Marketing Subject Guide

Principles of marketing
H. Ali, V. Talwar
MN3141
2013
Undergraduate study in
Economics, Management,
Finance and the Social Sciences
This subject guide is for a 300 course offered as part of the University of London
International Programmes in Economics, Management, Finance and the Social Sciences.
This is equivalent to Level 6 within the Framework for Higher Education Qualifications in
England, Wales and Northern Ireland (FHEQ).
For more information about the University of London International Programmes
undergraduate study in Economics, Management, Finance and the Social Sciences, see:
www.londoninternational.ac.uk
This guide was prepared for the University of London International Programmes by:
H. Ali, BSc (Hon), MPhil., Ph.D Lecturer in Marketing, Open University Business School
V. Talwar, B. Eng, PGDBA, Ph.D., Assistant Professor (Lecturer) in Marketing, Henley Business
School, University of Reading; Visiting Faculty, The London School of Economics and Political
Science
Chapters 1, 2, 4, 9, 11 and 13 contain some material originally written by Rafael Gomez.
This is one of a series of subject guides published by the University. We regret that due
to pressure of work the authors are unable to enter into any correspondence relating to,
or arising from, the guide. If you have any comments on this subject guide, favourable or
unfavourable, please use the form at the back of this guide.
University of London International Programmes

Publications Office
Stewart House
32 Russell Square
London WC1B 5DN
United Kingdom
www.londoninternational.ac.uk
Published by: University of London

© University of London 2013
Reprinted with minor revisions 2015
The University of London asserts copyright over all material in this subject guide except where
otherwise indicated. All rights reserved. No part of this work may be reproduced in any form,
or by any means, without permission in writing from the publisher. We make every effort to
respect copyright. If you think we have inadvertently used your copyright material, please let
us know.
Contents
Contents
Chapter 1: Introduction........................................................................................... 1
1.1 Route map to the guide............................................................................................ 1
1.2 Introduction to the subject area................................................................................ 2
1.3 Syllabus.................................................................................................................... 2
1.4 Aims of the course.................................................................................................... 2
1.5 Learning outcomes for the course............................................................................. 2
1.6 Overview of learning resources................................................................................. 3
1.7 Examination advice................................................................................................ 14
Chapter 2: An overview of marketing: history and theory.................................... 17
2.1 Introduction........................................................................................................... 17
2.2 Definitions and a brief introduction to the history of marketing................................ 18
2.3 A brief history of marketing theory.......................................................................... 19
2.4 Exchange............................................................................................................... 20
2.5 History of business orientations: the triumph of marketing?..................................... 21
2.6 Marketing problems............................................................................................... 25
2.7 Looking ahead: the marketing framework and the ultimate aim of production......... 26
2.8 Overview of chapter............................................................................................... 26
2.9 Reminder of your learning outcomes....................................................................... 26
2.10 Test your knowledge and understanding............................................................... 26
Chapter 3: The marketing environment ............................................................... 29
3.1 Introduction........................................................................................................... 29
3.2 Types of environment.............................................................................................. 31
3.3 Customers, consumers or clients?........................................................................... 31
3.4 Stakeholders........................................................................................................... 33
3.6 Reminder of learning outcomes.............................................................................. 37
3.7 Test your knowledge and understanding................................................................. 37
Chapter 4: Consumer behaviour............................................................................ 39
4.1 Introduction........................................................................................................... 39
4.2 Tastes and constraints in explaining differences and changes in behaviour............... 41
4.3 Prospect theory...................................................................................................... 44
4.4 The social-psychological approach to consumer buyer behaviour.............................. 46
4.5 The role of social networks...................................................................................... 49
4.6 A cognitive versus behavioural approach to consumer decision-making................... 50
4.7 Mechanisms of behavioural/habitual explanation.................................................... 52
4.8 Applications of behavioural and cognitive principles in marketing............................ 52
4.9 Alternative-based and attribute-based search strategies.......................................... 54
4.10 Information control............................................................................................... 55
4.11 Types of buying behaviour..................................................................................... 56
4.12 The case of advertising: cognitive versus behavioural approaches........................... 58
4.13 Overview of chapter............................................................................................. 58
4.14 Reminder of learning outcomes............................................................................ 59
i
MN3141 Principles of marketing
Chapter 5: Organisational buyer behaviour.......................................................... 61

5.1 Introduction........................................................................................................... 61
5.2 Characteristics of business markets......................................................................... 63
5.3 The importance of risk............................................................................................ 65
5.4 What is risk?.......................................................................................................... 65
Chapter 6: Market segmentation, targeting and positioning............................... 71
6.1 Introduction........................................................................................................... 71
6.2 Importance of segmentation................................................................................... 73
6.3 Market segmentation, targeting and positioning..................................................... 74
6.4 Problems in implementing segmentation................................................................. 76
6.5 Positioning............................................................................................................. 78
Chapter 7: Customer relationship marketing (CRM)............................................. 83
7.1 Introduction........................................................................................................... 83
7.2 The development of relationship marketing............................................................. 85
7.3 Building customer relationships and customer equity............................................... 86
7.4 Planning marketing: partnering to build customer relationships............................... 86
7.5 The role of trust in relationships.............................................................................. 86
7.6 Using relationships instead of markets or hierarchies............................................... 87
7.7 Networks and relationships.................................................................................... 94
Chapter 8: Branding and product development.................................................... 99
8.1 Introduction........................................................................................................... 99
8.2 Value.................................................................................................................... 102
8.3 Co-creation and value.......................................................................................... 103
8.4 Quality in marketing............................................................................................. 104
8.5 Branding.............................................................................................................. 108
8.6 New product development.................................................................................... 114
8.7 Organisational adoption of innovation.................................................................. 114
8.8 Common design by users...................................................................................... 116
8.9 Introduction to services marketing........................................................................ 117
8.10 Overview of chapter........................................................................................... 120
8.11 Reminder of your learning outcomes................................................................... 120
8.12 Test your knowledge and understanding............................................................. 120
Chapter 9: Product innovation and the life cycle approach................................ 123
9.1 Introduction......................................................................................................... 123
9.2 Product innovation............................................................................................... 125
9.3 Modelling the rate of adoption of an innovation.................................................... 129
9.4 Economic perspectives on product success............................................................ 130
9.5 Informational cascades......................................................................................... 133
9.6 What is a product life cycle?................................................................................. 137
9.7 Overview of chapter............................................................................................. 141
ii
Contents
9.8 Reminder of your learning outcomes..................................................................... 142

Chapter 10: Promotion........................................................................................ 143
10.1 Introduction....................................................................................................... 143
10.2 What is promotion?............................................................................................ 145
10.3 Advertising......................................................................................................... 148
10.4 Sales promotions................................................................................................ 149
10.5 Personal selling.................................................................................................. 151
10.6 Word of mouth................................................................................................... 152
10.7 Digital marketing communications...................................................................... 152
10.8 Communications and relationships...................................................................... 153
10.10 Reminder of your learning outcomes................................................................. 154
10.11 Test your knowledge and understanding........................................................... 154
Chapter 11: Pricing.............................................................................................. 155
11.1 Introduction....................................................................................................... 155
11.2 Why is pricing important?................................................................................... 156
11.3 Pricing policies and strategy................................................................................ 166
11.4 Summarising pricing policy in theory................................................................... 167
Chapter 12: Distribution...................................................................................... 171
12.1 Introduction....................................................................................................... 171
12.2 Why firms use distribution channels.................................................................... 172
12.3 The functions performed by marketing channel members..................................... 173
12.4 The importance of power in channel member relationships.................................. 177
12.5 Coordination in channel relationships................................................................. 179
12.6 Channel design and management decisions........................................................ 180
12.7 Relationship specific investments in distribution.................................................. 181
12.8 Fairness in distribution channels......................................................................... 182
12.10 Reminder of your learning outcomes................................................................. 183
12.11 Test your knowledge and understanding........................................................... 184
Chapter 13: Corporate social responsibility (CSR).............................................. 185
13.1 Introduction....................................................................................................... 185
13.2 What ethical and social problems is marketing accused of causing?..................... 187
13.3 Marketisation..................................................................................................... 193
13.4 Societal marketing (revisited).............................................................................. 194
13.5 Definitions and a brief history of corporate social responsibility (CSR).................. 194
Appendix 1: Sample examination paper............................................................. 201
Appendix 2: Activity feedback............................................................................. 203
Chapter 2................................................................................................................... 203
Chapter 3................................................................................................................... 203
Chapter 4................................................................................................................... 204
Chapter 5................................................................................................................... 205
iii
Chapter 7................................................................................................................... 206

Chapter 8................................................................................................................... 207
Chapter 10................................................................................................................. 207
Chapter 12................................................................................................................. 208
Chapter 13................................................................................................................. 208
iv
Chapter 1: Introduction
1.1 Route map to the guide

This subject guide should be used as a guide to reading and research
as opposed to a replacement for it. In the Essential reading section of
every chapter, we identify at least one (and sometimes more) Essential
readings from the Kotler and Armstrong textbook (see Section 1.6.2). This,
along with the subject guide, should form the backbone of your study.
Apart from that, we encourage you to seek out the Further readings and
electronic sources, such as websites, which provide additional material of
relevance to the subject.
In order to succeed in the course you should:
• Work through the subject guide and Essential reading; in each of these
identify the relevant chapter and sections of Kotler and Armstrong that
you need to read.
• As you read the subject guide chapters, take note of the Further
reading and references listed and follow up with information from
electronic sources to gain a fuller appreciation of ideas and concepts
which appear in each chapter of the guide and textbook.
• When you have finished your readings, you should examine the
learning outcomes in the subject guide and check to see if you have
understood the material. You may also find it useful to check your
understanding by attempting the Sample examination questions at the
end of each chapter.
In the next couple of paragraphs we will attempt to show how you can
get the best out of this subject guide, Kotler and Armstrong and the other
Essential readings. In order to illustrate this discussion, we will take
Chapter 5 from the subject guide as an example, but the principles raised
here are relevant to other chapters as well.
Chapter 5 of the subject guide deals with organisational buyer behaviour
and the Essential reading from Kotler and Armstrong is Chapter 6. The
Kotler and Armstrong chapter provides a useful introduction to the
topic, which is full of business examples. The chapter then highlights the
features of business markets and then deals with aspects of business buyer
behaviour, such as the types of buying situation and the business buying
process. You’ll note that the explanation is essentially descriptive. The
text explains what marketers generally do. This is particularly useful since
many marketing students who do not work in marketing may sometimes
wonder about the business relevance of concepts that they are studying.
However, there is a fundamental limitation with Kotler and Armstrong’s
coverage. The textbook does not critically examine various concepts and
issues. The subject guide complements this approach and examines the
extent to which the (often-cited) differences between consumer and
business markets are valid. The subject guide then moves onto examining
one of the factors that influences business buyer behaviour – risk. This
concept is considered in some detail and reference is made to a variety
of journal articles. The section also considers how marketers can seek to
manage risk. This discussion serves a further use, since it helps to inform
the discussion on relationships in Chapter 7 of the subject guide.
1
This approach will ensure that you are not only familiar with a breadth of
marketing topics (through your reading of Kotler and Armstrong), but that
you also gain some in-depth insights into key concepts.
1.2 Introduction to the subject area

As the title of the course indicates, the emphasis in this subject guide is on
the principles –(that is, the models, theories, concepts and frameworks)
rather than just the practice – of marketing.
Although attention will naturally be paid to marketing-based concepts;
such as pricing, promotion, distribution and branding, the predominant
theoretical insights will be drawn from several disciplines, such as
management, economics and psychology. Overall the approach will be
conceptual and will better enable you to apply your learning to a broad
range of marketing problems.
1.3 Syllabus
General introduction
An overview of marketing: history and theory
The marketing environment
Consumer behaviour
Organisational buyer behaviour
Market segmentation, targeting and positioning
Customer relationship marketing (CRM)
Branding and product development
Product innovation and the lifecycle approach
Promotion
Pricing
Distribution
Corporate social responsibility (CSR)
1.4 Aims of the course

This course aims to:
• introduce you to the fundamental principles of marketing
• give you a broad understanding of consumers and the marketing
behaviour of firms
• explore the relevance of other academic disciplines to marketing
• encourage you to question the limitations of marketing management and
to suggest ways of overcoming its many problems
• develop your practical skills by applying learned theories to real-world
organisational problems.
1.5 Learning outcomes for the course

This course is ideally suited to those who wish to develop a sophisticated
and critical understanding of marketing theory. At the end of this course and
having completed the Essential reading and activities, you should be able to:
2
• discuss the function and effect of advertising/promotion from an

organisational perspective
• describe the pricing behaviour of firms in an uncertain environment
where information may be limited or wrong
• describe and analyse the marketing behaviour of firms and consumers.
These themes run throughout the course. You will be expected to acquire a
knowledge and critical understanding of these and other important themes
as well as the sub-topics that form a part of each major theme.
1.6 Overview of learning resources

1.6.1 The structure of the guide
This subject guide has three main areas of study:
• A general introduction to marketing giving the historical foundations
of the subject as well as the scope of what marketing is all about.
• A focus on understanding consumer and buyer behaviour. This is an
essential element, since the hallmark of marketing, as opposed to
other management disciplines, is the belief in the sovereignty of the
consumer and ultimate strength to an organisation of structuring
managerial strategies with the end user in mind.
• A focus on the organisation and on understanding its particular
marketing behaviour.
1.6.2 Reading advice

There are many textbooks that cover most of the major themes related to
the principles of marketing found in this guide. However, the Kotler and
Armstrong text, listed under Essential reading, is the book most often
used in university programmes around the world. It also has the virtue of
having a dedicated international edition and one of the longest print runs
in academic history. As such, although our guide is structured thematically
quite differently from the Essential reading textbook, all the chapters of
the subject guide have corresponding ones in the textbook. Our subject
guide is therefore a complement to and not a substitute for this Essential
text.
Essential reading
Kotler, P. and G. Armstrong Principles of marketing. (Upper Saddle River,
NJ: Pearson Prentice Hall, 2012) 14th international edition [ISBN
9780273752431].
Detailed reading references in this subject guide refer to the editions of the
set textbooks listed above. New editions of one or more of these textbooks
may have been published by the time you study this course. You can use
a more recent edition of any of the books; use the detailed chapter and
section headings and the index to identify relevant readings. Also check
the virtual learning environment (VLE) regularly for updated guidance on
readings.
Essential journal articles

Gaski, J.F. ‘The theory of power and conflict in channel of distribution’, Journal
of Marketing 48(3) 1984, pp.9–29.
Greatorex, M., V-W. Mitchell and R. Cunliffe ‘A risk analysis of industrial buyers:
the case of mid-range computers’, Journal of Marketing Management 8
1992, pp.315–33.
3
Mitchell, V-W. ‘Buy-phase and buy-class effects on organisational risk perception

and reduction in purchasing professional services’, Journal of Business and
Industrial Marketing 13(6) 1998, pp.461–78.
Noordhoff, C.S., K. Kyriakopoulos, C. Moorman, P. Pauwels and B.G.C. Dellaert
‘The bright side and dark side of embedded ties in business-to-business
innovation’, Journal of Marketing 75 2011 pp.34–52.
Ring, P.S. and A.H. Van de Ven ‘Structuring cooperative relationships between
organisations’, Strategic Management Journal 13(6) 1992, pp.483–98.
Wilson, D.F. ‘Why divide consumer and organisational buyer behaviour?’,
European Journal of Marketing 34(7) 2000, pp.780–96.
Yilmaz, C., E.E. Telci, M. Bodur, T.E. Iscioglu and T. Eker ‘Source characteristics
and advertising effectiveness’, International Journal of Advertising 30(5)
2011, pp.889–914.
Further reading
As well as the Essential reading you will find that each subject guide
chapter has a reference to Further reading. Usually the texts referred to
as Further reading are linked to an activity in that chapter of the subject
guide and you are expected to read the relevant parts of the cited article
and answer the questions that are asked. You will need to support your
learning by reading as widely as possible and by thinking about how
these principles apply in the real world. To help you read extensively, you
have free access to the VLE and University of London Online Library (see
below).
Other useful texts for this course include:
Aldrich, H. and D.A. Whetten ‘Organisation sets, action sets and networks:
making the most of simplicity’ in Nystrom. P.C. and W.H. Starbuck (eds)
Handbook of organisational design Vol 1. (Oxford: Oxford University Press,
1981) [ISBN 9780198272410], pp.385–408.
Baker, M.J. Marketing strategy and management. (Basingstoke: Palgrave
Macmillan, 2007) sixth edition [ISBN 9781403986276].
Bauer, R.A. ‘Consumer behaviour as risk taking’ in Cox, D. (ed.) Risk taking
and information handling. (Boston, MA: Division of Research, Graduate
School of Business Administration, Harvard University, 1967) [ISBN
9780875840635], pp.22–33.
Boissevain, J. Friends of friends. Networks, manipulators and coalitions. (Oxford:
Basil Blackwell, 1974) [ISBN 9780631149705].
Chesbrough, H. Open innovation: the new imperative for creating and
profiting from technology. (Boston, MA: Harvard Business School Press,
2003) [ISBN 9781578518371].
Cox, D.F. ‘Risk taking and information handling in consumer behaviour – an
intensive study of two cases’ in Cox, D. (ed.) Risk taking and information
handling. (Boston, MA: Harvard University Press, 1967)
[ISBN 9780875840635], pp.82–108.
Cram, T. ‘Pricing’, in Baker, M.J. and S.J. Hart (eds) The marketing book.
(Oxford: Butterworth-Heinemann, 2008) sixth edition
[ISBN 9780750685665].
Freeman, R.E. Strategic management: a stakeholder approach. (Boston, MA:
Pitman, 1984) and (Cambridge: Cambridge University Press, 2010)
[ISBN 9780521151740].
Galbraith, K. The affluent society. (London: Penguin, 1999)
[ISBN 9780140285192].
Guseman, D.S. ‘Risk perception and risk reduction in consumer services’, in
Donelly, J.H. and W.R. George (eds) in Marketing of Services, Proceedings
of the American Marketing Association. (Chicago, IL: American Marketing
Association, 1981) [ISBN 9780877571483], pp.200–04.
4
Holbrook, M.B. ‘The nature of customer value’, in Rust, R.T. and R.L. Oliver
(eds) Service quality: new directions in theory and practice. (Thousand Oaks,
CA: Sage Publications, 1994) [ISBN 9780803949201], pp.21–71.
Homburg, C., S. Keuster and H. Krohmer Marketing management: a
contemporary perspective. (London: McGraw-Hill, 2009) [ISBN
9780077117245].
Kay, J. ‘A model of product positioning’ in The foundations of corporate success.
(Oxford: Oxford University Press, 1993) and new edition (Oxford: Oxford
University Press, 1995) [ISBN 9780198289883], pp.242–50.
Klein, N. No logo: no space, no choice, no jobs: taking aim at the brand bullies.
(Toronto: A.A. Knopf Canada, 2000) and (Fourth estate, 2010) 10th edition
[ISBN 9780007340774].
Kotler, P., S.H. Ang, S.M. Leong and C.T. Tan Marketing management – an Asian
perspective. (Singapore: Prentice Hall, 1996) and (Prentice Hall, 2004) third
edition [ISBN 9780131066250].
Kotler, P. Marketing management. (Englewood Cliffs, NJ: Prentice Hall, 1991)
seventh edition [ISBN 9780135524800].
Kuhlmeijer, H.J. Managerial marketing. (Leiden: Stenfert Kroese, 1975) [ISBN
9789020704600].
Lambin, J. Market driven management: strategic and operational marketing.
(Basingstoke: Macmillan, 2000) [ISBN 9780333793190].
Lambin, J. and I. Schuiling Market-driven management: strategic and
operational marketing. (Basingstoke: Palgrave Macmillan, 2012) third edition
[ISBN 9780230276024].
McDonald, C. Challenging social work: the institutional context of practice.
(Basingstoke: Palgrave Macmillan, 2006) [ISBN 9781403935458], p.115.
Nagle, T. and R.K. Holden The strategy and tactics of pricing: a guide to profitable
decision making. (Englewood Cliffs, NJ: Prentice Hall, 1994) [ISBN
9780136106814].
Nagle, T. and R.K. Holden The strategy and tactics of pricing: a guide to growing
more profitably. (Upper Saddle River, NJ: Prentice Hall, 2006).
Olson, J.C. ‘Cue utilisation in the quality perceptions process’ in Venkatesan,
M. (ed.) Third annual conference of the Association for Consumer Research.
(Chicago: Association for Consumer Research, 1972) pp.167–79.
Peter, J.P. and J.C. Olson Consumer behavior and marketing strategy. (New
York: McGraw-Hill, 2005) and (McGraw-Hill, 2010) ninth edition [ISBN
9780071267816].
Puttnam, D. Movies and money. (New York: Knopf, 1998) [ISBN
9780679446644].
Rogers, E.M. Diffusion of innovations. (London: Free Press, 1983) third
edition [ISBN 0029266505]; (London: Free Press, 1995) fourth edition
[ISBN 9780029266717]; (London: Free Press, 2003) fifth edition [ISBN
9780743222099].
Rogers, E. and R. Shoemaker Communication of innovations. (New York: Free
Press, 1972) [ISBN 0029266807].
Rokeach, M. The nature of human values. (New York: The Free Press, 1973).
Samuelson, P.A. Economics: an introductory analysis. (New York: McGraw-
Hill, 1994) and (McGraw-Hill, 1998) new edition of 1948 edition [ISBN
9780070747418].
Schnaars, S.P. Marketing strategy: customers and competition. (New York: Free
Press, 1998) second edition [ISBN 9780684831916].
Trott, P. Innovation management and new product development. (Harlow: Pearson,
2012) fifth edition [ISBN 9780273736561].
Webster, F.E. and Y. Wind ‘A general model for understanding organisational
buyer behaviour’, in Enis, B.M. and K.K. Cox (eds) Marketing classics.
(Boston, MA: Allyn and Bacon, 1991) [ISBN 9780273736561 (pbk.)].
West, D., J. Ford and E. Ibrahim Strategic marketing: creating competitive
advantage. (Oxford: Oxford University Press, 2006) [ISBN 9780199556601].
5
Williamson, O.E. Markets and hierachies: analysis and antitrust implications.

