious and need to be communicated by the firm to the consumer (e.g., via advertising, personnel selling). In such cases, the perceived value of a product typically falls below its objective value.

The perceived value of a product also can be influenced by the price of competing products or substitutes. Company A may develop a product that creates great objective value for consumers. Consumers may recognize this value and be willing to pay a high price to obtain the product. However, if Company B introduces an identical product at a much lower price, the perceived value of Company As product would be reduced to the price of Company Bs product.

It is important to note that the perceived value of a product to a consumer should equal the maximum price that consumer is willing to pay for the product. Imagine a consumer who perceives the value of a product to be 100 INR. If priced above 100 INR, the consumer has no incentive to buy the product. If priced at 100 INR or less, however, the consumer always stands to gain from purchasing.

The last major component to the economic approach to pricing involves the firms cost of goods sold (i.e., COGS). Just as the consumer requires an incentive to purchase a product, the firm requires an incentive to sell the product. In order to stay in business and make a positive return, a firm must charge a price that covers both its cost of production and earns a profit.

All of these economic factors come together to form the value pricing approach to pricing. In optimally pricing a product, a firm is bound at the upper end by the consumers perceived value for the product. This perceived value is influenced by the objective value of the product to the consumer, by the firms marketing effort to communicate that objective value, and by the price of substitute products. At the same time, the firm is bound on the lower end by its COGS.

By pricing above COGS and below perceived value, the firm has an incentive to sell the product, measured as [price COGS], and the consumer has an incentive to purchase the product, measured as [perceived value price]. In value pricing terminology, the firm has created value by offering a product that the consumer values at a price greater than the firms COGS. In turn, by pricing between perceived value and COGS, the firm has captured some of that value for itself and has allowed consumers to capture the remainder.

Adding a Behavioral Component to the Economic Perspective

The Economic Perspective: Consumers Buy When Perceived Value Exceeds Price

To complement this economic perspective, we now add a behavioral or psychological perspective to product pricing. This perspective captures how fair a deal one is getting. To make this point clear, consider the following scenarios first proposed by Professor Richard Thaler.1

Note 1: Richard H. Thaler, Mental Accounting and Consumer Choice, Marketing Science, Vol. 4, No. 3 (Summer 1985): p. 199 214

Do you like it?

Scenario #1
You are lying on the beach on a hot day. All you have to drink is ice water. For the past hour, you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A friend gets up to make a phone call and offers to bring back a bottle of your favorite beer from the only nearby place where beer is sold a small, run down-grocery store. He says that the beer might be expensive and asks how much you are willing to spend. He says he will not buy the beer if it costs more than the price you state. What price do you tell your friend?

Scenario #2
You are lying on the beach on a hot day. All you have to drink is ice water. For the past hour, you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A friend gets up to make a phone call and offers to bring back a bottle of your favorite beer from the only nearby place where beer is sold a fancy resort hotel. He says that the beer might be expensive and asks how much you are willing to spend. He says he will not buy the beer if it costs more than the price you state. What price do you tell your friend?

The interesting question is why? As pointed out by Thaler, for the person consuming the beer on the beach, nothing of importance has changed between the two scenarios. Specifically, in both scenarios, the ultimate consumption is identical the same beer is consumed on the same beach. no atmosphere from the fancy resort hotel or the run-down grocery store is being consumed by the beer drinker to justify different prices. there is no strategic reason to report a price below ones perceived value for the beer [e.g., you cannot haggle over price with hotel or store owner].

It appears that ones willingness to pay in these two scenarios is driven not only by the economic utility of the transaction [i.e., perceived value price], but also by the psychological utility of the transaction, driven largely by a consumers perception of fairness.

The Relative versus Absolute Value of Money

Scenario #3
You set off to buy a Sony MP3 Player at what you believe to be the cheapest store in the area. Upon arriving, you find that the MP3 Player you want costs INR 1500, a price consistent with your prior expectations. As you are about to make the purchase, a reliable friend tells you that the very same MP3 Player is selling for INR 100 less at a store approximately 10 minutes away. Do you go to the other store to buy the MP3 Player?

Scenario #4
You set off to buy a Sony Camcorder at what you believe to be the cheapest store in the area. Upon arriving, you find that the Camcorder you want costs INR 30000, a price consistent with your prior expectations. As you are about to make the purchase, a reliable friend tells you that the very same Walkman is selling for INR 100 less at a store approximately 10 minutes away. Do you go to the other store to buy the Camcorder?

These two scenarios raise a curious and important fact about money. Namely, the psychological utility of a fixed amount of money (e.g., INR 100) is relative. Saving INR 100 on a INR 1500 item will have much greater impact on a consumers behavior than saving INR 100 on a INR 30000 item.

Strategy #1: Actively Manage Price Expectations Strategy #2: Actively Manage Perceptions of Cost of Goods Sold

Summing up
Implicit in this session are several questions that, if answered through careful analysis, can help a company to focus on the most important aspects of the total marketing mix and their fit with the customers, company, and competitive situation. 1. Are the elements of the marketing mix consistent with one another? 2. Do the elements add up to a harmonious, integrated whole? 3. Is each element being used to its best leverage? 4. Does the total program, as well as each element, meet the needs of the carefully and explicitly defined target market segment? 5. Does the marketing mix build on the organizations culture and core competencies? Does it either avoid weaknesses or imply a clear program to correct them? 6. Does the marketing mix create a distinctive personality in the competitive marketplace and protect the company from the strongest competitors?