(New York: Free Press, 1975) [ISBN 9780029347805].
Journals
Anjos, M., R.C.H. Cheng and C.S.M. Currie ‘Optimal pricing policies for
perishable products’, European Journal of Operational Research 166 2005,
pp.246–54.
Badot, O. and B. Cova ‘The myopia of new marketing panaceas: the case for
rebuilding our discipline’, Journal of Marketing Management 24(1–2) 2008,
pp.205–19.
Barry, J and A. Weinstein ‘Business psychographics revisited: from segmentation
theory to successful marketing practice’, Journal of Marketing Management
25 (3–4) 2009, pp.315–40.
Beane, T.P. and D.M. Ennis ‘Market segmentation: a review’, European Journal
of Marketing 21(5) 1987, pp.20–42.
Belobaba, P.P. ‘Application of a probabilistic decision model to airline seat
inventory control’, Operations Research 37(2) 1998, pp.183–97.
Ben Porath, Y. ‘The F connection: families, friends and firms and the
organisation of exchange’, Population and Review 6 1980, pp.1–30.
Berger, J., A.T. Sorensen and S.J. Rasmussen ‘Positive effects of negative
publicity’, Marketing Science 29(5) 2010, pp.815–27.
Bettman, J.R. ‘Perceived risk and its components: a model and empirical test’,
Journal of Marketing Research 10(2) 1973, pp.184–90.
Bikhchandani, S., D. Hirshleifer and I. Welch ‘Learning from the behaviour of
others: conformity, fads and informational cascades’, Journal of Economic
Perspectives 12(3) 1998, pp.151–70.
Birley, S., S. Cromie and A. Myers ‘Entrepreneurial networks: their emergence
in Ireland and overseas’, International Small Business Journal 9(4) 1991,
pp.56–74.
Bourantas, D. ‘Avoiding dependence on suppliers and distributors’, Long Range
Planning 22(3) 1989, pp.140–49.
Boze, B.V. ‘Selection of legal services: an investigation of perceived risk’,
Journal of Professional Services Marketing 3(1) 1987, pp.287–97.
Brik, A.B., B. Rettab and K. Mellahi ‘Market orientation, corporate social
responsibility and business performance’, Journal of Business Ethics 99
2011, pp.307–24.
Brown, B.P., A.R. Zablah, D.N. Bellenger, J. Wesley and W.J. Johnston ‘When
do B2B brands influence the decision making of organizational buyers?
An examination of the relationship between purchase risk and brand
sensitivity’, International Journal of Research in Marketing 28 2011, pp.194–
204.
Bryson, A., R. Gomez and P. Willman ‘From the two faces of unionism to the
Facebook society’, Labor and Employment Relations Association Series,
Proceedings of the 60th Annual Meeting, (2008) pp.51–60. Downloadable:
http://cep.lse.ac.uk/pubs/download/mhrldp0006.pdf
Buil I. L. de Chernatony and E. Martinez ‘Examining the role of advertising
and sales promotions in brand equity creation’, Journal of Business Research
66(1) 2013, pp.115–22.
Chakravorti, B. ‘Stakeholder marketing 2.0’, Journal of Public Policy &
Marketing 29(1) 2010, pp.97–102.
Chitturi, R., R. Raghunathan and V. Mahajan ‘Delight by design: the role of
hedonic versus utilitarian benefits’, Journal of Marketing 72 2008, p.49.
Cho, J. and J. Lee ‘An integrated model of risk and risk reducing strategies’,
Journal of Business Research 59 2006, pp.112–20.
Choi, J.A., M. Koo, I. Choi and S. Auh ‘Need for cognitive closure and
information search strategy’, Psychology and Marketing 25(11) 2008,
pp.1027–42.
6
Clerides, S. ‘Price discrimination with differentiated products: definition and

identification’, Economic Inquiry 42(3) 2004, pp.402–12.
Coase, R. ‘The lighthouse in economics’, Journal of Law and Economics 17(2)
1974, pp.357–76.
‘Corporate social responsibility: two-faced capitalism’, The Economist, 22 January
2004.
Crosno, J.L. and R. Dahlstrom ‘A meta-analytic review of opportunism in
exchange relationships’, Journal of the Academy of Marketing Science 36
2008, pp.191–201.
Currie, C.S.M. and D. Simpson ‘Optimal pricing ladders for the sale of airline
tickets’, Journal of Revenue and Pricing Management 8(1) 2009, pp.96–106.
Dahl, R.A. ‘The concept of power’, Behavioral Science 2(3) 1957, pp.201–15.
Danneels, E. ‘Market segmentation: normative model versus business reality;
an exploratory study of apparel retailing in Belgium’, European Journal of
Marketing 30(6) 1996, pp.36–51.
Darley, W.K., C. Blankson and D.J. Luethge ‘Toward an integrated framework
for online consumer behaviour and decision making process: a review’,
Psychology and Marketing 27(2) 2010, pp.94–116.
David, P.A. ‘Clio and the economics of QWERTY’, American Economic Review
75(2) 1985, p.332.
Davis, H.L. ‘Service characteristics, consumer search and the classification of
retail services’, Journal of Retailing 55(3) 1979.
Deber, R.B., N. Kraetschemer, S. Urowitz and N. Sharpe ‘Patient, consumer, client
or customer: what do people want to be called?’ Health Expectations
8 2005, pp.345–51.
Derbaix, C. ‘Perceived risk and risk relievers: an empirical investigation’, Journal
of Economic Psychology 3(1) 1983, pp.19–38.
Dibb, S. ‘Market segmentation: strategies for success’, Marketing Intelligence and
Planning 16(7) 1998, pp.394–406.
Dibb, S. and L. Simkin ‘Implementation problems in industrial market
segmentation’, Industrial Marketing Management 23(1) 1994, pp.55–63.
Dibb, S. and P. Stern ‘Questioning the reliability of market segmentation
techniques’, Omega – International Journal of Management Science 23(6)
1995, pp.625–36.
Dimofte, C.V. ‘Implicit measures of consumer cognition: a review’, Psychology and
Marketing 27(10) 2010, pp.921–37.
Dobni, D. and G.M. Zinkhan ‘In search of brand image: a foundation analysis’,
Advances in Consumer Research 17 1990, pp.110–19.
Duncan, T. and S.E. Moriarty ‘A communication-based marketing model for
managing relationships’, Journal of Marketing 62 1998, pp.1–13.
Durgee, J.F., G.C. O’Connor and R.W. Veryzer ‘Observations: translating values
into product wants’, Journal of Advertising Research 36(6) 1996, pp.90–99.
Erdem, T., M.P. Keane and B. Sun ‘The impact of advertising on consumer
price sensitivity in experience goods markets’, Quantitative Marketing and
Economics 6 2008, pp.139–76.
El-Ansary, A.I. and L.W. Stern ‘Power measurement in the distribution channel’,
Emerson, R.M. ‘Power dependence relations’, American Sociological Review 27(1)
1962, pp.31–40.
Evans, L., G. Guthrie and N. Quigley ‘Contemporary microeconomic foundations
for the structure and management of the public sector’, New Zealand Treasury
Working Paper 12/01/2012; http://purl.oclc.org/nzt/p-1446
Fang, E. ‘Customer participation and the trade-off between new product
innovativeness and speed to market’ Journal of Marketing 72 2008, pp.90–
104.
Fernandes, T.M. and J.F. Proenca ‘The blind spot of relationships in consumer
markets: the consumer proneness to engage in relationships’, Journal of
Marketing Management 24(1–2) 2008, pp.153–68.
7
Fishman, C. ‘The Wal-Mart you don’t know’, FastCompany Magazine 77,

December 2007; www.fastcompany.com/magazine/77/walmart.html
Frambach, R.T. and N. Schillewaert ‘Organizational innovation adoption:
a multi-level framework of determinants and opportunities for future
research’, Journal of Business Research 55 2002, pp.163–76.
Frazier, G.L., J.D. Gill and S.H. Kale ‘Dealer dependence and reciprocal actions
in a channel of distribution in a developing country’, Journal of Marketing
53(1) 1989, pp.50–69.
Frooman, J. ‘Stakeholder influence strategies’, Academy of Management Review
24(2) 1999, pp.191–205.
Fuchs, C. and A. Diamantopoulos ‘Evaluating the effectiveness of brand-
positioning strategies from a consumer perspective’, European Journal of
Marketing 44(11) 2010, pp.1763–86.
Gale, D. ‘What have we learned from social learning?’, European Economic
Review 40(3–5) April 1996, pp.617–28.
Gallarza, M.G., I. Gil-Saura and M.B. Holbrook ‘The value of value: further
excursions on the meaning and role of customer value’, Journal of Consumer
Behaviour 10 2011, pp.179–91.
Gaski, J.F. ‘The theory of power and conflict in channel of distribution’, Journal
of Marketing 48(3) 1984, pp.9–29.
Gatignon, H. and T.S. Robertson ‘A propositional inventory for new diffusion
research’, Journal of Consumer Research 11 1985, pp.849–67.
Geanakoplos, J., M. Magill and M. Quinziil ‘Demography and the long-run
predictability of the stock market’, Cowles Foundation Discussion Paper 1380
(August 2004); http://ideas.repec.org/p/cwl/cwldpp/1380.html
Ghobadian, A., S. Speller and M. Jones ‘Service quality: concepts and models’,
International Journal of Quality & Reliability Management 11(9) 1994,
pp.43–66.
Gourville, J.T. ‘Eager sellers and stony buyers, understanding the psychology of
new-product adoption’, Harvard Business Review June 2006, pp.98–106.
Granovetter, M. ‘The strength of weak ties’, American Journal of Sociology 78(6)
1973, pp.1360–80.
1992, pp.315–33.
Gullett, J., L. Do, M. Canuto-Carranco, M. Brister, S. Turner and C. Caldwell
‘The buyer-seller relationship: an integrative model of ethics and trust’,
Journal of Business Ethics 90 2009, pp.329–41.
Gundlach, G.T. and W.L. Wilkie ‘Stakeholder marketing: why “stakeholder” was
omitted from the American Marketing Association’s official 2007 definition
of marketing and why the future is bright for stakeholder marketing’,
Journal of Public Policy & Marketing 29(1) 2010, pp.89–92.
Hakansson, H. and D. Ford ‘How should companies interact in business
networks?’, Journal of Business Research 55 2002, pp.133–39.
Halstead, D., C. Droge and M.B. Cooper ‘Product warranties and post-purchase
service’, Journal of Services Marketing 7(1) 1993, pp.33–40.
Hanson, W.A. and D.S. Putler ‘Hits and misses: herd behavior and online
product popularity’, Marketing Letters 7(4) 1996, pp.297–305.
Heide, J.B. and G. John ‘The role of dependence balancing in safeguarding
transaction-specific assets in conventional channels’, Journal of Marketing
52(1) 1988, pp.20–35.
Higgs, B., M.J. Polonsky and M. Hollick ‘Measuring expectations: forecast vs.
ideal expectations. Does it really matter?’ Journal of Retailing and Consumer
Services 12(1) 2005, pp.49–64.
Hirschman, A. ‘Rival interpretations of market society: civilizing, destructive, or
feeble?’ Journal of Economic Literature 20(4) 1982, pp.1463–84.
Holmstrom, B. and J. Roberts ‘The boundaries of the firm revisited’, Journal of
Economic Perspectives 12(4) 1998, pp.73–94.
8
Homer, P.M. ‘Relationships among ad-induced affect, beliefs and attitudes –

another look’ Journal of Advertising 35(1) 2006, pp.35–45.
Huang, P., N.H. Lurie and S. Mitra ‘Searching for experience on the web: an
empirical examination of consumer behaviour for search and experience
goods’, Journal of Marketing 73 2009, pp.55–69.
Hurst, E. and M. Aguiar ‘Consumption, expenditure and home production over
the lifecycle’, University of Chicago, Department of Economics Working Paper
(2004); http:/ideas.repec.org/p/red/sed005/303.html
Jain, S.P. and S.S. Posavac ‘Prepurchase attribute verifiability, source credibility
and persuasion’, Journal of Consumer Psychology 11(3) 2001, pp.169–80.
Jocz, K.E. and J.A. Quelch ‘An exploration of marketing’s impacts on society:
a perspective linked to democracy’, Journal of Public Policy and Marketing
27(2) 2008, pp.202–06.
Johanson, J. and L.G. Mattson ‘Interorganisational relations in industrial
systems: a network approach compared to a transaction approach’,
International Studies of Management and Organization 27(1) 1987,
pp.34–38.
Joshi, A.W. and S.J. Arnold ‘The impact of buyer dependence on buyer
opportunism in buyer-supplier relationships: the moderating role of
relational norms’, Psychology and Marketing 14(8) 1997, pp.823–45.
Jyh-Shen, C. and C. Droge ‘Service quality, trust, specific asset investment and
expertise: direct and indirect effects in a satisfaction-loyalty framework’,
Journal of the Academy of Marketing Science 34(4) 2006, pp.613–27.
Kang, G-D. and J. James ‘Revisiting the concept of a societal orientation:
conceptualisation and delineation’, Journal of Business Ethics 73 2007,
pp.301–18.
Kang, MP., J.T. Mahoney and D. Tan ‘Why firms make unilateral investments
specific to other firms: the case of OEM suppliers’, Strategic Management
Journal 30 2009, pp.117–35.
Kapeller, J. and S. Puhringer ‘The internal consistency of perfect competition’,
Journal of Philosophical Economics 3(2) 2010, pp.134–52.
Kennedy, C.R., F. Harris and M. Lord ‘Integrating public policy and public affairs
in a pharmaceutical marketing program: the AIDS pandemic’, Journal of
Public Policy & Marketing 23(2) 2004, pp.128–39.
Kilbourne, W.E. and M.C. LaForge ‘Materialism and its relationship to individual
values’, Psychology and Marketing 27(8) 2010, pp.780–98.
Kirmani, A. and A.R. Rao ‘No pain, no gain: a critical review of the literature
on signaling unobservable product quality’, Journal of Marketing 64 2000,
pp.66–79.
Klemperer, P. ‘Markets with consumer switching costs’, The Quarterly Journal of
Economics 102(2) 1987, pp.375–94.
Kopalle, P.K. and D.R. Lehmann ‘Setting quality expectations when entering
a market: what should the promise be?’ Marketing Science 25(1) 2006,
pp.8–24.
Kozinets, R.V., K. de Valck, A.C. Wojnicki and S.J.S. Wilner ‘Networked
narratives: understanding word-of-mouth marketing in online
communities’, Journal of Marketing 74 2010, pp.71–89.
Kuksov, D. and Y. Xie ‘Competition in a status goods market’, Journal of
Marketing Research Vol XLIX 2012, pp.609–23.
Kyoung-Nan, K. and D.W. Schumann ‘Consumers’ expectations on value
perception and purchase intention’, Advances in Consumer Research 28
2006, pp.316–22.
Lemke, F., M. Clark and H. Wilson ‘Customer experience quality: an exploration
in business and consumer contexts using repertory grid technique’, Journal
of the Academy of Marketing Science 39 2011, pp.846–69.
Liu, Y. ‘Developing a scale to measure the interactivity of websites’, Journal of
Advertising Research 43(2), 2003 pp.207–16.
Liebenstein, H. ‘Bandwagon, snob and Veblen effects’, Quarterly Journal of
Economics 64(2) 1950, pp.165–201.
9
Malär, L., H. Krohmer, W.D. Hoyer and B. Bettina ‘Emotional brand attachment
and brand personality: the relative importance of the actual and the ideal
self’, Journal of Marketing 75 2011, pp.35–52.
McDougall, G.H.G. ‘The intangibility of services: measurement and competitive
perspectives’, Journal of Services Marketing 4(4) 1990, pp.27–40.
McLaughlin, H. ‘What’s in a name: “client”, “patient”, “customer”, “consumer”,
“expert by experience”, “service user” – what next?’ British Journal of Social
Work 2008, pp.1–17.
Mehta, N., X. Chen and O. Narasimhan ‘Disentangling the multiple effects
of advertising on brand choice decisions’ Marketing Science 27(3) 2008,
pp.334–55.
Milligan, L. ‘People power’ www.vogue.co.uk/ news/2011/07/25/versace-joins-
sandblasting-campaign 12 September 2011.
Mitchell, R.K., B.R. Agle and D.J. Wood ‘Toward a theory of stakeholder
identification and salience: defining the principle of who and what really
counts’, Academy of Management Review 22(4) 1997, pp.853–86.
Modigliani, F. ‘Life-cycle, individual thrift, and the wealth of nations’, American
Economic Review 76(3) 1986, pp.297–313.
Modigliani, F. and R. Brumberg ‘Utility analysis and the consumption function:
an interpretation of cross-section data’ in Kurihara, K.K. (ed.) Post-Keynesian
economics. (New Brunswick, NJ: Rutgers University Press, 1954) pp.388–
436.
Monterrico Metals Annual Report (2005): www.monterrico.com/i/
pdf/2005AnnualReport.pdf
Morgan, N.A. and L.L. Rego ‘Brand portfolio strategy and firm performance’,
Journal of Marketing 59(73) 2009, pp.59–74.
Natale, S.M. and C. Doran ‘Marketisation of education: an ethical dilemma’,
Nayyar, P.R. ‘Information asymmetries: a source of competitive advantage
for diversified service firms’, Strategic Management Journal 11(7) 1990,
pp.513–19.
Nelson, P. ‘Advertising as information’, Journal of Political Economy 83 1974,
pp.729–54.
Neville, B.A., S.J. Bell and G.J. Whitwell ‘Stakeholder salience revisited:
refining, redefining and refuelling an underdeveloped conceptual tool’,
Nguyen, N.H., M. Skitmore and J. Kwok Wai Wong ‘Stakeholder impact analysis
of infrastructure project management in developing countries:
a study of perception of project managers in state-owned engineering firms
in Vietnam’, Construction Management and Economics 27 2009, pp.1129–40.
Nijssen, E.J. ‘Success factors of line extensions of fast-moving consumer goods’,
European Journal of Marketing, 33(5) 1999, pp.450–74.
Nitzan, I. and B. Libai ‘Social effects on customer retention’, Journal of
Marketing 75 2011, pp.24–38.
innovation’, Journal of Marketing 75 2011, pp.34–52.
Olander, H., P. Hurmelinna-Laukkanen, K. Blomqvist and P. Ritala ‘The dynamics
of relational and contractual governance mechanisms in knowledge sharing
of collaborative R&D projects’, Knowledge and Process Management 17(4)
2010, pp.188–204.
O’Rand, A.M. and M.L. Krecker ‘Concepts of the lifecycle: their history,
meanings, and uses in the social sciences’, Annual Review of Sociology 16
1990, pp.241–62.
10
O’Shaughnessy, J. and N.J. O’Shaughnessy ‘Reply to criticisms of marketing,

the consumer society and hedonism’, European Journal of Marketing 41(1)
2007, pp.7–16.
Palmer, R.A. and P. Millier ‘Segmentation: identification, intuition, and
implementation’, Industrial Marketing Management 33 2004, pp.779–85.
Palazón, M., V.E. Delgado-Ballester ‘Sales promotions effects on consumer-
based brand equity’, International Journal of Market Research 47(2) 2005,
pp.179–204.
Palazón-Vidal, Mariola and Elena Delgado-Ballester ‘Sales promotions effects
on consumer-based brand equity’, International Journal of Market Research
47(2) 2005, p.181.
Parasuraman, A., V.A. Zeithaml and L.L. Berry ‘A conceptual model of service
quality and its implications for future research’, Journal of Marketing 49(4)
1985, pp.41–50.
Park, D-B. and Y-S. Yoon ‘Segmentation by motivation in rural tourism: a
Korean case study’, Tourism Management 30(1) 2009, pp.99–108.
Peloza, J. and J. Shang ‘How can corporate social responsibility activities create
value for stakeholders? A systematic review’, Journal of the Academy of
Marketing Science 39 2011, pp.117–35.
Pires, G.D., J. Stanton and P. Stanton ‘Revisiting the substantiality criterion:
from ethnic marketing to market segmentation’, Journal of Business Research
64 2011, pp.988–96.
Porter, M. ‘How competitive forces shape strategy’, Harvard Business Review
57(2) 1979, pp.137–45.
Prescott E.C. ‘Why do Americans work so much more than Europeans?’ Federal
Reserve Bank of Minneapolis Quarterly Review 28(1) 2004, pp.2–13.
Quinn, L., T. Hines and D. Bennison ‘Making sense of market segmentation:
a fashion retailing case’, European Journal of Marketing 41(5–6) 2007,
pp.439–65.
Raghubir, P., J.J. Inman and H. Grande ‘The three faces of consumer
promotions’, California Management Review 46(4) 2004.
Redding, P. ‘The evolving interpretations of customers in higher education:
empowering the elusive’, International Journal of Consumer Studies 29(5)
2005, pp.409–17.
organisations’, Strategic Management Journal 13 1992, pp.483–98.
Ringold, D.J. and B. Barton Weitz ‘The American Marketing Association
definition of marketing: moving from lagging to leading indicator’, Journal
of Public Policy & Marketing 26(2) 2007, pp.251–60.
Rohlfs, I. ‘A Theory of interdependent demand for a communications service’,
Bell Journal of Economics and Management Science 5(1) 1974, pp.16–37.
Rose, P. and S.P. DeJesus ‘A model of motivated cognition to account for the link
between self-monitoring and materialism’, Psychology and Marketing 24(2)
2007, pp.93–115.
Salkever, A. ‘Byte of the apple’, Business Week 21 April 2004.
Schreier, M., C. Fuchs and D.W. Dahl ‘The innovation effect of user design:
exploring consumers’ innovation perceptions of firms selling products
designed by users’, Journal of Marketing 76 2012, pp.18–32.
Sheth, J.N. and C. Uslay ‘Implications of the revised definition of marketing:
from exchange to value creation’, Journal of Public Policy & Marketing 26(2)
2007, pp.302–07.
Shimp, T.A. and W.O. Bearden ‘Warranty and other extrinsic cue effects on
consumers’ risk perceptions’, Journal of Consumer Research 9(1) 1982,
pp.38–46.
Singh, J., R.K. Jayanti, J.E. Kilgore, K. Agarwal and R.R. Gandarvakottai ‘What
goes around comes around: understanding trust–value dilemmas of market
relationships’, Journal of Public Policy & Marketing 24(1) 2005, pp.8–62.
11
Smith, R.E., J. Chen and X. Yang ‘The impact of advertising creativity on the
hierarchy of effects’, Journal of Advertising 37(4) 2008, pp.47–61.
Smith N.C., M.E. Drumwright and M.C. Gentile ‘The new marketing myopia’,
Spekman, R.E. and D. Strauss ‘An exploratory investigation of a buyer’s concern
for factors affecting more cooperative buyer-seller relationships’, Industrial
Marketing and Purchasing 1(3) 1986, pp.26–43.
Spinelli, S. and S. Birley ‘An empirical evaluation of conflict in the franchise
system’, British Journal of Management 9 1998, pp.301–25.
Springer R.A. ‘Pharmaceutical industry discursives and the marketization of
nursing work: a case example’, Nursing Philosophy 12 2011, pp.214–28.
‘Survey: corporate social responsibility’, The Economist, 20 January 2005.
Swaminathan, V. and C. Moorman ‘Marketing alliances, firm networks and firm
value creation’, Journal of Marketing 73 2009, pp.52–69.
Tadajewski., M. ‘Towards a history of critical marketing studies’, Journal of
Tae-Hoon, P. ‘Hierarchical structures and competitive strategies in car
development’, Asian Business and Management 6 2007, pp.179–98.
Thaler, R. ‘Toward a positive theory of consumer choice’, Journal of Economic
Behaviour and Organisation 1 1980, pp.39–60.
Tversky, A. and D. Kahneman ‘The framing of decisions and the psychology of
choice’, Science 211(4881) 1981, pp.453–58.
Twede, D., R. Clarke and J.A. Tait ‘Packaging postponement: a global packaging
strategy’, Packaging Technology and Science 13(4) 2000,
pp.105–15.
Tynan, C., S. McKechnie and C. Chhuon ‘Co-creating value for luxury brands’,
Vallaster, C., A. Lindgreen and F. Maon ‘Strategically leveraging corporate social
responsibility: a corporate branding perspective’, California Management
Review 54(3) 2012, pp.34–60.
Van de Ven, A. ‘On the nature, formation, and maintenance of relations among
organisations’, Administrative Science Quarterly 1(4) 1976, pp.598–621.
Vargo, S.L. and R.F. Lusch ‘Evolving to a new dominant logic for marketing’,
Journal of Marketing 68 2004, pp.1–17.
Varian, H. ‘Differential pricing and efficiency’, First Monday: The Internet Peer
Reviewed Magazine 2 (1996); www.firstmonday.org/htbin/cgiwrap/bin/ojs/
index.php/fm/article/view/473
Vargo, S.L., P.P. Maglio and M.A. Akaka ‘On value and value co-creation: a
service systems and service logic perspective’, European Management
Journal 26 2008, pp.145–52.
Viswanathan, M., J.A. Rosa and J.A. Ruth ‘Exchanges in marketing systems:
the case of subsistence consumer–merchants in Chennai, India’, Journal of
Marketing 74 2010, pp.1–17.
West, J. and S. Gallagher ‘Challenges of open innovation: the paradox of
firm investment in open-source software’, R&D Management 36(3) 2006,
pp.319–31.
Wible, A. ‘It’s all on sale: marketing ethics and the perpetually fooled’, Journal
of Business Ethics 99 2011, pp.17–21.
Wilkie, W.L. and E.S. Moore ‘Expanding our understanding of marketing in
society’, Journal of the Academy of Marketing Science 40 2012, pp.53–73.
Williamson, O. ‘The economics of organisation: the transaction cost approach’,
American Journal of Sociology 87(3) 1985, pp.548–77.
Williamson, O.E. ‘Transaction cost economics: the governance of contractual
relations’, Journal of Law and Economics 22(2) 1979, pp.233–61.
Wright, M. and D. Charlett ‘New product diffusion models in marketing: an
assessment of two approaches’, Marketing Bulletin 6 1995, pp.32–41.
12
Wu, L-L. and J-Y. Lin ‘The quality of consumers’ decision-making in the
environment of e-commerce’, Psychology and Marketing 23(4) 2006,
pp.297–11.
and advertising effectiveness’, International Journal of Advertising 30(5) 2011,
pp.889–914.
Yorkston, E.A., J.C. Nunes and S. Matta ‘The malleable brand: the role of implicit
theories in evaluating brand extensions’, Journal of Marketing 74 2010,
pp.80–93.
Yu, H.X., S. Taewon and G.K. Ik-Whan ‘Do the magnitude and asymmetry of
specific asset investments matter in the supplier–buyer relationship?’, Journal
of Marketing Management 26(9–10) 2010, pp.858–77.
1.6.3 Online study resources

In addition to the subject guide and the Essential reading, it is crucial that you
take advantage of the study resources that are available online for this course,
including the VLE and the Online Library.
You can access the VLE, the Online Library and your University of London
email account via the Student Portal at:
https://my.londoninternational.ac.uk
You should have received your login details for the Student Portal with
your official offer, which was emailed to the address that you gave on your
application form. You have probably already logged in to the Student Portal in
order to register. As soon as you registered, you will automatically have been
granted access to the VLE, Online Library and your fully functional University
of London email account.
If you have forgotten these login details, please click on the ‘Forgotten your
password’ link on the login page.
The VLE
The VLE, which complements this subject guide, has been designed to
enhance your learning experience, providing additional support and a sense
of community. It forms an important part of your study experience with the
University of London and you should access it regularly.
The VLE provides a range of resources for EMFSS courses:
• Self-testing activities: Doing these allows you to test your own
understanding of subject material.
• Electronic study materials: The printed materials that you receive from
the University of London are available to download, including updated
reading lists and references.
• Past examination papers and Examiners’ commentaries: These provide
advice on how each examination question might best be answered.
• A student discussion forum: This is an open space for you to discuss
interests and experiences, seek support from your peers, work
collaboratively to solve problems and discuss subject material.
• Videos: There are recorded academic introductions to the subject,
interviews and debates and, for some courses, audio-visual tutorials and
conclusions.
• Recorded lectures: For some courses, where appropriate, the sessions from
previous years’ Study Weekends have been recorded and made available.
• Study skills: Expert advice on preparing for examinations and developing
your digital literacy skills.
• Feedback forms.
13
Some of these resources are available for certain courses only, but we
are expanding our provision all the time and you should check the VLE
regularly for updates.
Making use of the Online Library

The Online Library contains a huge array of journal articles and other
resources to help you read widely and extensively.
To access the majority of resources via the Online Library you will either
need to use your University of London Student Portal login details, or you
will be required to register and use an Athens login:
http://tinyurl.com/ollathens
The easiest way to locate relevant content and journal articles in the
Online Library is to use the Summon search engine.
If you are having trouble finding an article listed in a reading list, try
removing any punctuation from the title, such as single quotation marks,
question marks and colons.
For further advice, please see the online help pages:
www.external.shl.lon.ac.uk/summon/about.php
Unless otherwise stated, all websites in this subject guide were accessed in
April 2013. We cannot guarantee, however, that they will stay current and
you may need to perform an internet search to find the relevant pages.
1.7 Examination advice

Important: the information and advice given here are based on the
examination structure used at the time this guide was written. Please
note that subject guides may be used for several years. Because of this
we strongly advise you to always check both the current Regulations
for relevant information about the examination, and the VLE where you
should be advised of any forthcoming changes. You should also carefully
check the rubric/instructions on the paper you actually sit and follow
those instructions.
The examination for this subject will be a three-hour written examination,
in which candidates will be expected to answer four questions out of a
total of eight. Sample examination questions are included at the end of
each chapter and a Sample examination paper is located at the end of the
guide.
As will be evident upon inspection, the examination questions blend
concrete definitional knowledge of the subject (you have to learn and
recall what the concepts mean) along with analytical applicability (you
have to know how to use the concepts you have learned). In answering
any question it is important to utilise concepts from the subject guide,
Essential reading and Further reading where applicable. However, what
is more important than a vast reservoir of accumulated knowledge is the
quality of your arguments. Think of the material in this guide as offering
supporting material for your own intelligence and informed opinions. We
encourage you to take full advantage of the questions that appear at the
end of every chapter in order to conduct self-testing. The ‘PRSQT’ method
is of particular applicability in preparing for the examination in this
subject:
• Preview the material you are about to read.
• Read the material.
• Go back and study the material you have read by taking notes.
14
• Create an inventory of questions that may be relevant to the course.

• Test yourself with the questions you have assembled.
We hope that this subject guide will enable you to enjoy the study of
marketing and help you to refine your understanding of the many topics
that have an inordinate effect on the way we behave as consumers and
how our market-oriented societies are structured.
Remember, it is important to check the VLE for:
• up-to-date information on examination and assessment arrangements
for this course
• where available, past examination papers and Examiners’ commentaries
for the course which give advice on how each question might best be
answered.
15
Notes
16
Chapter 2: An overview of marketing: history and theory
Chapter 2: An overview of marketing:

history and theory
2.1 Introduction
Before we can start discussing marketing theories and concepts, it is
useful to understand the origins of marketing and how academics define
it today. This will be followed by a discussion of the four main historical
business orientations (production, product, sales and marketing) and how
marketing fits into this. The chapter will conclude with an examination of
marketing problems and how marketing students can draw upon different
academic disciplines such as psychology and economics to solve them.
2.1.1 Aims of the chapter

The aims of this chapter are to:
• show how and where the practice of marketing originated
• help ground the study of marketing in its historical antecedents
• identify which academic disciplines are the most important for the
study of marketing.
2.1.2 Learning outcomes

By the end of this chapter, and having completed the Essential reading
and activities, you should be able to:
• identify different definitions of marketing and the implications of the
differences
• explain the meaning of exchange and value in the context of
marketing
• discuss the history of marketing theory and the different orientations
that firms can follow.
2.1.3 Essential reading

Kotler, P. and G. Armstrong Principles of marketing. (Upper Saddle River, NJ:
Pearson Prentice Hall, 2012) Chapter 1. You should read the entire chapter
to familiarise yourself with the Marketing ethos.
2.1.4 Further reading

Vargo, S.L., P.P. Maglio and M.A. Akaka ‘On value and value co-creation: a
service systems and service logic perspective’, European Management
Journal 26 2008, pp.145–52.
2.1.5 References cited

Porter, M. ‘How competitive forces shape strategy’, Harvard Business Review
57(2) 1979, pp.137–45.
Ringold, D.J. and B. Barton Weitz ‘The American marketing association
definition of marketing: moving from lagging to leading indicator’, Journal
of Public Policy & Marketing 26(2) 2007, pp.251–60.
Sheth, J.N. and C. Uslay ‘Implications of the revised definition of marketing:
from exchange to value creation’, Journal of Public Policy & Marketing 26(2)
2007, pp.302–07.
Smith, A. Wealth of nations [1776]. (Wordsworth, 2012)
[ISBN 9781840226881].
17
Vargo, S.L. and R.F. Lusch ‘Evolving to a new dominant logic for marketing’,
Wilkie, W.L. and E.S. Moore ‘Expanding our understanding of marketing in
society’, Journal of the Academy of Marketing Science 40 2012, pp.53–73.
2.1.6 Useful websites

www.marketingpower.com/
This is the home of the American Marketing Association (AMA); the
oldest marketing association of its kind. There are links to other affiliated
marketing associations around the world.
2.1.7 Synopsis of chapter content

This chapter starts by examining the definitions and history of marketing.
The importance of the definitions is explored with reference to the
concepts of exchange and value. The chapter then examines the notion
of exchange in more detail and the implications of the different types
of exchange for marketers. We then look at another popular topic in
marketing, the orientations or philosophies that firms can follow. Some of
the concepts underlying these orientations are also considered; this allows
us to distinguish between them more clearly.
2.2 Definitions and a brief introduction to the history of

marketing
Ringold and Weitz (2007) make the following, useful, observation
A widely accepted definition of marketing offers marketing
practitioners and academics, as well as those with whom they
want to communicate, some consensus with respect to what
marketing is and is not.
(Ringold and Weitz 2007, p.251)
There are many definitions of marketing. Here we present four of the most
widely used versions since the inception of marketing to the present:
• ‘Marketing consists of those activities involved in the flow of goods and
services from the point of production to the point of consumption.’
(American Marketing Association, 1938)
• ‘Marketing is the process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods and services to
create exchange and satisfy individual and organizational objectives.’
• ‘Marketing is an organizational function and a set of processes for
creating, communicating and delivering value to customers and for
managing customer relationships in ways that benefit the organization
and its stakeholders.’
• ‘Marketing is the activity, set of institutions, and processes for creating,
communicating, delivering and exchanging offerings that have value
for customers, clients, partners, and society at large.’
18
Activity 2.1
What substantial differences exist between the first formal definition of marketing (i.e.
the AMA’s 1938 definition) and the one the AMA provided nearly 70 years later in 2007?
What explains the changes, if any, in the definition?
See Appendix 2 for feedback.
Looking at the two most recent definitions of marketing, one sees that they
agree on the following points:
• Marketing is a management process.
• Marketing is about giving customers what they want.
• In the AMA 1995 version, marketing is about exchange (namely, of
ideas, goods and services).
• The AMA definition also describes the ways in which marketing can
stimulate exchange (namely, through conception, pricing, promotion
and distribution).
2.3 A brief history of marketing theory

You may wonder why a history of marketing is of interest in the context
of more recent developments. To paraphrase Joseph Schumpeter,1 in 1
Joseph Schumpeter
order to be a well-grounded social scientist, one needs a command of four (1883–1950) was a
well-known economist
disciplines (economics, statistics, mathematics and history). However, if
who developed and
forced to choose just one of these disciplines, Schumpeter always claimed popularised a version
he would have chosen history. of business cycle theory
A proper historical account of ‘marketing’ would begin with early based on punctuated
spurts of technological
capitalism and sociological theories of the growth of consumerist culture.
advances that is now
However, that is a bit beyond the scope of this chapter. Instead, we will accepted by economists
briefly trace the growth and emergence of the marketing framework, of the evolutionary
which began in the 1900s when marketing began to divorce itself from its school of economics.
founding discipline of economics.
We will then go on to show why some marketers argue that the marketing
framework is the most ‘advanced’ of all business orientations.
According to Wilkie and Moore (2012) the development of marketing
thought can be divided into four eras:
• First era: Founding the field (1900–20): Economists had been
focused on production and attention was needed on distribution.
• Second era: Formalising the field (1920–50): It was in this
period that electricity appeared in the majority of US homes and
subsequently the accompanying consumer products. Packaged goods
delivered by new retailing concepts like supermarkets, also appeared.
Academically the field was spun-off from economics. There was an
increased emphasis on the functional approach to marketing (for
example, supplying the market, creating opportunities for exchange
and undertaking facilitating functions). We will discuss the concept of
exchange later in this chapter.
• Third era: Paradigm shift (1950–80). Mass marketing dominated.
The focus of marketing was to look at the subject from the perspective
of the marketing manager. This led to the development of concepts
such as the marketing orientation, segmentation, the 4Ps (product,
place, price and promotion) and branding.
• Fourth era: A fragmentation of the mainstream (1980–present):
This era returned to a more economic focus. It was strongly influenced
19
by Michael Porter and his five-forces model and the paradigm of

competitive advantage. Advances in economic strategy and game
theory also influenced the growth of the strategic marketing school.
The field has also been influenced by the globalisation of marketing.
You should note that these developments also influenced the adoption of
different business orientations at different points in time. So, for example,
when the emphasis was on creating large quantities of product, in order
to meet customers’ unmet needs, the production orientation was popular.
However, when supply problems were addressed and product quality
became more important, the product orientation became more relevant.
Vargo and Lusch (2004) start with a review of the academic study of
marketing. They point out that marketing initially started with a focus on
distribution and exchange of commodities. This approach is described as
having a ‘goods-dominant logic’, where units of output are seen as central
components of exchange. It was only in the 1950s that the discipline
evolved into marketing management (the 4Ps), with an emphasis on
decision-making and serving customers. In the 1980s, marketing concepts
such as relationship marketing and the market orientation emerged, which
were not wholly grounded in microeconomics, the discipline which had
initially served as the basis for marketing theories.
In the late 20th century, one of the new areas of research was in services
marketing and initially a lot of effort was expended on identifying how
services were different to goods. However, an alternative view began to
emerge. Customers do not buy goods or services; rather they buy offerings,
which provide services to the customers and yield value. Marketing
had moved from a ‘goods-dominant logic’, which emphasised tangible
outputs and discrete transactions, to a ‘service-dominant logic’, which
saw intangibility, exchange processes and relationships as being more
important. A service-dominant logic implies that firms want to customise
offerings, and recognise that the consumer is always a co-creator of value
(Vargo et al., 2008). This perspective considers how marketers can help
consumers in specialisation and value-creation.
2.4 Exchange
Earlier definitions of marketing included reference to the term
‘exchange’ and while the relevance of this has recently been questioned,
it is nevertheless useful to understand why exchange was considered
important. Although written in 1975, Bagozzi’s classic article dealing with
exchange still offers practical and theoretical insights today. He identifies
three different types of exchange.
• Restricted exchange: This involves two party reciprocal
relationships (e.g. the customer and the salesman), one of whom sells
something to the other in return for money.
• Generalised exchange: This involves at least three actors. The
benefit flows between the parties may be indirect. Bagozzi gives the
example of a public bus company that asks a department store for a
donation of benches, which are to be used for the benefit of the bus
company’s passengers. The benches themselves contain advertising
and as a result of seeing these, the passengers start frequenting the
department store. Therefore, there is not a direct benefit flow from the
department store to the passengers, as the latter receive the benefits
from the bus company. Similarly the passengers ‘reward’ to the bus
company comes from visiting the department store that is advertised.
20
The usefulness of this example is that there is no direct exchange

between parties, but there is an exchange of interest.
• Complex exchange: Bagozzi refers to this as being similar to a
distribution channel, where a manufacturer sells to a retailer (so there
is two-way exchange between them), the retailer sells to the customer
(so there is two-way exchange between them), who in turn sells to a
consumer (which is also two-way).
This framework shows that exchanges can vary in terms of whether they
are undertaken between two or more parties. Exchanges can also range
between being concrete and reciprocal and consummated immediately, to
ones where what is being exchanged is more ambiguous and the exchange
can take some time to be completed. The exchange can also sometimes
be a process, where there may be two groups of people at each end of the
exchange and all the others in between add value to the offering before
passing it on along the chain by means of exchanges.
The usefulness of these ideas to marketers is that:
• Marketers may need to understand how restricted or generalised the
exchange that they undertake actually is. Once marketers do this they
may be better able to understand how to manage the exchange in
order to undertake it more effectively. In the example of generalised
exchange given above, the department store may assess that this
method of promoting the store not only has obvious advertising
benefits in terms of making potential customers aware of the store, but
also that it may encourage customers to think of the department store
in a more positive way (that is, as an altruistic company). So with
generalised exchanges marketers need to be aware of all the possible
monetary and non-monetary costs and benefits of the exchange. Such
exchanges can benefit a variety of stakeholders, as well as customers.
This can be useful to consider because those other stakeholders may
be important now or may become important in the future.
• In complex exchanges, the underlying notion is that each party is
adding some value (benefits) to the offering, but it is also imposing
certain costs. Marketers may need to assess the benefits that different
channel intermediaries add to the benefits received by the final
customer and weigh that against any additional costs that they may
create. Could other parties in that channel undertake the same tasks
(creation of value), but at lower cost? Where consumers buy products
direct from manufacturers via the internet, they are foregoing the
benefits that intermediaries may have offered (for example, the chance
to actually see and touch the product), but they may gain from lower
prices, or a more immediate purchase and at least the perception of
more choice.
2.5 History of business orientations: the triumph of

marketing?
Having described the evolution of marketing theory, we will now look at a
brief account of the emergence of the current marketing framework, which
has come to dominate certain industries and markets.
There are five main business orientations, each of which has emerged as
a response to evolutions in the marketplace. If I were to ask the question:
‘What kind of a firm do you work for (or have you in the past)?’, the
answer is likely to suggest one of these five orientations:
21
• Production: Here the focus is on producing more, selling high

volumes, controlling costs and production efficiency. The firm which
pioneered this orientation is Ford in the early 1900s, with its adoption
of assembly line manufacturing and a standardised product, the Model
T, which was famously available in any colour ‘as long as it’s black!’
• Product: This orientation moves away from standardised products
and focuses on improving quality. The assumption is that customers
want a better quality version of the same thing, and are prepared to
pay a premium for a differentiated product. This approach was first
adopted by General Motors (GM) in the 1930s, which gained market
share from Ford in the 1930s by offering customers a diversified
product line.
• Selling: The selling orientation, as the name suggests, focuses on
aggressive sales and promotion to sell whatever the organisation wants
to make or distribute. Here the seller’s needs come first, and products
are ‘pushed’ under the assumption that if the price is low enough,
customers will buy the product whether they like it or not. Examples
of this orientation include firms that use door-to-door salesmen to
distribute encyclopedias or vacuum cleaners. This orientation has been
accurately portrayed in the films, in particular, the 1988 Hollywood
movie Tin Men, the play and later film adaptation of David Mamet’s
Glengarry Glen Ross (1992) and more recently in the movie Boiler
Room (1999), which depicts financial industry salesmen trying to
convince prospective investors to buy stock over the telephone.
• Marketing: The marketing orientation is one of the most advanced
orientations according to marketing founders such as Philip Kotler.
They feel this way because marketing, unlike other orientations,
focuses on the end user by first defining customer needs and then
developing offerings that deliver what the customer wants and needs.
In this approach, customers and their needs come first. Can you think
of a company that uses this orientation?
• Societal: The most recent orientation to have been identified, is
the societal orientation where marketers following the marketing
orientation also take into account present and future customer welfare,
as well as the welfare of the environment. The practical implications of
this orientation are, for example, fast food restaurants that offer lower
fat options and which use recyclable napkins and mats.
Finally, as will be noted later on in this guide, you should be aware that
it is possible for firms to display a combination of orientations. Looking
at the actual practices of firms it is often difficult to see if there are any
firms who are wholly oriented one way or another. Some aspects of their
activities suggest one orientation, while other aspects of their activities
suggest another. In general we should view these orientations as ‘ideal’
types and recognise that reality is often some combination of the above
and therefore a bit messier.
Case study 2.1: Measuring the marketing orientation
Ajay Kohli and his colleagues developed a measure for assessing the marketing
orientation of firms. Understanding what the measure looks at can be a useful means
of better understanding what the marketing orientation really is (or one interpretation
of it). They identified three basic components of the marketing orientation: intelligence
generation, intelligence dissemination and responsiveness.
Intelligence generation involves the firm collecting information about customer needs and
there should be a number of different departments doing this. Intelligence dissemination
22
involves information exchange within the organisation and responsiveness refers to the
implementation of marketing programmes based on the intelligence gathered.
In the questionnaire developed by Kohli and his colleagues there were a number of
measures of each of the above components. For example, to assess a firm’s intelligence
generation managers would be asked to respond to statements such as ‘In this business
unit, we meet with customers at least once a year to find out what products or services
they will need in the future’. For intelligence dissemination statements included, ‘We
have interdepartmental meetings at least once a quarter to discuss market trends and
developments’ and for responsiveness statements included ‘Our business plans are
driven more by technological advances than by market research’. The last statement
is noteworthy because it shows the trade-off between a marketing orientation and a
product orientation. Managers who agree with that statement are reflecting a product
orientation and they may well be quite proud of that.
Kohli, A.K., B.J. Jaworski and A. Kumar ‘MARKOR: a measure of market orientation’,
Journal of Marketing Research 30 1993, pp.467–77.
Let us now look at the assumptions underlying the different orientations.

Table 2.1 shows the different assumptions made about the market and
consumer behaviour by firms that follow the different orientations.
If you look at the second column of this table, the production-oriented firm
assumes that there is a lack of supply; it is because of this assumption that
its focus is to produce as much as possible.
There are obvious examples of markets around the world where this
assumption holds and the behaviour of some marketers is evidence of a
production orientation. The airline market is a case in point. Some airlines
flying between developed countries to destinations in developing countries
know that demand for seats is very high (from people wishing to see their
families). The number of competitors on these routes is sometimes limited
and such airlines know that they do not need to even attempt to provide a
good service; they must simply fill seats to ensure that they have enough
aircraft flying production-orientation). Contrast this with the extremely
competitive London to New York route, with customers having the choice
of a number of airlines. In such a situation where supply exceeds demand,
a marketing orientation is more likely.
If you look at the second box in the first column of Table 2.1 you will see
that as a result of market conditions, it is possible to make assumptions
about buyer behaviour. Where supply is limited, customers cannot afford
to be choosy and may not be able to consider quality or variety. Rows three
and four are important for practical purposes because they identify the
situations when the different orientations may be effective and ineffective.
You should also pay attention to the last row in the table. This shows that
it is possible for firms to display a combination of orientations. Looking
at the practices of firms in real life it is often difficult to see if there are
any that are wholly oriented one way or another. Some aspects of their
activities suggest one orientation, other characteristics of their activities
suggest another. This is why we argue that firms can have combinations of
orientations.
The argument presented in the last row of the second main column
of Table 2.1 is that some firms may combine elements of the product
orientation with the marketing orientation. For example, product
development may be undertaken as a result of innovation by the firm’s
engineers (without prior market research). However, prior to launch the
product may be tested among customers.
23
24
Production Product Sales Marketing Societal
Assumptions There is a lack of supply. There is a lack of quality Oversupply/lack of demand Oversupply/lack of demand As well as products that
regarding market products. requires additional sales can be overcome if you satisfy needs and wants,
conditions effort. take into account needs should also consider wider
and wants. issues – in their own right.

Assumptions Customers are not Customers are not aware They need to be pushed Customers prefer products Customers will buy from
regarding buyer concerned about product of the possibilities for the into buying. which cater for their needs marketers with concerns
behaviour quality or variety. product class. and wants and if this is for wider environmental
done they may come back. issues. This will also win
Will need less sales effort. favour with government.
Situations when When there is a lack of In high technology When buyers’ behaviour is Where customers have Where there is pressure to
effective supply – customers will businesses where there characterised by inertia. a choice and will prefer look after the environment
buy whatever is available. is an asymmetry of those products which cater and other social issues.
information between buyer most closely to their needs.
and seller.
Situations when When customers have a When marketers come Where focus on selling Where customers are Where there is no
ineffective choice – they will want to regard themselves in leads marketers to sell unable to identify pressure from customers/
quality and variety. the business of making a whatever they have rather their needs and wants. government and no long-
particular product and not than consider customers’ Where there is a lack term benefits and the costs
fulfilling a particular want. wants. of production capability outweigh the benefits.
Table 2.1: Assumptions made by firms following the different orientations.

and customers will buy
anything.
Combinations of Plus marketing orientation, Sell products which
orientations to develop a product and people want to buy, but
then undertake research. accompany with heavy
sales pitch.
Activity 2.2
Write down examples of firms that in your experience follow the different orientations.
Then write down which elements of consumer buyer behaviour or characteristics of the
market have encouraged the firms to follow a specific orientation.
You should read the details of the other orientations and consider the advantages
and disadvantages of each. You should note that it has been argued that a marketing
orientation can lead to problems for marketers since it may lead to them focusing on
customers’ perceptions of what is required, and for many industries this may lead to
cosmetic changes to a product.
2.5.1 Other academic disciplines and marketing

Marketing is not itself a unitary theoretical discipline. Rather, it is a
framework drawing from many different academic disciplines. Although
its roots are in industrial economics, it is actually a composite of three
major academic disciplines: economics, psychology and management. Each
theoretical approach has its specific contribution to areas of marketing
relevance which are summarised in Table 2.2.
Academic discipline Area of marketing relevance

Price theory and strategy
Economics Economic behaviour
Applied game theory
Consumer behaviour
Psychology Advertising messages
Social psychology
Segmentation strategy
Management Demand analysis
General management strategy
Table 2.2: Academic disciplines and marketing.
2.6 Marketing problems

‘Real world’ marketing problems involve all three disciplines in varying
degrees and proportions. A marketing practitioner has to decide which
academic discipline is most relevant to the problem at hand. Marketing
problems can essentially be divided into four groups:
• Operational marketing problems involve working with existing
opportunities; for example, by targeting the product to a specific segment
of consumers.
• Analytical marketing problems are related to the market structure in
which a firm operates, and its effects on the firm’s marketing approach.
• Normative marketing problems are those which concern themselves with
how things ‘should be’. An example of this is the emergence of corporate
social responsibility and ethical marketing (‘no logo’ movement).
• Strategic marketing problems involve evaluating the needs of customers
and evaluating how the company can provide a solution to this need.
Each problem requires a different set of academic approaches. It takes time
to develop the requisite skills as a marketing analyst or practitioner in order
to know when to use which approach to solve a given problem. In some
25
cases, even defining what the problem is requires experience and subtle
knowledge of the problem at hand.
2.7 Looking ahead: the marketing framework and the

ultimate aim of production
We end this chapter on a rather philosophical note. What is the ultimate
aim of marketing or of any form of production? The ultimate aim of
production is not the production of goods and services, nor the satisfaction
of a narrow set of consumer preferences, but rather ‘the production of free
human beings associated with one another in terms of equality’. This was
US philosopher John Dewey’s definition, one which he had based from his
careful reading of Adam Smith’s definition in the Wealth of nations (1776).
Smith deplored what he called the ‘vile maxim’ – which amounted to a
distortion of true human values in favour of wealth acquisition without
an underlying aim other than to gain riches. Marketing, with its focus on
solving problems and meeting the needs of end users, would probably
have suited Adam Smith.
We mention this in passing because there is a group of marketing scholars
and practitioners who believe in something similar called ‘social or
ethical marketing’ and this is one of their ultimate aims. They believe the
marketing orientation, with its focus on the end user and the solving of
problems for people, can achieve a better society.
2.8 Overview of chapter

Modern definitions of marketing describe it as a management process that
involves the identification and anticipation of customer requirements. The
development of marketing can be divided into four eras.
Most businesses can be classified into five main business orientations
(or some combinations thereof) that evolved in response to changes in
technology and society.
2.9 Reminder of your learning outcomes

Having completed this chapter, and the Essential reading and activities,
you should be able to:
• identify different definitions of marketing and the implications of the
differences
• explain the meaning of exchange and value in the context of
marketing
• discuss the history of marketing theory and the different orientations
that firms can follow.
2.10 Test your knowledge and understanding

1. a. Define marketing. (5 marks)
b. How has the definition of marketing evolved? (10 marks)
c. What is the implication of the replacement of the term ‘exchange’
with that of ‘value’? (10 marks)
2. a. Distinguish between the different types of exchange as identified
by Bagozzi. (10 marks)
26
b. Give examples of each of these types of exchange. (5 marks)

c. Discuss the advantages and disadvantages to firms of using
generalised exchanges. (10 marks)
3. a. Explain what is meant by the term product orientation. (5 marks)
b. Under what circumstances would you expect firms to use this
orientation? (10 marks)
c. What are the possible disadvantages of following this orientation?
(10 marks)
27
Notes
28
Chapter 3: The marketing environment
3.1 Introduction
This chapter focuses on the environmental factors that affect the
marketing activities of organisations. Such factors include demographic
changes, changes in fashions, changes in consumption due to economic
development and political changes. How marketers cope with such
changes is also covered. Another important theme that runs throughout
this course is the fact that marketers have to be aware of changes that take
place in the marketing environment, since these can have a major impact
on how marketers change and evolve their own marketing strategies.
You should note that while this chapter and the accompanying material
in Kotler and Armstrong (2012) draw attention to specific aspects of the
political, economic, social and technological environments, these are
all dynamic areas and for examination purposes you need to have your
own examples that illustrate, for example, how specific changes in the
economic environment have had an influence on marketers. Clearly there
is a similarity in concepts and their study in this chapter will repay when
you reach the end of the course. Finally, you should remember that study
of the marketing environment is important insofar as the environment can
have an important impact on the activities of marketers. For this reason
this topic has important, though often unstated, links with the other topics
in this subject guide. You should be aware that examination questions on
any of the other topics may require you to have an awareness of the issues
addressed in this topic.

The aims of this chapter are:
• identify the different elements of the marketing environment
• describe and distinguish between the marketing environment’s
elements
• distinguish between the terms customer, client and consumer and
highlight the implications for marketers
• provide a framework for assessing stakeholders.

• explain the difference between the micro and macroenvironment of a
firm
• describe how the different elements of the micro and
macroenvironment affect firms’ marketing activities
• explain the difference between the terms consumer, client and
customer and understand the debate surrounding the use of these
terms in certain professions
• outline the basis on which marketers prioritise certain stakeholders
over others.
29

NJ: Pearson Prentice Hall, 2012) Chapter 3. You should read the
sections headed: ‘The company’s microenvironment’ and ‘The company’s
macroenvironment’. However, you do not need to read the sub-section
‘The changing American family’, ‘Geographic shifts in population’, ‘A better
educated population’ or ‘Increasing diversity’. You also do not need to read
the section titled, ‘Responding to the marketing environment’. Although
the material in Kotler and Armstrong is essential to your study, it is also
conceptually easy and for that reason it is not explained further in this
chapter of the subject guide.

Chakravorti, B. ‘Stakeholder marketing 2.0’, Journal of Public Policy &
Marketing 29(1) 2010, pp.97–102.
Mitchell, R.K., B.R. Agle and D.J. Wood ‘Toward a theory of stakeholder
identification and salience: defining the principle of who and what really
counts’, Academy of Management Review 22(4) 1997, pp.853–86.
Smith N.C., M.E. Drumwright and M.C. Gentile ‘The new marketing myopia’,

Deber, R.B., N. Kraetschemer, S. Urowitz and N. Sharpe ‘Patient, consumer,
client or customer: what do people want to be called? Health Expectations 8
2005, pp.345–51.
Freeman, R.E. Strategic management: a stakeholder approach. (Boston: Pitman,
1984).
Gundlach, G.T. and W.L. Wilkie ‘Stakeholder marketing: why “stakeholder” was
omitted from the American marketing association’s official 2007 definition
of marketing and why the future is bright for stakeholder marketing’,
Kennedy, C.R., F. Harris and M. Lord ‘Integrating public policy and public affairs
in a pharmaceutical marketing program: the AIDS pandemic’, Journal of
Public Policy & Marketing 23(2) 2004, pp.128–39.
McDonald, C. Challenging social work: the context of practice. (Basingstoke:
Palgrave Macmillan, 2006) p.115.
McLaughlin, H. ‘What’s in a name: ‘Client’, ‘Patient’, ‘Customer’, ‘Consumer’,
‘Expert by experience’, ‘Service user’ – what next?’, British Journal of Social
Work 2008, pp.1–17.
Milligan, L. People power (2011). Accessed from: www.vogue.co.uk/
news/2011/07/25/versace-joins-sandblasting-campaign; available 12
September 2011.
Monterrico Metals Annual Report (2005): www.monterrico.com/i/
pdf/2005AnnualReport.pdf; accessed 12 February 2012
Neville, B.A., S.J. Bell and G.J. Whitwell ‘Stakeholder salience revisited:
refining, redefining and refuelling an underdeveloped conceptual tool’,
Journal of Business Ethics 102 2011 pp.357–78.
Nguyen, N.H., M. Skitmore and J. Kwok Wai Wong ‘Stakeholder impact
analysis of infrastructure project management in developing countries: a
study of perception of project managers in state-owned engineering firms in
Vietnam’, Construction Management and Economics 27 2009, pp.1129–40.
Redding, P. ‘The evolving interpretations of customers in higher education:
empowering the elusive’, International Journal of Consumer Studies 29(5)
2005, pp.409–17.

This chapter briefly describes the marketing environment and then
distinguishes between customers, consumers and clients. The second
main topic this chapter covers is stakeholder analysis and the basis by
30
which marketers can categorise their stakeholders. The chapter ends with
a broad assessment of the ways in which marketers can influence their
stakeholders – these approaches will be illustrated in more specific ways
in later chapters that deal with the marketing mix and corporate social
responsibility.
3.2 Types of environment

Companies interact with two types of environment: the
‘microenvironment’ and the ‘macroenvironment’. The microenvironment
comprises the company’s suppliers, customers, marketing intermediaries
and competitors. The macroenvironment is made up of wider forces which
affect demand for a company’s goods. These forces include demographics,
economics, nature, technology, politics and culture.
The microenvironment1 consists of five major factors: 1
Those of you who studied
SC1021 Principles of
1. The marketer’s ‘internal environment’ (namely, its own management
sociology should recall the
structure). coverage of ‘Elements of
2. The ‘marketing channel’ used by the firm (for example, its suppliers). organisations’. That topic
considered the role of
3. The markets in which the firm may be selling (these may be consumer, ‘missions and goals’; these
producer, reseller, government or international markets). are an important element
of the internal environment
4. The firm’s competitors. for an organisation. For
5. Groups of people who have an interest in the marketer’s ability example, the mission of
to achieve their objectives. As well as obvious groups such as an organisation explains
what the organisation is
shareholders, interested publics can also include local interest
about and what different
groups who may have concerns about the marketer’s impact on the stakeholders can expect
environment or on local employment. The characteristics of the firm’s from it.
internal environment affect its ability to serve its customers.
3.3 Customers, consumers or clients?

In standard marketing texts there is an initial distinction made between
business buyers and consumers. Consumers are people who buy for
their own use, whereas business buyers make purchases in order to
help with their sales to their own customers. Within discussions relating
to consumer markets, there is another distinction that is made between
consumers and customers (which is unrelated to the business buyer and
consumer distinction).
Consumers are understood to be people who actually use a product or
service and customers are the people who pay for these. To take a
simple example which highlights the difference between the two roles, the
parent is the customer for baby food because they make the purchasing
decision and the payment, but the baby is the consumer. This distinction
is important because the customer will be making decisions about what
to buy, based on what they think the consumer will want. In the case of
babies, marketers will need to make appeals to the customer (parent),
but in the case of young children, marketers have found that it can make
sense to have advertising appeal to the consumer (the child) who can then
‘pester’ the parent to make the ‘right’ decision!
There is also a distinction between ‘customers’ and ‘clients’. Customers
are considered to be people who have a relatively high ability to define
what they need and want, and the marketer has to respond to these needs
and wants. In contrast the term ‘client’ is generally associated with the
provision of professional services (such as accountancy and legal services).
In these businesses, it is the marketer who is often in a position to advise
31
their customer as to what their needs and wants are, and then charge fees
for delivering services that meet these needs. The power balance between
the marketer and the people they are undertaking exchanges with is
quite different according to whether the latter are customers or clients.
Although Kotler and Armstrong take the term ‘customer’ for granted, you
should be aware that the very notion of calling people ‘customers’ has
attracted debate in recent years. Since the 1980s when there was a move
in developed countries to privatise industries and organisations that were
previously under government ownership, there has been an ideological
move towards introducing business concepts into such organisations.
The move has become more widespread with organisations still under
government ownership taking on business concepts and ideas as a means
of improving efficiency and responsiveness to the needs of the people they
deal with. One of the developments has been that such people are referred
to as ‘customers’, with the idea being that this will encourage staff to be
more focused on addressing people’s needs.
However, in the fields of health, education and social work, for example,
there has been a debate about the role of the service provider and the
people that they are trying to serve. Indeed the very notion of referring
to people as ‘customers’ or ‘clients’ has been questioned. According to
McLaughlin (2008), in a paper dealing with social work, people inside and
outside the social work profession have challenged the term ‘client’. Within
the profession, there was a concern that the notion of a ‘client’ represented
an objectification of the social work relationship whereby it was assumed
‘power laid with the professional to identify what the passive client
needed’. In this context the term ‘client’ was considered to be a negative
– because it would lead to clients of social services feeling disempowered.
This may be a sensitive issue in a profession where service providers deal
with vulnerable sections of society, such as the disabled.
In the education context, there has been a debate as to whether students
can meaningfully be referred to as ‘customers’. Redding (2005) says:
‘Customer-related truisms commonly touted in business include: “the
customer knows best”. Yet academics … are all quick to point out that this
is not, nor should it be the case with students.’ There is a perception that
the term ‘customer’ is misapplied in a context where there is a significant
information asymmetry between provider and receiver.
Finally, in the field of health, Deber et al. (2005, p.350) conclude:
The results show that the respondents from the four clinical
populations (breast, prostate, fracture, HIV) tended to reject most
of the labels suggested to replace ‘patient’ (customer, survivor,
consumer, partner, client). It must also be recognised that the
term patient tends to be moderately preferred, rather than
achieve strong support. Yet our results suggest that the individuals
we surveyed still place high value on a relationship with their
provider that is based on a model other than that between buyer
and seller. It seems to be captured by the label “patient”.
The essence of this debate is captured in the following quotation:
The words we use to describe those who use our services are,
at one level, metaphors that indicate how we conceive them. At
another level such labels operate discursively, constructing both
the relationship and attendant identities of people participating
in the relationships, inducing very practical and material
outcomes.
(McDonald 2006, p.115).
32
The point you should take away from this discussion is that there will
invariably be a variety of ways in which marketers can refer to people
with whom they are exchanging goods and services. The term ‘customer’ is
not always a neutral one and it has connotations that not all people in all
organisations will appreciate.
Activity 3.1
Consider the case of a charity. The organisation collects donations from people who want
to help others, the people who work for the charity are volunteers who give their time
free of charge. The charity’s users are the people who make use of its services.
The question is ‘who is it that can best be identified as its customers?’
In order to answer this question you will find it helpful to consider again the concept of
exchange discussed in the previous chapter.
3.4 Stakeholders
Stakeholders have been defined as: ‘any group or individual who can
affect or is affected by the achievement of an organisation’s objectives’,
(Freeman, 1984, p.46). This definition means that a broad array of people
and groups in an organisation’s microenvironment can be considered to be
stakeholders and not just customers.
Smith, Drumwright and Gentile (2010) argue that this broader view is
very important:
Marketers suffering from the new marketing myopia view the

customer only as a ‘consumer’ – a commercial entity seeking
to satisfy short-term, material needs through consumption
behaviors. The customer is not viewed as a citizen, a parent,
an employee, a community member, or a member of a global
village with a long-term stake in the future of the planet …
. We are arguing for a more sophisticated understanding
of consumption that takes into consideration a wider set of
stakeholders who are concerned about a company’s social and
environmental impacts and recognizes that customers also wear
some of those other stakeholder hats.
(Smith et al. 2010, pp.4–5)
This may involve organisations engaging with groups that managers

sometimes view as adversaries, such as activists, scientists, politicians and
the local community.
The role of customers themselves is changing and they are no longer
passive recipients of products and services; they are now involved in the
value creation process. From banks and supermarkets that allow self-
service, to airlines whose passengers can undertake their own online
check-in and boarding pass print out, customers are increasingly doing
what they may have previously expected the marketer to have done. This
refers to the concept of co-creation which we saw in the last chapter and
which is covered in more detail in Chapter 8 on products, services and
branding.
Moreover, third-party entrepreneurs, inventors and others who have
historically not been considered stakeholders, have an opportunity to
affiliate with the company (Chakravorti, 2010, p.97). There are additional
drivers encouraging such change. With increasing use of social media,
stakeholders are now in a stronger position to collaborate and exert
33
influence on marketers. For example, after campaigning by individuals on

Facebook where worker deaths had been attributed to the process, Versace
stopped sandblasting its jeans (Milligan, 2011).
Thus, a stakeholder-oriented view of marketing management
appears (1) to complement extant conceptions of marketing,
(2) to be consistent with emergent thinking in marketing
management, and (3) to follow logically on emergent trends in
our culture and economy.
(Gundlach and Wilkie 2010, p.91)
We will discuss this topic in more detail later.
3.4.1 Framework for prioritising stakeholders

Chapter 3 of Kotler and Armstrong (2012) provides a fairly standard
approach for assessing the marketing environment. This involves
describing the different elements of the microenvironment and is a staple
of all marketing textbooks aimed at undergraduates. Below we look at a
framework that extends this approach and provides a basis for prioritising
stakeholders.
Stakeholder marketing has been described as, ‘a balanced positioning
to connect with multiple parties with potentially differing contexts,
objectives, and beliefs’ (Chakravorti, 2010, p.99). Why should marketers
prioritise the needs of stakeholders? ‘For managers with limited resources,
correctly identifying the organization’s stakeholder set and accurately
prioritising stakeholder claims are key processes in the successful
management of organizations’ (Neville et al. 2011, p.357).
The following quotation about the pharmaceutical industry provides an
acute example of competing claims by different stakeholders:
These diametrically opposed viewpoints have produced
confrontational relationships among the stakeholders that
are primarily motivated by market forces, the employees and
stockholders of pharmaceutical firms, and those with overriding
social and humanitarian concerns, represented by governments
and key NGOs. When the pricing and distribution of lifesaving
drugs to the poor are the focal points of contention, the
emotional intensity of anti-industry sentiments is particularly
strong. A major strategic risk for pharmaceutical companies
is that an environment of confrontational politics over the
distribution of lifesaving drugs may engender a broad-based
public affairs and public policy backlash.
(Kennedy, Harris and Lord 2004, p.131)
In a seminal article dealing with distinguishing stakeholders (from non-
stakeholders) and further identifying those stakeholders ‘who really count’,
Ronald Mitchell et al. (1997) identified three criteria:
1. Stakeholders’ power to influence the firm
In their framework ‘a party to a relationship has power, to the extent
it has or can gain access to coercive, utilitarian, or normative means,
to impose its will in the relationship’ (Mitchell, Agle and Wood, 1997,
p.865) with the company (even though the power may be temporary).
Politicians in countries that have strong governments may be able to
exercise power over businesses. Nhat Hong Nguyen gives the example
of the construction industry in Vietnam:
All respondents share the view that project clients have the
highest power. This can be explained by the fact that most
34
construction projects for upgrading infrastructure in Vietnam

have been funded either by the Vietnamese government or by
provinces’ authorities. Therefore, in these projects, the clients
not only have the power of those who provide finance, but
have also held the political power in the national management
system to formally approve and decide whether the project is to
be implemented or changed.
(Nguyen et al. 2009, p.1136)
This would have implications, for example, for the sales staff of
international firms trying to do business in Vietnam, with the efforts
made to woo government requiring more resources than may be the
case in other countries.
2. Legitimacy of the stakeholders’ relationship with the firm.
Legitimacy is ‘a generalised perception or assumption that the
actions of an entity are desirable, proper, or appropriate within some
socially constructed system of norms, values, beliefs, and definitions’
(Mitchell, et al. 1997, p.866). For example, a local community, which
is otherwise relatively powerless, in a developing country may have
clearly legitimate concerns if, for example, the activities of a mining
company will interfere with their traditional lifestyle. Following
protests regarding the activities of Monterrico Metals plc on local
populations in Peru:
In co-ordination with medical staff from the Ministry of

Health…the Company provided basic hygiene packs which
included, amongst other things, a toothbrush, toothpaste and, in
some cases, medicines.
(Monterrico Metals Annual Report, 2005, p.21)
3. Urgency of the stakeholders’ relationship with the firm.

Urgency is the degree to which stakeholder claims call for immediate
attention; for example, an accident caused by an enterprise may
require immediate action. Environmental disasters provide the most
obvious example of situations calling for a corporate response. The
above three attributes determine stakeholder salience – within which
stakeholders are either latent, expectant or definitive.
3.4.2 Salience
Salience is the degree to which managers give priority to competing
stakeholder claims. There are other views regarding stakeholder salience,
however. For example, although some stakeholders may lack power or
legitimacy, they may, nevertheless be important to a marketer because
they may represent a source of power in the future. In countries where
governments are changing there may be constituencies that are currently
ignored but which in future may be quite important. In addition, an
organisation’s brand values may mean that it feels it should deal with a
stakeholder group even though it represents no threat.
Based on the above criteria, Mitchell et al. (1997) identified different
categories of stakeholders based on their possessing one or more of each
of the above categories.
1. Latent stakeholders. Low salience involves the possession of only
one of the attributes (whether power, legitimacy or urgency).
Latent stakeholders may likely be ignored and managers may not
even be aware of their existence. For their part such stakeholders
35
may not give any attention to the firm. Within the latent group of
stakeholders are those described as being dormant. They have power,
but it is unused. However, marketers need to remain cognisant of
such stakeholders because they may choose to exercise their power at
some future point in time because they acquire urgency or legitimacy.
Following the financial crisis of the late 2000s, which resulted in
economic austerity, pressure groups emerged that challenged the tax
affairs of various British companies, because they were felt to be paying
too little tax. The protests became so acute that Vodafone, a leading
national telecommunications company, was forced to make public
announcements regarding its position; for example: www.vodafone.
com/content/index/press/press_statements/statement_tax.html
2. Discretionary stakeholders. They only have legitimacy.
Discretionary stakeholders may receive what Mitchell et al. (1997)
refer to as discretionary corporate social responsibility namely,
firms do not have to engage with such stakeholders, but may do so
anyway). Demanding stakeholders have urgent claims. They may be
bothersome, but have neither legitimacy or power.
3. Expectant stakeholders. Moderate salience involves possession of
two attributes.
Expectant stakeholders are distinguished from latent stakeholders
because they may be ‘expecting’ something and as such their stance
is active rather than passive (the latter being a feature of latent
stakeholders). Dominant stakeholders are powerful and legitimate.
Firms usually have mechanisms in place to deal with the interests of
these groups: for example, investor relations, staff and public affairs
departments. Firms may also proactively produce reports to meet the
information needs of such stakeholders. Dependent stakeholders lack
power but have urgent and legitimate claims. Mitchell et al. (1997)
argue that such stakeholders will often rely on others to exercise
power on their behalf; for example, the media or politicians or the
benevolence of the firm’s management. Sometimes none of these are
present, as the residents of Bhopal, in India, found to their cost, when
the local Union Carbide plant had a catastrophic accident. In addition
such stakeholders may use the power afforded by new technologies
in order to collaborate and collectively bring pressure to bear on
organisations. One such organisation is www.sharesoc.org which
lobbies on behalf of small private investors. Dangerous stakeholders
have urgency and power and these may be expressed via terrorist acts,
sabotage and strikes. Huntingdon Life Sciences in the UK undertook
vivisection of animals, a legal activity, but was forced to shut down its
operations as a result of violent action against it and its staff.
4. Definitive stakeholders. High level of salience requires possession
of all three attributes.
Such stakeholders are likely to be dominant stakeholders, who
subsequently have an urgent claim. The reaction of various
governments to the banking crisis and their direct intervention in
the affairs of some banks, showed how they were banks’ definitive
stakeholders.
There has been substantial analysis of this framework following its
publication. A recent example is the work of Neville et al. (2011).
One of their observations is that as far as legitimacy is concerned,
managers need to distinguish between the legitimacy of the claim and
the legitimacy of the organisation making the claim. For example, if a
36
protest group decides to pursue violent action in pursuit of a legitimate

claim, managers should nevertheless pay attention to the claim because
other groups are likely to take up the claim if it is not addressed.
Another aspect of the framework to attract attention is that Mitchell et
al. (1997) considered salience in terms of the presence or absence of
urgency, legitimacy and power. (Their definition and typology, however,
are not able to capture varying levels or degrees of the attributes),
(Neville et al. 2011, p.367). They go on to argue that while power
and urgency can be continuous, studies dealing with legitimacy vary
in terms of whether it is something which exists in terms of varying
degrees or whether it is something that is either present or not present.
Neville et al. conclude that it is both dichotomous and variable. These
and other considerations lead them to give an alternative definition of
salience:
Stakeholder salience is the prioritization of stakeholder claims
by managers based on their perception of the degree of power
of the stakeholder and the degree of moral legitimacy and
urgency of the claim.
(Neville et al. 2011, p.369)

The firm is affected by both its microenvironment and the
macroenvironment. The characteristics of the marketer’s
microenvironment affect its ability to serve its customers. The
macroenvironment comprises the wider societal forces which determine
the opportunities and threats facing a firm. Prioritising stakeholders can be
undertaken using a framework.
3.6 Reminder of learning outcomes

• explain the difference between the micro and macroenvironment of a
firm
• describe how the different elements of the micro and
macroenvironment affect firms’ marketing activities
• explain the difference between the terms consumer, client and
customer and understand the debate surrounding the use of these
terms in certain professions
• outline the basis on which marketers prioritise certain stakeholders
over others.

1. a. What are the main components of the microenvironment of
marketing? (5 marks)
b. With respect to each of these components identify the major
questions that the marketer should be asking him/herself when
carrying out an audit of the microenvironment. (20 marks)
2. a. Distinguish between the terms customer, client, customer.
(10 marks)
b. Why may certain professions prefer the people they serve not to be
referred to as clients or customers? (15 marks)
37
3. a. Explain what is meant by the terms power, legitimacy and urgency,

when assessing the importance of stakeholders. (15 marks)
b. What other considerations should marketers take into account
when using this framework for assessing stakeholders? (10 marks)
38
Chapter 4: Consumer behaviour
4.1 Introduction
In a sense, everything an organisation does (whether it is a private for-
profit enterprise, a non-profit entity or a governmental organisation)
hinges on the assumptions the organisation holds about customers’
buyer behaviour. In marketing we tend to think only of the profit-making
private sector, but whether they want to admit it or not, governmental
organisations and non-profit organisations also engage in marketing
exercises. The goal of marketing is determining wants and satisfying them,
and this essentially is what government services are about as well. So, the
importance of knowing how people will behave is tantamount to knowing
the ‘secret to organisational success’.
So let us begin with the simplest description of consumer behaviour.
Consumer behaviour is simply the individual purchasing and/or
consuming decision of an individual – and/or household – whoever buys
goods and services for personal consumption (Kotler and Armstrong,
2012, p.160). That purchase can be the consumption of a good or service
in the marketplace or can even include the purchase of a stock and other
investment decisions as well. This good or service can be either publicly
supplied or privately produced by the organisation.
Consumer behaviour can be modelled from a number of perspectives. As
pointed out by Kotler and Armstrong (2012, p.161), consumer purchases
are influenced by forces such as:
• cultural: the set of basic values, perceptions, wants and behaviours
learned by an individual from being a member of society
• social: the influences of social factors such as the consumer’s relation
to small groups, family and social roles
• individual: the characteristics of the individual such as the
consumer’s age, economic situation and occupation 1
Those of you who
• psychological: the motivation, perception and beliefs and attitudes 1 have studied MN2079
Elements of social and
of the consumer.
applied psychology will
It is not our intention in this brief introduction to explain each of the recall that Stockdale et
factors affecting consumer behaviour in great detail, as the Kotler and al. deal with ‘attitudes’.
This is an important
Armstrong text does a very good job of this already. We will start by
topic in marketing,
presenting a relatively stylised economic interpretation of consumer specifically in terms of
behaviour and then we will see what implications this has for the consumer behaviour and
marketing decisions of an organisation. We will then contrast this also for understanding
economic version with the social and psychological approaches. the differences between
consumers and different
4.1.1 Aims of the chapter countries; indeed the
link between attitudes
The aims of this chapter are to: and culture is discussed
• explain why the study of consumer behaviour is so central to the in more depth in Section
9.8 of that subject guide.
marketing framework
The uni-dimensional
• convince you of the importance of understanding buyer behaviour model described by
from a multi-dimensional perspective Stockdale et al. refers to
attitudes as: ‘a general
• present the various social-psychological, psychological and economic enduring positive or
theories of how consumers make their choices. negative feeling about a
person, object or issue.
39

By the end of this chapter, and having completed the Essential reading and
activities, you should be able to:
• explain why the study of consumer behaviour is so important to
marketing
• explain why economics differs from social psychology in its
explanation of consumer behaviour
• identify some different characteristics of consumers’ social networks
and the impact of these on buyer behaviour
• discuss the differences between cognitive and behavioural theories of
consumer behaviour
• outline the types of consumer behaviour based on the concepts of
setting, involvement, information gathering and perceived brand
differences.

NJ: Pearson Prentice Hall, 2012) Chapter 5. Note: the entire chapter is
important.

Choi, J.A., M. Koo, I. Choi and S. Auh ‘Need for cognitive closure and
information search strategy’, Psychology and Marketing 25(11) 2008,
pp.1027–42.
Darley, W.K., C. Blankson and D.J. Luethge ‘Toward an integrated framework
for online consumer behaviour and decision making process: a review’,
Psychology and Marketing 27(2) 2010, pp.94–116.
Dimofte, C.V. ‘Implicit measures of consumer cognition: a review’, Psychology
and Marketing 27(10) 2010, pp.921–37.
Huang, P., N.H. Lurie and S. Mitra ‘Searching for experience on the behavior for
search and experience goods’, Journal of Marketing 73 2009, pp.55–69.
Nitzan, I. and B. Libai ‘Social effects on customer retention’, Journal of
Marketing 75 2011, pp.24–38.
Tversky, A. and D. Kahneman ‘The framing of decisions and the psychology of
choice’, Science 211(4881) 1981, pp.453–58.

Cho, J. and J. Lee ‘An integrated model of risk and risk reducing strategies’,
Geanakoplos, J., M. Magill and M. Quinziil ‘Demography and the long-run
predictability of the stock market’, Cowles Foundation Discussion Paper 1380
(August 2004); http://ideas.repec.org/p/cwl/cwldpp/1380.html
Gourville, J.T. ‘Eager sellers and stony buyers; understanding the psychology of
new-product adoption’, Harvard Business Review June 2006, pp.98–106.
Hurst, E. and M. Aguiar ‘Consumption, expenditure and home production over
the life-cycle’, University of Chicago, Department of Economics Working Paper
(2004); http:/ideas.repec.org/p/red/sed005/303.html
Kapeller, J. and S. Puhringer ‘The internal consistency of perfect competition’,
Journal of Philosophical Economics 3(2) 2010 pp.134–52.
Kuksov, D. and Y. Xie ‘Competition in a status goods market’, Journal of
Marketing Research Vol XLIX 2012, pp.609–23.
Malär, L., H. Krohmer, W.D. Hoyer and B. Bettina ‘Emotional brand attachment
and brand personality: the relative importance of the actual and the ideal
self’, Journal of Marketing 75 2011, pp.35–52.
Modigliani, F. ‘Life-cycle, individual thrift, and the wealth of nations’, American
Economic Review 76(3) 1986, pp.297–313.
40
Modigliani, F. and R. Brumberg ‘Utility analysis and the consumption function:

an interpretation of cross-section data’ in Kurihara, K.K. (ed.) Post- Keynesian
economics. (New Brunswick, NJ: Rutgers University Press, 1954), pp.388–436.
Peter, J.P. and J.C. Olson Consumer behavior and marketing strategy. (New York:
McGraw-Hill, 2005).
Prescott E.C. ‘Why do Americans work so much more than Europeans?’, Federal
Reserve Bank of Minneapolis Quarterly Review 28(1) 2004, pp.2–13.
Thaler, R. ‘Toward a positive theory of consumer choice’, Journal of economic
behaviour and organisation 1 1980, pp.39–60.
Wu, L-L. and J-Y. Lin ‘The quality of consumers’ decision-making in the
environment of e-commerce’, Psychology and Marketing 23(4) 2006,
pp.297–311.

www.consumerpsychologist.com/ (last accessed 11 June 2013). The site
contains a useful listing of many consumer behaviour websites.

This chapter deals with an economic-based approach to understanding
consumer behaviour; we then look at the social-psychological and
psychological approaches. Within each of these approaches you will
come across models that are also covered in Kotler and Armstrong, but
the perspective taken here is to give a deeper conceptual and theoretical
grounding to the models; for example, the self-concept and information
search are considered in some detail.
Activity 4.1
Before we give you the analytical tools of economics, think about why the following
countries differ in their consumption or purchase of leisure.
Actual labour supply* Tax rates
Germany 19.3 0.59
France 17.5 0.59
USA 25.9 0.4
*hours worked per person per week
Table 4.1: Actual labour supply and tax rates.
(Source: Prescott E.C. ‘Why do Americans work so much more than Europeans?’,
Federal Reserve Bank of Minneapolis Quarterly Review 28(1) 2004, pp.2–13.
4.2 Tastes and constraints in explaining differences and

changes in behaviour
Traditionally, economists (if asked) would explain consumer behaviour in
three steps:
1. The first step is to examine consumer preferences (easier said than
done). For practical purposes this just means what a consumer would
theoretically prefer, disregarding prices and income.
2. The second step is to acknowledge that consumers do in fact face
budget constraints that restrict the quantities or amounts of goods and
services that can be consumed.
3. The third step is to put consumer preferences and budget constraints
together to determine choices. Economists do this by assuming that
people maximise their satisfaction by combining a set of goods and
41
services. Graphically they are able to represent this via the use of
indifference curves2 and budget lines3 as depicted in Figure 4.1. The 2
An indifference curve
point A, at which the indifference curve touches or is tangent to the represents combinations
of two goods that
budget line (that is, the point of tangency) is where our theoretical
provide equal levels
consumer apportions his consumption of goods X and Y. of satisfaction for the
consumer.
X 3
Budget lines map the
maximum amount of
consumption possible
based on the price
Indifference curve and quantities of each
product consumed.
Budget line
Y
Figure 4.1: Indifference curve and budget line.

There are also economic assumptions made purely about consumer
preferences that need to be stated to make the approach more complete.
These are that:
• individuals are able to make choices and rank their preferences for
different goods and services
• individuals are rational in the choices they make
• more is preferred to less
• consumer preferences can be considered in terms of whether a bundle
of goods provides more utility (or satisfaction) than another. How much
more utility it provides does not matter. Since the emphasis here is on
ordering bundles of goods, this kind of utility is known as ordinal utility.
We can arrive at several theorems of consumer behaviour, but we will just
draw your attention to one of the key assumptions about the psychology
of consumers of which you should be aware (the fourth bullet point
above), which is known as the principle of diminishing marginal rate
of substitution. Put simply, it states that as more and more of one good,
service or attribute is consumed, we would expect that a consumer
would prefer to give up fewer and fewer units of a second product to get
additional amounts of the first.
So as we move along the indifference curve and as the consumption of
one good increases, the consumer’s desire for more still should diminish.
Thus he/she should be willing to give up less and less of good X to obtain
additional good Y. This assumption is what gives the indifference curve its
bowl-like shape.
Activity 4.2
Where does the principle of diminishing marginal rate of substitution break down? And
what are the reasons for this?
So what implications can we draw from this simple view of consumer

behaviour? Remember that marketers are interested in two things: why
consumer choices differ across consuming agents (this could be between
42
two people, or the average consumption patterns of two consumer

segments or even two nations); and changes in the consumption behaviour
of the same consumer over time (again, a person or groups of persons with
similar consumption patterns).
The reason why these consumption patterns may differ, based on the
economic model presented above, depends on two things: preferences
(sometimes referred to simply as tastes by economists) and/or constraints
(typically budget-related but there can also be physical, geographic and
even social constraints that economists would consider as binding). Based
on these two reasons, economists typically argue that models where
constraints differ are the more interesting cases since these are more
likely to be measurable by a researcher and subject to observable change.
What happens to tastes and preferences (the psychology of the consumer)
is often hard to determine and therefore not theoretically of interest to
mainstream economists, since it is very hard to test these theories with the
large-scale empirical data that economists normally have access to. Here
are two possible ways of representing tastes and preferences:
Model 1: Consumer behaviour is some function of tastes and constraints.
In this model both are variable.
Model 2: Consumer behaviour is some function of tastes and constraints.
In this model only constraints are variable.
Economists think that they can explain most consumer behaviour in terms
of Model 2 and more precisely looking at constraints in terms of prices and
income. They even translate non-economic constraints into costs. This has
important implications for marketing (as seen in the alcohol consumption
case below). Two famous economists, Gary Becker and George Stigler,
have even argued that ‘tastes neither change capriciously nor differ
importantly between people’.
4.2.1 Stability of tastes and the economic explanation of custom

and tradition
In many cases we observe stable behaviour that we attribute to cultural
factors. For example, for as long as anyone can remember, consumption of
wine has been higher in France than in Germany, where beer is consumed
more than wine. What explains this and other national differences?
The ‘common sense’ answer would be that there is a custom of beer
consumption in Germany and a custom of wine consumption in France.
But to prove this assertion, we need to show that prices and incomes (the
environment) have not remained stable. In other words, only when we
observe stable behaviour in the face of prolonged or severe changes in
the environment can we then say that custom or tradition are important
factors in determining choices.
The economic answer to stable patterns of consumer behaviour relies on
the cost (price) of decision-making. The making of a decision is costly,
because in order to make a decision one requires information, and the
information must be analysed. Therefore, the price of a good or service
has to incorporate the cost of search as well as the market price. When a
temporary change takes place in the environment, perhaps in price or in
income, it generally may not pay to disinvest in the knowledge or skills
that one has acquired. As a result, behaviour will appear stable in the
face of temporary changes and will reinforce the popular perception that
culture is the causal factor.
So returning to our example of wine and beer consumption in France and
Germany, is it tradition or some other constraint that is at work? And more
43
importantly, what use can this debate have to marketing departments? It could
be argued that in France people have more information about the quality of
wine than beer, and consequently they will not switch to beer without:
a. a huge increase in information (translation for marketers: huge
advertising campaign)
b. a large drop in the market price of beer to counteract the information
search costs.4 4
When consumers are
prompted to search for
Now what about ‘permanent or long-lasting changes’ in the environment; more information about
for example, the shift to a market economy in the former Soviet Union? a product or service.
Typically, one observes a heterogeneous response. The younger generation Information search can
usually responds to these changes to a greater extent than older persons. be costly in terms of
time or the purchase of
Why? The popular press account is that young persons are more readily
some market research
seduced away from old customs by the glitter of the Western-style consumer (e.g. the purchase of
environment. In the economic interpretation, it has nothing to do with fickle a consumer reports
or immutable taste differences between old and young; rather it has to do magazine).
with the cost to older persons of disinvesting in the knowledge of how to
do things under the old environment. The older one is, the fewer years one
has to collect the returns from investments in certain patterns of behaviour.
Young persons on the other hand are not so encumbered, not because they
are more flexible or adaptable to changes in the environment; they simply
have a greater incentive to invest in new knowledge and new skills.
Activity 4.3
What implications does the above view of consumer behaviour have for marketers of fast
foods who are entering countries where people are not accustomed to eating the types of
foods these companies sell. Should they:
a. Engage in a highly visible and expensive advertising campaign aimed at everyone
over 40, extolling the virtues of their food?
b. Use that same money and invest it in sales promotion campaigns?
c. Enter the market with relatively low prices.
What would have a bigger impact on people’s commitment to the new regime?
A more trivial application (or confirmation) of this theory is the discounts

given to senior citizens for the cinema. If preferences really differed, then
there would be no need to lower the price of cinema tickets if you were
over 65 years of age. What you would do is produce films that catered to
that group, or you would engage in publicity campaigns aimed at changing
their attitudes. Instead, the price cuts apply to all films but are targeted to a
consumer group less likely to step out of the house.
This particular economic view of consumer behaviour has very powerful
implications. It says that we are the same – old or young, non-market or
Western. What differs is the incentive we have to behave in a certain way or
consume a certain good.
4.3 Prospect theory

Prospect theory offers various insights into the anomalies and contradictions
in buyer behaviour and in particular about decision-making under conditions
of risk.
According to utility theory, two choices with the same expected utility will
be given the same preference by rational decision-makers. When they are
faced with a choice the consumer will prefer the option that offers the
44
highest expected utility. However, as Kahneman and Tversky (1981, p.454)

argued, ‘people exhibit patterns of preference which appear incompatible
with expected utility theory’. Moreover, if people always made decisions on
a utilitarian basis, there would be little need for marketing!
Prospect theory shows that where people face gains and losses their
decision-making will not be symmetrical. This is illustrated in Figure
4.2, where the value function is s-shaped. The loss of the same size as a
possible gain is considered to have more impact and more effort will be
expended in avoiding it. This is because people make decisions based
on emotion and also because they may not completely understand the
decisions they are about to make.
Why do consumers deviate from rational economic behaviour? The
answer may lie in how people value prospects. According to Gourville
(2006), four characteristics that define human behaviour have been
identified.
Reference Point Subjective value (Utility)
The loss side is

steeper than that
for gains. As the amount of
Consumers loss/gain
Losses Gains
overvalue increases, the
losses marginal effect
compared to on value gets
gains – smaller
demonstrating
loss aversion
Figure 4.2: A value function.

The first characteristic is individuals’ reliance on perceived value rather
than objective or actual value. Secondly, when considering the value of a
purchase, people use a reference point and that will often be something
that they own already. This means that we may assess whether or not
the price of a new smartphone is attractive, depending on what we
paid for our current model and the prices that we have recently seen in
advertising and stores. Thirdly, where value exceeds this reference point it
is considered to be a gain and where it falls short it is considered to be a
loss. Finally, when people consider possible gains or losses, they are likely
to attach more weight to the possible loss. People have loss aversion and
prefer not to take bets that have an equal probability of a loss or gain of an
equal amount of money.
In a US proposal to pass onto consumers some of the costs of using credit
cards, people representing the credit card industry asked that the price
difference between using cash or using credit cards should be shown by
shops as a cash discount for using cash, rather than as a surcharge for
the use of credit cards. The difference in labels was important because it
established a different reference point in customers’ minds. Losses seem
bigger to people (than gains of the same size). As a result people are less
willing to accept a surcharge, than give up a discount of the same value.
The concept of loss aversion also means that people tend to value things
that they already own more than those that they do not have. To put it in
even more explicit terms, people put more value on goods that they own,
than they would put on the same goods were they to have to purchase
them. This is referred to as the endowment effect. In marketing the
45
examples of this affect being used are where firms who process photographs
will process those that have not been exposed correctly and will offer
customers the chance to have a refund. Many customers do not choose to
take up this offer – due to the endowment effect, customers prefer keeping
the photograph that they have already, rather than the possibility of another
one in the future. Another application is the offer to customers of a trial
period for a product, with the option for the customer to get their money
back if they are not happy with it.
As Thaler (1980) explains, in this instance the marketer is taking advantage
of two decision points facing the customer. In the first decision point
customers assess the costs to themselves in terms of the transactions costs
of buying the goods and the amount of time and effort that will be spent in
taking the goods back to the shop if they are not satisfied with them. Where
people attach little value to these transaction costs, they will go ahead
and make the purchase. The second decision point comes two weeks later
when the customer has to make the decision as to whether or not to return
the goods to the shop. If the customer has been making use of the product
and has adapted to it, they will view the cost of keeping the good as an
opportunity cost and will likely keep it.
4.4 The social-psychological approach to consumer buyer

behaviour
Let us begin with the simplest contrast between economic and social-
psychological views. In the economic view, one assumes that consumers
have fixed preferences, are self-interested in that they feel better or
worse depending on what they do rather than on the outcomes of others.
Sometimes economists even use a utility function to show how simple their
model of human behaviour is:
U (x, y)
where x and y represent a bundle of goods/services. Consumers gain more
utility U whenever they consume more of x and y. The trick for the firm is
merely to supply the consumers with what they want.
The social-psychological view assumes that consumers are not exclusively
self-interested in that the utility function encompasses many things including
other consumer goods, and that preferences may change over time such that
the firm might induce purchases by ‘socialising’ consumers. A firm might try
to influence preferences in order to achieve the goal of increasing sales. In
the economic view, that goal is achieved normally through price cuts.
In short, there is a sharp contrast in explaining consumer behaviour
through the extrinsic motives such as prices and costs (assumed by
economists) and the intrinsic motives such as preferences and attitudes
(assumed by social-psychologists).
It may make sense to enhance the economic view with the social-
psychology view by using (broad-minded) utility-maximisation models,
but this is not standard as social psychologists talk about personalities
and the self (not ‘preferences’) and the process of self-creation, through
socialisation, in order to explain people’s choices.
4.4.1 The socialisation process

There are three basic feedback loops that social psychologists use to explain
not just consumer behaviour but human behaviour more generally. These
models are shown by diagrams developed by James Montgomery of the
University of Wisconsin (Figures 4.3, 4.4 and 4.5). The self-concept
46
comprises a cognitive and an affective understanding of who and what we

are. Among the forms that it can take are the ‘actual self’ and the ‘ideal
self’. The actual self represents our perceived reality of ourselves (that is,
who and what I think I am now). In contrast, the ideal self represents our
construction of what we would like to be or to become. Consumers achieve
self-congruence by consuming a brand with a personality that we consider
to represent either the actual or ideal self. Actual self-congruence reflects
the consumer’s perception of the fit between the actual self and the brand’s
personality, whereas ideal self-congruence is the perceived fit of the brand
personality with the consumer’s ideal self. An actually self-congruent brand
reflects who the consumer actually is (‘this brand’s personality is like who I
really am’), whereas an ideally self-congruent brand reflects who the
consumer would like to be (‘this brand’s personality is like who I would
like to be’).5 5
Those of you who
have studied MN2079
This concept is important in marketing because as Malar et al. argue Elements of social and
the self-concept can influence brand attachment. The latter concept is applied psychology will
explained in the following way: recall that Stockdale et
al. (2005) discuss the
In psychology, attachment is an emotion-laden bond between a
‘functions of the self’.
person and a specific object …. In a marketing context, people
This topic has an
can also build and maintain emotionally charged relationships important link with
with brands … Thus, emotional brand attachment reflects marketing, because as
the bond that connects a consumer with a specific brand and they point out, ‘beliefs
involves feelings toward the brand. These feelings include about the ideal self
reflect a person’s hopes
affection, passion, and connection …, which represent ‘hot’
or wishes as to how
affect from the brand’s linkage to the self ….. they might or could be’.
(Malar et al. 2011, p.36) In social psychology
one of the purposes
There is the basic feedback loop where the numbers refer to the causal for understanding the
ordering, as shown in Figure 4.3 below: function of the self is
to assess the impact on
Person has individuals of differences
between the actual
well defined
Attributions self and the ideal self.
self-concept
A possible result of
and makes Reinforcing part of feedback process
such differences can
decisions based
be social anxiety. In
on these marketing, the reason
for understanding the
function of the self is to
(1) SELF-CONCEPT (2) Actions see how it impacts on
individuals’ consumption
of brands, for example.
Figure 4.3: Basic feedback loop.

This is where a person has a well-defined self-concept or personality,6 and 6
The distinguishing
makes choices and undertakes actions based on this set of psychological personal psychological
characteristics (Kotler and Armstrong, 2012, p.176). The attributions7 characteristics that lead
to relatively consistent
are the reinforcing part of the feedback process, and these usually can be
and lasting predictions
both external and internal, meaning that they are either made by a third of an individual’s
person observing some action or by the person undertaking the action. For responses to their
instance, if a person is aggressively competitive, is this because of the kind environment.
of person he/she is, or is the person reacting to situational pressures? If a 7
Attributions are the
student fails a test, does s/he have low ability, or is the test unfair? In both causal explanations
examples, the questions concern the causes of observed behaviour and the people use to explain
behaviour either of
answers of interest are those given by the person and external observers
themselves or of others
because these can serve to reinforce or to change the self-concept.
47
In the realm of consumer theory this model states that if I am consistently

buying Starbucks coffee when there are other coffee choices available
to me, then I am more than likely doing so because I am a ‘Starbucks
lover’. However, if I regularly buy coffee from Starbucks, but the nearest
competing coffee chain is one hour away, then there are two possible
attributions: I like Starbucks, or I actually prefer another coffee but can’t
be bothered to drive an hour to get it.
There are also alternative specifications of the above feedback loop such
as dissonance theory. This is where people take actions and only later
construct reasons for their actions (see Figure 4.4).
Rationalisations/Attributions
People change current self/concept
(2) SELF-CONCEPT (1) Actions

Dissonance theory
where people take actions and only later
construct reasons for their actions
Personality or self
concept is
reinforced after
High involvement/Low differences between
the action is taken
brands links with this model
Figure 4.4: Dissonance theory feedback loop.

Here the personality or self-concept is solidified after the action is taken.
There is quite a bit of experimental evidence suggesting that individuals
often attempt to justify past effort/actions, effectively changing their
current self-concept. This internal justification occurs especially when
there is no fixed external justification. Consumers often face this kind
of dissonance after making a high-involvement purchase decision (see
below), where there are no a priori differences in the brands (refer to
Kotler and Armstrong, 2012, p.178).
Finally, there is the case where culture and social forces can play a big role
on the individual’s personality and actions. This is where the self-concept
is actually the result of a set of social roles or norms (see Figure 4.5).
Attributions Personality or self

concept is reinforced after
the action is taken
(3) SELF-CONCEPT (2) Actions
Culture and social forces play a big role on

individual’s personality and actions (1) Social norms
Figure 4.5: Influence of social pressures on the feedback loop.

Here social factors are very important determinants in individual actions
and ultimately shape behaviour and personality. Take, for example, our
discussion earlier about French wine drinkers and German beer drinkers.
In this model, in each society there are social pressures that act as an
48
inducement, usually early on in life, and which solidify later on through

the life course and become personality traits and preferences that are hard
to dislodge.
This is perhaps why marketers spend such an inordinate amount of time
and energy trying to target advertisements to the young rather than to the
old, because the self-concepts of the old are already set, while those of the
young can still be influenced.
4.5 The role of social networks

Influence within social networks takes place between the individuals
within these networks. There are a number of ways by which the influence
can be transmitted, and it does not just have to be through conversation,
it could be through seeing someone with a product or information about
another person who uses a product. ‘Social influence can occur through
the transmission of information that reduces uncertainty and search
effort, through normative and social pressure, or as a result of network
externalities.’ (Nitzan and Libai, 2011, p.24).
Some of the mechanisms of social effects are as follows: tie strength,
homophily (social similarity) and degree of centrality.
Tie strength refers to the idea that consumers may be more affected
by people with whom (they perceive) they have closer relationships.
The strength of tie may signify the intensity and tightness of a social
relationship. Relationships may range from strong, primary ones, such as
a spouse or close friend, to weak, secondary relationships, such as seldom
contacted acquaintances.
Similarity (in terms of beliefs, education and occupation) between
consumers and others is referred to as homophily. Customers are more
likely to trust the opinions of people whose preferences they share and,
conversely, people who recommend products are more likely to share their
opinions with people who are similar to them. The measure of homophily
reflects the level of similarity between two people who take part in a social
tie; that is, how alike they are with respect to their personal attributes.
Degree centrality refers to someone’s degree of connectivity, which is
the number of other people directly related to the focal individual (the
person whose network we are discussing). Highly connected customers are
typically considered to have the opportunity to affect others’ behaviour.
People with numerous connections might also be more strongly affected
by the behaviour of others. But there is a counter-argument to this. People
have a limited amount of time and attention to give to any one person
or activity. So a customer with a greater number of connections may
devote, on average, less attention to each connection and, as a result, a
customer with more connections might actually have a weaker effect on
the decisions of others.
Possessions and behaviours can act as signals of identity and group
membership and this marking function has important implications for the
interaction between consumers (Malär, Krohmer, Hoyer and Nyffenegger,
2011). Sometimes brands and other items of consumption can be used to
denote membership of a social group. There can be two groups of people
who seek to do this: people who really are members of such a group and
those who aspire to be. In addition, consumers have the choice of either
using explicit signals (large ostentatious brands) or subtle signals. Explicit
signals make it clear the more visible the consumption is (for example,
visibility of brand names) the easier it is to use consumption as a means of
49
communicating with others either within one’s network or those outside

it. However, explicit signals (the ostentatious wearing of brands) also have
downsides. People sometimes adopt products or brands associated with
other groups, however, in an attempt to gain the signal value associated
with them. People often aspire to be like particular outgroups (social
groups with whom one does not identify); this would apply to teenagers
who come from educated and professional, middle-class, backgrounds, but
who buy clothes and accessories associated with young people who are
from more deprived backgrounds.
This situation is likely to apply to explicit signals. More visible brand logos
make it easier to identify someone, but they also make it easier for other
people who aspire to become members of a social group to determine
which brand is the aspiration group’s symbol and to adopt it themselves.
In contrast, members of a social group may have subtle signals that are
harder for others to recognise, but are still observable to insiders who
have the necessary connoisseurship to decode their meaning. Such insider
knowledge allows group members to recognise even inconspicuous
ingroup markers that outsiders might miss.
So, if outsiders or mainstream individuals use explicit signals, insiders may
avoid such symbols so that they do not look like outsiders trying to imitate.
By choosing subtle signals instead, insiders can differentiate themselves,
facilitating the expression of identity and desired interactions with similar
others. Selecting subtle signals may even be a deliberate strategy to restrict
imitation by outsiders by making in-group tastes hard to copy.
Activity 4.4
Apply this assessment of social networks to your own.
a. Who do you share information with? How does it depend on tie strength?
b. Are you relatively highly connected in your network, and how does this affect the flow
of marketing information?
c. How does social similarity affect the flow of information?
4.6 A cognitive versus behavioural approach to

consumer decision-making
Now we will look at the psychological model (as opposed to the social-
psychological approach seen above) of consumer decision-making. It
involves two concepts (the environment and the cognitive process) which
are not all that dissimilar from the ‘constraints and taste’ approach of
consumer theory in economics.
Psychological explanations of consumer behaviour, which emphasise
environmental factors, are called behavioural or habitual explanations.
Theories that emphasise internal mental processes are called cognitive
explanations. You can see in Table 4.2 that the behavioural approach
is quite close to the strict economic interpretation with its emphasis on
external factors (constraints); whereas the cognitive approach has a closer
resemblance with a new branch of economics that is called quasi-rational
economics, which attempts to integrate the ways in which consumers
process information into economic models.
50
Positions and assumptions Behavioural approach Cognitive approach

Emphasis on explaining Observable behaviour Mental constructs
Role of environment Predominant controlling One influence among many
variable
Role of cognitive factors Mediators Predominant controlling
variables
View of freedom and All behaviour is controlled Humans are autonomous,
discretion by environmental factors independent agents of
action
Table 4.2: Comparison of behavioural and cognitive approaches.

Source: Table created using data from Kotler and Armstrong (2004, p.197)
Several points need to be raised regarding this rather simple classification
system. Notice the resemblance between the behavioural approach and the
constraints-based approach of economists like Becker and Stigler (refer
back to Section 4.2 on the tastes and constraints view of buyer behaviour).
Second, in this division we can see that the behavioural approach is akin
to saying that ‘actions speak louder than words’. Third, one can think of
situations, experiments and examples of consumer behaviour that confirm
both views.
So how can we make these concepts measurable in order to better
understand how to implement marketing strategy? The psychological
model after all is aimed at explaining consumer behaviour (brand loyalty,
choices, etc.). Cognitive approaches emphasise how people store, process
and use information and how they create beliefs and form attitudes and
values. Behavioural approaches really look at observable associations
between behaviours and their environmental stimuli.
According to Dimofte (2010) many constructs are assumed to represent
stable mental representations (or in the case of attitudes, consistent
evaluations) that are stored in memory. However, another view is that
when both the initial and a newly formed attitude towards the same
object are stored in memory, a dual attitude can result. This can apply
particularly where people are consuming goods they would not admit to
in public. In this example, explicit attitudes may involve an individual’s
conscious acknowledgment that engaging in an ‘unhealthy’ behaviour
is bad, whereas implicit attitudes point to a more positive underlying
assessment. For example, a KFC customer, who has recently received
health promotion information about the health risks of consuming fast
food (for example, increased obesity levels or risk of heart disease), may
increase their negative explicit attitudes toward the brand and how much
they buy from the chain. However, it is also possible that the individual
will continue to demonstrate a positive attitude towards the brand and
perhaps still have a yearning as they go past a KFC restaurant and smell
the enticing smells wafting from within. So while a communications
campaign may encourage a consumer’s explicit, conscious attitudes
towards a brand to become more negative, as in this example, implicit
or non-conscious attitudes may yet retain their pre-existing brand
associations. This duality challenges the view that people hold only one set
of attitudes at a time.
51
4.7 Mechanisms of behavioural/habitual explanation

Let us begin with how behavioural explanations work. The classic work
in this field was Pavlov and his explanation of salivation in his pet dog.
Salivation is an innate response to the smell of food. Pavlov rang a
bell every time the dog was fed the food. Over time the dog came to
associate the bell with the smell – so when Pavlov stopped pairing the
bell with the food, the dog still salivated. The bell became what is called a
discriminative stimulus in the environment.
The above is an example of classical conditioning, which can be defined
as a process by which a previously neutral stimulus (the bell), by being
paired with an unconscious stimulus (food) comes to elicit a response
(salivation) very similar to the response originally elicited by the
unconditioned stimulus. Operant conditioning differs from classical
conditioning in that the operant behaviours are elicited because of stimuli
elicited after the behaviour has taken place. Marketers use this information
concerning human behaviour to design fixed-ratio schemes (for example,
a pizza chain gives a free pizza after 10 purchases; a coffee shop stamps a
card each time you come in and then the tenth time you get a free coffee).
4.8 Applications of behavioural and cognitive principles

in marketing
In the next chapter we will look at the notion of perceived risk in more
detail. Here we will give a brief explanation of the concept, since it will
make the following discussion of the consumer decision-making process
model clearer. Cho gives the following succinct explanation of risk from a
consumer context:
Individuals tend to define a decision situation as risky when
they have a lot to lose if they make a poor decision, in particular
if this loss will have a considerable impact on their financial
situations.
(Cho and Lee 2006, p.114)
4.8.1 Consumer decision-making process model

John Dewey initially developed a precursor of the five-stage buyer process
model in 1910; it was subsequently adapted for use in marketing by Engel-
Kollat-Blackwell and is sometimes referred to as the EKB model (Darley,
Blankson and Luethge 2010). The five stages are as follows:
1. Problem recognition
2. Search
3. Alternative evaluation
4. Purchase
5. Outcomes.
A basic explanation of this model is given in Kotler and Armstrong (2012).
Here we will focus on some interesting issues related to specific stages of
the model. Cho and Lee explain the motivation behind information search
in the following way:
high perceived risk puts consumers in a distressed and anxious
state, which in turn motivates them to engage in problem-
solving activities to resolve it; consumers employ information
search as a problem-solving strategy to reduce perceived risk.
(Cho and Lee 2006, p.115)
52
This is one of two possible ways of dealing with such risk. One is to
reduce uncertainty through information search and the other is to reduce
vulnerability by lowering the amount at stake.
Huang et al. (2009) state that one way of distinguishing between
different aspects of information acquisition by consumers is to consider
the difference between ‘search’ and ‘experience’. All products are said to
contain search and experience attributes. Search refers to the assessment
of product quality without the customer interacting with the product.
Experience refers to situations where product quality can best be assessed
by actually using the product. The impact of the internet on consumer
information search can be considered in terms of search and experience.
For example, a well-designed website that sells premium cameras can
provide much richer information about the cameras, such as their
specifications, how they can be used and the resulting photographs, expert
opinions and consumer feedback, than the information available from a
salesperson in a traditional retail shop. In addition, consumers shopping
for cameras can read extensive product reviews from other consumers and
thus can ‘experience’ these products before purchase.
The internet can be used to present information about search attributes,
such as price, colour, shape, dimensions and other standard product
specifications and this should require less time to obtain and process on
the part of consumers. Comparisons between brands can be facilitated
through the use of comparative tables in online reviews.
Although perhaps surprising, the web can also be used to gather
experience information. This can be elicited via ratings provided by people
who have bought and used the product. Qualitative buyer feedback (their
written descriptions) can also be useful. Buyers can also make assessments
on the basis of evaluating videos or three-dimensional demonstrations
of the product, and for certain products potential buyers can download
digital samples from the website; they can also refer to third-party product
tests and recommendations.
However, the information that potential buyers receive about experience
attributes may be different between each of the sources of information
that they use. This is due to differences in customers’ product experiences
and the way that these are described in reviews. There are three possible
solutions to this problem: firstly, consumers can synthesise information
from different sources; for example, different sources may have a greater
variety of opinions. Secondly, consumers can evaluate product attributes at
a more abstract level; for example, one source of information may refer to
one measure of picture quality for a camera and another source may use
another measure; the assessment could be made at the more general level
of picture quality. The third approach would be to restructure information
from different sources in order to make it comparable. For example,
reviews of products could be made more comparable by identifying what
they have to say about specific attributes.
Online sellers can invest large sums on websites that facilitate consumer
information searches. However, the risk they face is that websites will be
used by potential buyers in order to gather information, but once buyers
have done this, they will use search engines in order to find outlets that
provide the same goods at a lower price. This is an example of a free-rider
problem and how the internet can exacerbate it.
Purchasers of experience goods may be less likely than purchasers of
search goods to engage in free-riding behaviour. This could be because
greater effort is required to evaluate experience attributes and because
53
information on experience attributes is likely to be presented through

interfaces that are unique to each website; the initial learning costs of
using a particular website to acquire experience information will be higher.
This should lead to ‘experience effects’ that reduce incentives to learn
new interfaces and increase cognitive lock-in, thus reducing free-riding
behaviour.
One of the reasons for a pre-purchase search is to reduce the perceived
risk associated with purchasing a product online. A characteristic of search
attributes is that information provided by sellers reflects objective facts;
and consumers will generally consider such information to be true and
unbiased. In contrast, this level of trust may not hold information about
experience attributes because that is subjective and based on individual
judgment and the heterogeneous tastes of consumers. For this reason, a
buyer is more inclined to buy experience goods from a trusted seller, and
in many cases, this trusted seller will be the website that provides the
buyer with the most extensive product information.
From the preceding discussion we can see that the effect of the above
mechanisms is likely to be greater for consumers searching for experience
goods. Information about search attributes can be effectively delivered
in a simple manner because such information is more likely to be factual
and basic. So buyers of search products will be less likely to spend time
viewing multimedia content or reading lengthy reviews; instead they may
simply gather what limited information they need from shopping bots
(price comparison websites). In contrast, consumers of experience goods
are likely to spend more time at high-quality websites.
4.9 Alternative-based and attribute-based search

strategies
Choi et al. (2008) illustrate the difference between alternative- and
attribute-based search strategies in the following way. Suppose you want
to choose a laptop computer from three alternatives, and you decide to
consider three attributes for each laptop. One way in which you can make
the comparisons is to examine all three attributes of a laptop and then
consider another laptop using the same attributes. An alternative approach
is to examine all the possible laptops for a given attribute and once that
has been done to then consider all laptops in terms of the next attribute.
The former search strategy has been referred to as the alternative-based
search, while the latter approach has been labelled the attribute-based
search strategy.
Whether one chooses the alternative-based or the attribute-based search
strategy is closely related to one’s decision rule. A compensatory rule will
involve adopting the alternative-based search than the attribute-based
search. A non-compensatory rule will yield an attribute-based search over
the alternative-based search. Table 4.3 illustrates this.
54
Type of rule Compensatory Non-compensatory

Search Alternative-based search Attribute-based search
Trade offs Between attributes – Strength on one dimension cannot
compensation for weakness on compensate for the weakness
one dimension is made up by on another. For example, if an
strength on another. alternative has a lower value than
a threshold for one attribute, the
alternative is eliminated from
further consideration even though
the alternative may have the
highest additive-sum value among
all options.
Final decision depends on each

alternative’s balance of values
on all attributes considered.
Chosen alternative is superior Chosen alternative is superior
to other alternatives in sum to the other alternatives only
of weighted utilities of all by virtue of its most important
attributes. attribute(s).
Seeks best choice. Seeks good enough choice.

Regarded as more rational. Regarded as less rational.
Conflict-confronting – since one Conflict-avoiding – since one
makes a choice by considering focuses only on the attribute(s)
all attributes and trades off each considered to be the most
alternative’s weakness with a important and compares all
strength. alternatives on that dimension
only.
Cognitive More (since trade-offs cause Less.
effort cognitive and emotional
difficulties).
Table 4.3: Alternative-based and attribute-based search strategies.

Source: This table is created from text contained in Choi et al. (2008).
4.10 Information control

This is the degree to which an information seeker can decide what
information content to read (or to listen to), how long to read it (or to
listen to it) and in what order to read it (or to listen to it). Information
control varies by type of media. Television has lower information control
than newspapers, which allow people to freely choose the order in which
they read the news and when they read it.
There are different levels of information control on the internet.
Information display models can be categorised as either pull or push, and
this reflects high and low levels of information control respectively. Push
is when an information provider sends (that is, pushes) information to
information seekers without them requesting it. Examples of these are
pop-up advertisements on the internet. In contrast, the pull model applies
where it is the information seeker who makes the initial request for the
process of information display, and can select information content, display
order and reading time according to his/her preferences.
55
Given that both levels of information control are present on the internet,
the question is: How can the levels of information control be properly
applied to generate better service for different kinds of consumers who
seek product information and make purchase decisions on the internet?
The effects of information control on consumers’ information processing
are as follows: A negative view of this concept holds that the act of
information control is indeed a cognitive process that utilises part of the
cognitive resources. Because these resources are limited in the working
memory, and people perform two tasks simultaneously when given
information control (namely, seeking target information and information
control), the cognitive resources of information processing are reduced.
Therefore, the performance of information processing should deteriorate
due to information control.
A more positive view is that a high degree of information control
can provide information based on personal preferences to satisfy the
information needs of the decision-maker. For example, if an information
seeker requires more time to digest information, s/he can extend the
information display time under high-control conditions, which should
facilitate information processing.
The positive effects can be improved by matching the degree of control to
individual characteristics (including ability, self-efficacy, motivation, etc.).
If a person with low technical skills were given increased power to control
what information they receive about technical products their ability to
make better decisons would not necessarily increase simply because of
being given more control. It is even possible that, because they overloaded
by being in control, their productivity would decline. On the other hand,
if a person with high abilities was given such control, it is very likely that
their decision-making would improve.
4.11 Types of buying behaviour

Buying behaviour differs greatly for different types of products and
services. Table 4.4 shows types of consumer-buying behaviour based on
a buyer’s involvement and the perceived differences among brands. You
should note that while it may seem as if some products are always high
involvement and some are low involvement, this need not necessarily be
the case. The reasoning behind this is as follows. According to Celsi and
Olson (1988, p.211), ‘a consumer’s level of involvement with an object,
situation, or action is determined by the degree to which s/he perceives
that concept to be personally relevant’.
So an individual’s perception of their involvement in a product depends
on them as individuals rather than being an invariable attribute of the
product itself. Although there are products that on average (across various
consumers) are high or low involvement, the actual level of involvement
is still defined individually. In other words, involvement resides within the
consumer but is influenced by the product. For example, for any marketer
of low involvement products, there will be some people for whom they
will be low involvement, but there will be others for whom the decision
represents a higher level of involvement – for example, those people who
such firms use on a regular basis to provide feedback on their products or
those who are buying the same product as a gift.
56
Involvement
Differences in brand High Low
Significant differences Complex buying behaviour Variety-seeking buying
between brands (cognitive process). behaviour (primarily
behavioural with some
cognitive).
Few differences Dissonance-reducing Habitual buying
between brands buying behaviour (primarily behaviour (behavioural
cognitive with some process).
behavioural).
Table 4.4: Types of buying behaviour.
Complex buying behaviour results from situations where involvement
is high and where there is a high degree of perceived difference among
brands. The involvement may arise from uncertainty of the product’s
quality and/or a high price, or a number of other factors such as personal
factors related to whether the product’s image and the needs it serves
are congruent with a consumer’s self-image, values and needs. Also, the
more socially-visible a product is, the greater the involvement. Once
in this situation, a consumer will attempt to learn about a product and
then assimilate the information into beliefs about the product’s quality
and possible benefits. This type of behaviour is cognitive in nature and
marketers must usually respond with promotion that is information-rich
(that is, using print media with long copy).
Dissonance-reducing buying behaviour is normally associated with
products that are risky, purchased infrequently or expensive (making
them high-involvement goods) but where there is little perceived
difference among brands. Consumers may shop around for the best price
but buy relatively quickly and often can be affected by environmental
(behavioural) factors such as convenience. After the purchase, however,
the consumer might experience post-purchase dissonance, believing
that there was actually something better on the market. So this type of
behaviour represents a mix of cognitive and behavioural factors.
Habitual buying behaviour occurs under conditions of low consumer
involvement and little significant brand differences. In these cases,
often for goods that are purchased frequently (for example, toothpaste),
behaviour does not pass through the standard cognitive process of belief–
attitude– behaviour formation. Instead, consumers passively receive
information as they watch television or surf the internet. Unconscious
advertising repetition creates familiarity, which often translates into a
brand purchase when the consumer is deciding which brand to buy. This is
almost pure behavioural decision-making and hence advertising tends to
be focused on classical conditioning, in which buyers are taught to identify
a certain product by a single symbol repeatedly attached to it.
Variety-seeking buying behaviour occurs in situations where there are
low-involvement purchases but significant differences in brands. In this
situation, rather than engage in lengthy pre-purchase surveys, consumers,
if curious about a new brand or dissatisfied with the product choice,
engage in switching to another brand. In such situations the advertising
approach differs across firms. Market leaders often want to encourage
habituation and therefore employ conditioning strategies; whereas
challenger firms rely instead on inducing consumers to switch and
therefore employ more cognitive approaches; these appeal to consumers
on the basis of reasons for making the switch.
57
4.12 The case of advertising: cognitive versus

behavioural approaches
You may well be familiar with advertising which says very little about the
product or service being promoted. Clearly such advertising is not about
information dissemination. It is about creating discriminative stimuli
rather than giving information to customers about the product or service.
This type of behaviour modification is commonly done by advertising
the brand and pairing it with something else that consumers regard as
positive – beer with nice music, toilet paper with a pleasant landscape.
Over time consumers come to associate these positive elements with the
product. Sometimes the images the company uses are designed to align
the company’s values with those of its customers.
Certain advertising media are better at this than others. Film, television
and the internet are all multi-sensual media. They are better because they
appeal to more than one sense at a time (this is how you get pairing). It is
much harder to pair when it appeals to only one or two senses.
The concepts of setting and involvement displayed in Table 4.5 may help
us understand when the two views are most appropriate. Setting refers to
the environmental control available to a consumer in a given purchasing
decision. When a consumer is inside a supermarket we say that this setting
is closed because the firm has almost complete control of the environment
– from the music, temperature, arrangement and size of the store. In an
open setting, consumers have more control of the variables such as when
making investment choices on a Sunday afternoon in the kitchen.
Involvement, as we saw before, refers to the state of awareness that
motivates consumers to seek out, attend to, and think about product
information prior to purchase. When involvement is low, advertising tends
to be highly persuasive. Combining both setting and involvement, we gain
an appreciation for what kind of psychological approach is most effective
in advertising. Open situations with high involvement rely more on
cognitive features of advertising techniques (information and comparison
shopping); whereas in low-involvement situations with open setting,
the advertising relies on persuasive advertisements with some cognitive
element (for example, advertisements with clever situations that offer
comedy and intellect).
Setting
Involvement Closed Open
High Behavioural advertising with Cognitive advertising with
some informative content. substantial informative
content.
Low Behavioural persuasive Cognitive persuasive
advertising. advertising.
Table 4.5: Advertising as a function of involvement and setting.

This chapter has dealt with an economic-based approach to understanding
consumer behaviour. We then looked at the social-psychological and
psychological approaches. Within the economic approach we specifically
looked at the importance of preferences and constraints. The insights
offered by prospect theory were also considered. Within the social-
psychological approach we looked at three feedback loops that explain
58
buyer behaviour and also consider the broader notion of the self-concept
and the role of social networks. Finally, we looked at psychological
approaches to buyer behaviour and within this looked at the decision-
making process model and specifically information search activity by
consumers.

Having completed this chapter and the Essential readings and activities,
• explain why the study of consumer behaviour is so important to
marketing
• explain why economics differs from social psychology in its
explanation of consumer behaviour
• identify some different characteristics of consumers’ social networks
and the impact of these on buyer behaviour
• discuss the differences between cognitive and behavioural theories of
consumer behaviour
• outline the types of consumer behaviour based on the concepts of
setting, involvement, information gathering and perceived brand
differences.

1. a. Describe the basic, dissonance reducing and social factors
feedback loops. (10 marks)
b. Using examples, explain how consumers’ social network
characteristics will have an impact on their buyer behaviour.
(10 marks)
c. Why may consumers prefer to use subtle signals with members of
their social networks? (5 marks)
2. a. Describe the five stage consumer buyer process model. (5 marks)
b. Explain why consumers’ information search processes will be
different between experience and search goods. (10 marks)
c. Critically discuss why customers may use this model for
the purchase of high involvement goods. (10 marks)
3. Ruritania is a country where traditionally everyone drinks tea. Using
an economic explanation of custom and tradition, explain how a firm
may try and introduce a new type of soft drink into this country.
(25 marks)
59
Notes
60
Chapter 5: Organisational buyer behaviour
Chapter 5: Organisational buyer

behaviour
5.1 Introduction
This topic deals with the purchasing of services and products by businesses
and public-sector bodies. Many companies buy a growing proportion of
their products from third parties. Canon, for example, supply printers to a
number of computer manufacturers who then sell the printers under their
own brand name. A number of car manufacturers buy a large proportion
of components from independent manufacturers.
In this chapter, the article by Wilson (2000) contains key differences
between consumer and industrial marketing; we then examine the validity
of some of these distinctions.
We then consider, in some depth, one of the major influences on business
buyers, that of risk. We consider different types of risk and how these
influence buyers – we also consider how these arise and how these can
be managed. In our discussion of risk we consider concepts that are not
covered in Kotler and Armstrong but are nevertheless very important
and may appear in the examination paper. You should also note that they
help to set the background for our consideration of customer relationship
management, which will be covered in Chapter 7 of the subject guide.
This is because one of the reasons why customers (whether consumers
or business buyers) may want to establish long-term relationships with
suppliers is because they perceive risk in making a purchase and they feel
that a long-term, trust-based relationship can help to manage such risk.
There is also an article by Mitchell that accompanies our coverage of risk
and you should read that in order to help your understanding of the topic.

• explain the differences between consumer and business buyer
behaviour and critically assess the extent to which they are valid
• distinguish between different types of risk for buyers
• explain how risk can arise for buyers, how it can affect them and how
managers can address it.

• describe the different stages of the business buyer process model, the
factors that influence the buying process and the individuals who take
part in the buying process
• explain the notion of risk for business buyers, how it can arise and
how they can manage it.
61

1992, pp.315–33.
Pearson Prentice Hall, 2012). Chapter 6. You need to read the sections
titled, ‘Business markets’ and ‘Business buyer behaviour’ (except for the
section on ‘e-procurement: buying on the internet’). The section titled
‘Business markets’ deals with the differences between consumer and
business markets. The section titled, ‘Business buyer behaviour’ has
essential material on, ‘the major types of buying situations, ‘participants in
the buying process’, ‘major influences on business buyers’ and the ‘business
buying process’. You do not need to read the section titled, ‘Institutional and
government markets’.

Barry, J and A. Weinstein ‘Business psychographics revisited: from segmentation
theory to successful marketing practice’, Journal of Marketing Management.
25(3–4) 2009, pp.315–40.
Bauer, R.A. ‘Consumer behaviour as risk taking’ in D. Cox, (ed.) Risk taking and
information handling. (Boston, MA: Division of Research, Graduate School
of Business Administration, Harvard University, 1967), pp.22–33.
Ben Porath, Y. ‘The F connection: families, friends and firms and the
organisation of exchange’, Population and Review 6 1980, pp.1–30.
Bettman, J.R. ‘Perceived risk and its components: a model and empirical test’,
Boze, B.V. ‘Selection of legal services: an investigation of perceived risk’,
Journal of Professional Services Marketing 3(1) 1987, pp.287–97.
Brown, B.P., A.R. Zablah, D.N. Bellenger, J. Wesley and W.J. Johnston, ‘When
do B2B brands influence the decision making of organizational buyers?
An examination of the relationship between purchase risk and brand
sensitivity’, International Journal of Research in Marketing 28 2011,
pp.194–204.
Cox, D.F. ‘Risk taking and information handling in consumer behaviour – an
intensive study of two cases’ in Cox, D. (ed.) Risk taking and information
handling. (Boston, MA: Harvard University Press, 1967), pp.82–108.
Marketing 30(6) 1996, pp.36–51.
Derbaix, C. ‘Perceived risk and risk relievers: an empirical investigation’,
Journal of Economic Psychology 3(1) 1983, pp.19–38.
Fernandes, T.M. and J.F. Proenca ‘The blind spot of relationships in consumer
markets: the consumer proneness to engage in relationships’, Journal of
Donelly, J.H. and W.R. George (eds) Proceedings of American Marketing
Association (Chicago, IL: 1981), pp.200–04.
Hirschman, A. ‘Rival interpretations of market society: civilizing, destructive,
or feeble?’, Journal of Economic Literature 20(4) 1982, pp.1463–84.
Johanson, J. and L.G. Mattson ‘Interorganisational relations in industrial
systems: a network approach compared to a transaction approach’,
62
International Studies of Management and Organization 27(1) 1987,

pp.34–38.
Webster, F.E. and Y. Wind ‘A general model for understanding organisational
buyer behaviour’, in B.M. Enis and K.K. Cox (eds) Marketing classics.
(Boston, MA: Allyn and Bacon, 1991).
Williamson, O. ‘The economics of organisation: the transaction cost approach’,
American Journal of Sociology 87(3) 1985, pp.548–77.
Williamson, O.E. ‘Transaction cost economics: the governance of contractual
relations’, Journal of Law and Economics 22(2) 1979, pp.233–61.

In this chapter the Essential reading deals with important features of
organisational buyer behaviour. This text focuses on specific concepts
in more detail. We critically examine the conventional distinctions that
are drawn between organisational buyer behaviour and consumer buyer
behaviour. We also highlight the notion of risk, how it arises, how it
can affect purchasers and how industrial buyers managed it. This is an
important concept that we will revisit when we consider relationship
marketing, since it is one of the major motivations for customers to enter
into long-term relationships, particularly those involving trust.
5.2 Characteristics of business markets

The characteristics of business markets and the features that distinguish
them from consumer markets are a standard content of marketing
textbooks and you should read about them in Kotler and Armstrong
(2012), Chapter 6. We will now consider some of the points made by
Wilson (Essential reading), which question some of these distinctions.
5.2.1 Are the distinctions between business buyers and consumers

valid?
Wilson (2000) questions the validity of distinguishing between
consumer and organisational buyer behaviour. He argues that
while the distinction can help with teaching and planning, it limits the
development of a generic theory of buyer behaviour.
Wilson argues that the differences are more likely to be that of degree.
This is in contrast to commonly taught ideas that organisational buyer
behaviour is rational and consumer buyer behaviour is not. Moreover,
developments in information technology, competition between suppliers
and communications have meant that the extent to which consumers can
be rational has increased. Wilson says that consumers do not only buy for
themselves, where they respond primarily to their own perceptions and
wishes, but they also buy on behalf of others. He also argues that societal
influences on consumers are similar to organisational influences on
business buyers: ‘some scholars have questioned the nature of rationality
in (organisational) purchasing decision-making, stressing the behavioural
underpinning and social construction of collective rationality, the cultural
and political influences at work’ (Wilson 2000, p.785). Moreover, the
distinction is usually made between consumer purchases of impulse goods
and organisational purchases of expensive or strategic goods (which would
involve many members of the organisation). Between these two types of
purchases there are clearly substantial differences in terms of information
gathering, for example. However, there will clearly be much less difference
between, what is for consumers, a significant purchase and what is a
standard purchase for an organisation. In the routine type of purchase you
would expect their behaviour to be more similar.
63
An important question raised by Wilson (2000, p.782) is ‘why people

assume that individuals should behave differently when embedded in the
context of one form of organisation (professional) as compared to another
(social)’.
Other important assumptions regarding organisational buyer behaviour
can equally be questioned. Organisational buyer behaviour theories are
based on research undertaken in large manufacturing organisations. The
practice in other industries, types of organisations (for example, not-for-
profit) and in different national contexts may well be different. Webster
and Wind (1972), for example, developed models that presented the
buying process as a series of compartmentalised phases (a linear model),
the result of which was a purchase, which was satisfactory for both
parties. It is argued that these results of empirically-driven research were
not surprising given the make-up of the respondents, not only in terms
of the types of organisations that they represented, but also in terms of
the individuals who responded, who were professionals and schooled in
working within bureaucratic organisations. They were, therefore, more
likely to say that their purchasing for their organisations followed a linear
and rational path.
Another basis for similarity between consumer buyers and organisational
buyers is argued to be in terms of the possible application of psychographic
segmentation for business buying. This is based on the notion that those
individuals who work as business buyers for their organisations are
influenced by personal needs as well as cultural norms at the level of the
organisation and the country within which the organisation operates. The
definition of organisational psychographics is:
‘...the segmentation of organisational buyers into homogenous

clusters of mindsets and behaviours that are distinguished by
motives, risk perceptions and social interaction styles in order
to identify prospects as well as predict the predispositions of
the firm’s decision makers for the sake of adapting products,
marketing messages and relational selling behaviours...’
(Barry and Weinstein 2009, pp.318–19)
This notion is based on the idea that as well as making purchases based
on objective criteria such as price and benefits, industrial buyers may also
be influenced by other, personal factors as well, such as the buyers’ need
for recognition within the organisation. Indeed, the Maslow hierarchy
can give a good indication of the different types of needs that can be
appealed to. As well as these personal factors, there can be other extrinsic
motivations. For example, the corporate culture of the buying organisation
can affect the buyer’s motivations. Such corporate cultures can, for
example, focus on competitiveness or risk taking or predictability. In turn
each of these cultures may drive a different type of decision-making by the
business buyer.
One area where the difference between organisations and consumers
is held to be quite valid, is that of relationship marketing, where the
differences are identified as: ‘switching-costs, availability of alternatives,
type and frequency of interactions, level of interdependency, underlying
motives, relative size and the overall importance given to relationships’
(Fernandes and Proenca 2008, p.155).
64
5.3 The importance of risk

One of the challenges facing organisational purchasers is that of risk. As
a result, purchasers have to use risk-reduction strategies. An important
element in studying organisational buyer behaviour is the study of risk
perception and its consequences.
Greatorex, Mitchell and Cunliffe (1992) give the example of the risks that
organisations face when purchasing computers. They identify the following:
• the process can involve disrupting the working patterns of employees
• there can be problems between the fit of the software and the
hardware
• the purchasing process itself is a challenging one with the specifications
of a variety of different components having to be considered. In
addition, the risks that buyers face are enhanced by the problems they
face in seeking redress from suppliers, should something go wrong.
5.4 What is risk?

In marketing, the notion of risk from the perspective of buyer behaviour
(that is, customer perceived risk) is generally based on an early definition
of the term: ‘The bearing of risk by an individual is defined as: a situation
which may lead to negative consequences and the individual is not able to
control the occurrence of such consequences’ (Bauer, 1967). The degree
of risk in an exchange depends on the size of the negative consequences
of making a purchase and the extent to which the purchaser can control
those consequences (also referred to as the probability of something going
wrong).
5.4.1 What buyers stand to lose

The negative consequences referred to above can be broken down in terms
of what buyers stand to lose should a purchase go wrong. Henthorne,
Latour and Williams (1993) consider organisational buying risk in terms
of performance risk, social risk and economic risk. Performance risk refers
to the likelihood of product failure and this may be more likely where
purchasers are dealing with a technically complex purchase or one that is
unfamiliar to them, and is more likely to occur where organisations have
to buy a diverse range of goods from a number of different suppliers. This
is because the buyers find it more difficult to gather information about
the products and suppliers and they may seek to mitigate these risks by
relying on people they know within and outside the firm. Social risk also
arises in organisational buying and refers to the approval of important
reference groups within an organisation; for example, superiors and co-
workers. The social risk that organisational buyers will associate with a
purchase will vary with its importance to the organisation and its visibility.
Finally, economic risk refers to the potential dollar investment loss that
the organisation may face as a result of making the wrong purchase. As
individuals progress in seniority within an organisation they will have
more direct involvement in more significant purchases and as a result they
will be more exposed to economic risk in their purchasing activity.
Cooper, Wakefield and Tanner (2006) add to the above discussion
in the following way. They consider distributors and agencies to be
low performance risk, because they offer customised communication.
However, they represent high financial risk because these channel
intermediaries add their margins to their prices. On the other hand, the
65
internet and catalogues are considered to have higher performance risk

because the level of information offered is relatively low and service is not
customised to customer needs; however, the level of financial risk with
these two channels is low because intermediary and selling costs are low.
Homburg, Muller and Klarmann (2011) expand on the notion of functional
risk and say that it will be greater for highly important products than for
less important products. With highly important products, the adverse
consequences of buying an inappropriate product are more substantial,
such as monetary losses due to replacement costs or, in business-to-
business settings, due to production downtimes and, as a result, customers
will have higher information needs.
5.4.2 Actual risk and perceived risk

Perceived risk is important to marketers since this is what influences
customers’ actions. Perceived risk is what the purchaser experiences
regardless of the actual level of risk. The issue that arises is whether there
is a type of risk other than perceived risk. Of course there may well be an
objective, real level of risk, which may be made up of what a customer
really has at stake when they make a purchase, and the real ‘scientific/
actuarial’ probability of something going wrong.
Perceived risk is risk perceived by the customer and as such directly
influences their behaviour. However, perceived risk can be different to
the actual risk in purchasing a product or service (namely, customers may
perceive more risk than actually exists or they may perceive less). Reducing
actual risk is neither a necessary nor a sufficient condition for reducing
perceived risk. Neither, in fact, does it follow that reducing perceived risk
will only be achieved by reducing actual risk.
Activity 5.1
Can you think of examples where perceived risk may have increased regardless of the
level of actual risk?
5.4.3 Linking perceived risk to other forms of risk

We will now look at the notion of perceived risk in a little more detail; in
particular, we will examine the distinction between perceived risk, which
distinguishes different classes of products (inherent risk; and perceived
risk, which varies between different brands within a product class
(handled risk).
Inherent risk and handled risk

A product class refers to a group of products that are homogeneous, or
generally considered to be substitutes for each other. Depending on how
substitutable the products are, the class can be considered to be narrow
or broad. For example, a narrow product class of breakfast meats might
be bacon, ham and sausage. A broad class would include all other meat
substitutes, even those occasionally sold for breakfast use.
Inherent risk is the level of risk customers perceive at the level of the
product class (that is, some product classes are perceived to be riskier than
others). Inherent risk is the latent risk a product class holds for a consumer;
the innate degree of conflict the product class is able to arouse. Handled
risk within a product class will depend on the specific brands being bought:
customers will perceive different degrees of risk between different brands
(Bettman, 1973, p.184).
66
Mitchell (2000) explains these concepts in the following terms related to

the purchase of professional services by organisational buyers:
Bettman’s (1973) notion of inherent and handled risk is also
important in this context. Inherent risk concerns a person’s risk
disposition towards a certain product category (e.g. consultants);
while handled risk relates to the level of risk engendered by the
employment of a specific consultant. As the purchaser becomes
more involved, so inherent risk will be replaced by handled risk
as the prime concern and motivator of risk-reduction activity.
(Mitchell 2000, p.463)
When a purchaser makes a purchase, the risk they perceive will depend on
two variables: the product class (inherent risk) and the brand within the
product class (handled risk).
The relationship between handled and inherent risk is as follows: where
a customer has no information, handled risk and inherent risk should be
the same. Handled risk should rise as inherent risk rises, but should fall
as customers’ information about the product class rises and they become
better informed about different brands. Other variables that reduce
handled risk are: the usefulness of the information a customer has about a
brand; and the confidence with which it is held.
Consequent risk and outcome risk

There is an alternative means of conceptualising inherent and handled
risk. Inherent risk will be the same across all brands within a product
class. Similarly, the amount the customer has to lose as a result of making
a wrong purchase will also be the same across all brands. However, this
will not always be the case and marketers can try to reduce the amount
a customer stands to lose as a result of buying their brand. The activity
below explains this in more detail. Outcome risk is what the customer has
at stake. Consequent risk is the probability of something going wrong; this
is effectively the same as handled risk and for this reason a line is shown
joining the two concepts.
In terms of the options customers have for mitigating outcome risk, they
can reduce what they have at stake and in order to mitigate consequent
risk they can acquire information in order to reduce the probability of
making the wrong decision (Cox, 1967).
Thus far customer perceived risk has been shown to operate at two
different levels; the product class and the brand (inherent and handled
risk). It has also been shown that risk can be decomposed into two
different forms: outcome and consequent.
Outcome/consequent and inherent/handled risk represent two different
ways in which risk can be conceptualised. The question is whether the
two frameworks can be integrated and whether any useful insights can be
gained as a result of this. We argue that an integration of these concepts
can be valuable from a managerial perspective for the following reasons.
At the level of inherent risk, the issue for managers is whether or not risk
really matters to customers. If it does, then marketing managers may need
to address the issue of perceived risk as part of their management of the
marketing mix. If it does not matter, then they can turn their attention to
other issues instead. We argue that the answer to the question ‘does risk
really matter?’ can be derived by looking at the level of outcome risk – if
something should go wrong, what does the customer have at stake? If the
customer has a great deal at stake, then clearly the manager may need to
consider how perceived (and even actual) risk should be managed.
67
The next question managers need to ask themselves is related to handled

risk – how does risk vary by brand (within the same product class)? The
answer to this question can be found by looking at the level of consequent
risk – different brands will vary in terms of different levels of reliability, for
example. Managers will then need to consider in which ways their offering
could be made more reliable.
The two frameworks can therefore be integrated quite effectively and
complement each other from a managerial point of view.
Figure 5.1 summarises these points as follows. There is a difference
between actual and perceived risk. Perceived risk can vary between
different product classes, where a product class comprises of brands that
consumers consider to be broadly substitutable. Some product classes will
have a high level of inherent risk and this will be because the customer
has a great deal at stake when making a purchase (the figure uses cars
as the example). Within this product class, individual brands will vary in
terms of handled risk and this will depend on the fact that different brands
have good or bad reputations for reliability. Unreliable car brands will be
considered to have a high level of consequent risk. Where marketers are
selling a brand in a product class where inherent risk is low, the question
may well arise as to whether risk will play a role in customer decision-
making at all and whether it can be ignored.
Actual risk
Factors that influence perception
Perceived risk
High
Customer has a lot at stake
inherent Product class: cars
(outcome risk)
risk
High probability of failure
High handled risk
(consequent risk)
Brand A
Brand B
Low handled risk Low probability of failure

(consequent risk)
Low
Customer has little at stake
inherent Product class: distilled water
(outcome risk)
risk
Figure 5.1: The different risk concepts.
Activity 5.2
How can firms reduce the level of consequent and outcome risk for their customers?
5.4.4 Risk taking and organisational characteristics

Organisations do not have the same propensity towards taking risks,
including in their purchasing behaviour, although some may be more
willing to do so than others. According to Pablo and Sitkin (2003), in
terms of the characteristics of organisations, there are four predictors of
risk taking behaviour.
68
1. The composition of the group, where group decision-making

influences individual risk behaviour.
2. An organisation’s cultural values towards risk; for example, preference
for certainty rather than uncertainty.
3. The organisation leader’s risk orientation and the lending of their own
legitimacy to taking risks will also influence risk-taking behaviour.
4. The organisation’s control systems will influence risk taking since
they can either reward or punish the outcomes of risky decisions and
managers’ willingness to take risks.
5.4.5 Managing risk

Given the existence and importance of risk, how do business buyers deal
with it? The traditional perspective of industrial buyer behaviour (Brown
et al., 2011) is that buying managers are objective, seek optimal solutions
and undertake systematic information processing. Objective decision-
making has been characterised as being deliberate and calculated. Another
perspective, however, is that subjective factors also enter the equation
and can include company reputation (buying a product not because it
is better, but because of an over riding need to make a purchase that
everyone considers to be safe), business relationships and risk perceptions.
This suggests that marketers can benefit from brands that emphasise risk
reduction.
Activity 5.3
Read Greatorex et. al. (1992), pp.318–19, in their survey of the literature, what methods
do they see organisational buyers using to manage risk when they make purchases?

In this chapter we referred you to the Essential reading, which deals with
important features of organisational buyer behaviour. This chapter has
then critically examined the conventional distinctions that are drawn
between organisational buyer behaviour and consumer buyer behaviour.
We have also highlighted the notion of risk, how it arises, how it can
affect purchasers and how it can be managed by industrial buyers. This is
an important concept that we will revisit when we consider relationship
marketing, since it is one of the major motivations for customers to enter
into long-term relationships, particularly those involving trust.

Having completed this chapter, and the Essential readings and activities,
• describe the different stages of the business buyer process model, the
factors that influence the buying process and the individuals who take
part in the buying process
• explain the notion of risk for business buyers, how it can arise and
how they can manage it.
69

1. a. When making purchases, what types of outcome risk do business
buyers face? (10 marks).
b. Using an example of your choice, evaluate the different ways in
which business buyers may seek to address such risk.
(15 marks)
2. a. Identify the major types of buying situations that business buyers
face? (5 marks)
b. How would you expect perceived risk to vary in each of these
situations? (10 marks)
c. What would be the implications for the business buying process?
(10 marks)
3. Identify and describe the situations where business buying can be very
similar to consumer buying. Critically assess the differences between
these situations and those where business and consumer buying are
likely to be very different from each other. (25 marks)
70
Chapter 6: Market segmentation, targeting and positioning
Chapter 6: Market segmentation,

targeting and positioning
6.1 Introduction
In this chapter we will explain the segmentation, targeting and positioning
(STP) process and consider the factors that can influence successful
positioning.
You should note that the recommended text (Kotler and Armstrong,
2012) tends to follow a normative approach to these topics; specifically it
focuses on how managers should undertake STP. For the purposes of this
chapter such an understanding is not sufficient. We have taken a critical
approach to this topic and expect you to be able to understand and explain
the criticisms levelled against it. Understanding the criticisms and being
able to explain and evaluate them against the benefits of STP is going to
be more challenging than simply understanding the process of STP; the
examination is likely to require more than simply describing the process.
The relevant sections in Chapter 7 of Kotler and Armstrong are:
• market segmentation
• market targeting
• differentiation and positioning.
The first two major sections of this chapter entitled ‘Importance of
segmentation’ and ‘Marketing segmentation, targeting and positioning’,
provide an overview for the whole of the Kotler and Armstrong chapter.
Section 6.4 ‘Problems in implementing segmentation’ again refers to the
entire process, but draws attention to various practical and conceptual
limitations, in a way not really addressed by Kotler and Armstrong. Section
6.5 of the chapter entitled, ‘Positioning’ links to the ‘Differentiation and
positioning’ section of Kotler and Armstrong and provides more conceptual
detail.

• explain why firms undertake segmentation, targeting and positioning
(STP)
• describe the process of STP
• assess the problems in implementing segmentation
• describe positioning and the factors that may influence its
effectiveness.

• describe and explain the STP process
• evaluate the possible usefulness of segmentation, targeting and
positioning to STP marketing managers
• critically evaluate the arguments in favour of STP and the criticisms
levelled against it.
71

Pearson Prentice Hall, 2012) Chapter 7. Note: You don’t need to read the
material dealing with segmenting international markets.

The following two texts are referred to in a self-contained way in this
subject guide. If you want to read the full articles in order to gain a fuller
understanding of the material, you are welcome to do so. However,
reading these articles is not essential.
Fuchs, C. and A. Diamantopoulos ‘Evaluating the effectiveness of brand-
positioning strategies from a consumer perspective’, European Journal of
Marketing, 44(11) 2010, pp.1763–86.
Park, D-B. and Y-S. Yoon ‘Segmentation by motivation in rural tourism: a
Korean case study’, Tourism Management 30(1) 2009, pp.99–108.

Beane, T.P. and D.M. Ennis ‘Market segmentation: a review’, European Journal
of Marketing 21(5) 1987, pp.20–42.
Marketing 30(6) 1996, pp.36–51.
Dibb, S. ‘Market segmentation: strategies for success’, Marketing Intelligence
and Planning 16(7) 1998, pp.394–406.
Dibb, S. and P. Stern ‘Questioning the reliability of market segmentation
techniques’, Omega – International Journal of Management Science 23(6)
1995, pp.625–36.
Dobni, D. and G.M. Zinkhan ‘In search of brand image: a foundation analysis’,
Advances in Consumer Research, 17 1990, pp.110–19.
Kay, J. ‘A model of product positioning’ in Kay, J. The foundations of corporate
success. (Oxford: Oxford University Press, 1993) pp.242–50.
Palmer, R.A. and P. Millier ‘Segmentation: identification, intuition, and
implementation’, Industrial Marketing Management 33 2004, pp.779–85.
Pires, G.D., J. Stanton and P. Stanton ‘Revisiting the substantiality criterion:
from ethnic marketing to market segmentation,’ Journal of Business Research
64 2011, pp.988–96.
Quinn, L., T. Hines and D. Bennison ‘Making sense of market segmentation:
a fashion retailing case’, European Journal of Marketing 41(5–6) 2007,
pp.439–65.
6.1.6 Useful website

http://en.wikipedia.org/wiki/Market_segment (last accessed June 2013)
This site has a brief and useful overview to the topic; hyperlinks help
explain some of the technical terms associated with this topic.

This chapter describes in significant detail the normative approach to
segmentation, targeting and positioning (STP) and explains the generally
defined advantages of this approach to marketers. We then examine a
number of criticisms levelled at STP. We investigate the nature of these
criticisms and the reasons why they may be valid. We conclude that STP
may conceptually be a useful tool and may provide managers with some
answers to an important problem.
72
6.2 Importance of segmentation

According to Quinn et al. (2007) the underpinning principles of market
segmentation can be traced back to economic pricing theory; different
prices for different groups of customers could be used to maximise profits.
In addition, Dibb points out that:
Businesses from all industry sectors use market segmentation
in their marketing and strategic planning. Customer needs
are becoming increasingly diverse. These needs can no longer
be satisfied by a mass marketing approach. Businesses can
cope with this diversity by grouping customers with similar
requirements and buying behaviour into segments. Choices
about which segments are the most appropriate to serve can
then be made, thus making the best of finite resources.
(Dibb 1998, p.394)
The importance of market segmentation is reflected in the definition of

what constitutes a segment. A market segment has been defined as a
group of present or potential customers with some common characteristic
that is relevant in explaining and predicting their response to a supplier’s
stimuli.
Segmentation is about finding a common characteristic among a group of
customers, which could help predict how they will react to the marketer’s
advertising, pricing, distribution, etc. Common characteristics can be
important because, taken as a whole, customers tend to be ‘diverse’ in
terms of their wants and preferences.
Therefore, if we are able to find out that certain groups of potential
customers react in the same way to our marketing efforts, we will be better
able to control those marketing efforts to ensure that a particular group of
people react in a positive way (namely, make a purchase and come back
for more). Specifically, we could tailor our marketing efforts to ensure
that the needs of that specific group of people are satisfied. Of course, it is
important that they have a characteristic in common, otherwise we would
not be able to identify the relevant groups.
Overall, market segmentation is important because it can be a means
of increasing sales and profitability. According to Beane and Ennis
(1987), market segmentation is done for two reasons: to look for new
product opportunities or areas that may be receptive to current product
repositioning; and to create improved advertising messages by gaining a
better understanding of one’s customers.
This distinction is important. In the first instance, the firm is segmenting
the market before it has entered it and will use information about
segments in order to develop specific elements of the marketing mix and
indeed to decide which segments should be focused on. In the second
instance, the marketer looks at an existing customer base and sees
which basis for segmenting groups of customers may be most effective
for predicting their behaviour. Elements of the marketing mix are then
designed to appeal to specific segments.
In this chapter, the notion ‘normative segmentation model’ refers to
the conventional segmentation–targeting–positioning sequence that is
presented in most marketing and retailing textbooks. The segmentation
model is labelled normative because of its prescriptive nature; it suggests
that practitioners should go about their business in a certain way
(Danneels, 1996).
73
6.3 Market segmentation, targeting and positioning

A ‘market segment’ is a large group of identifiable customers. A ‘niche’
is a more narrowly defined group of customers who may seek a specific
combination of benefits. No company can serve all the customers in a
particular market. Firms recognise that their competitors can be better
placed to serve the needs of some customers. For this reason firms have to
segment, target and position (STP) their products. However, this approach
is not always used by marketers. Mass marketing is used by marketers to
try to sell to all segments of the marketplace, regardless of the differences
in customers’ needs. Over the years there has been a shift away from mass
marketing, as increasing levels of competition have encouraged marketers
to become more responsive to customer wants. An early development
was ‘product-variety marketing’, which emphasised the importance of
providing customers with variety and differences in the specifications of
products. With recent emphasis on target marketing, the marketers should
distinguish between market segments and target one or more of them.
6.3.1 Market segmentation

According to Kotler and Armstrong (2012), there are four major steps to
target marketing:
1. Market segmentation involves identifying and profiling distinct groups
of potential customers.
2. Market targeting involves evaluating and then selecting one or more
market segments that are to be entered. Figure 6.1 shows the different
approaches that a firm can use for market targeting.
3. Differentiation involves differentiating the organisation’s offering from
that of competitors in order to offer customers superior value.
4. Market positioning involves establishing and communicating
producers’ benefits to target customers in selected markets.
M1 M2 M3 M1 M2 M3
Different products, different markets Different products, one market
P1 P1
P2 P2
P3 P3
Differentiated Concentrated
One product, different markets One product, one market
P1 P1
P2 P2
P3 P3
Undifferentiated Micromarketing
Figure 6.1: Market targeting.
The tools related to identifying and profiling market segments are the bases
of segmentation. In addition there are certain requirements for effective
segmentation. In order to undertake the second stage – ‘market targeting’
– the marketer needs to use the different criteria used for assessing the
74
attractiveness of different segments. Once the firm has done this, it needs to
decide which segments and how many to enter (this is illustrated in Figure
6.1). For example, the differentiated approach involves offering different
products to different market segments, reflecting a marketing orientation
(because there is a recognition of different customer needs). In contrast
an undifferentiated approach may be more cost effective because the firm
offers the same product to different segments, but may involve ignoring
differing needs and wants and may reflect a production orientation. The
final two stages are differentiation and positioning. You should read the
relevant sections of Kotler and Armstrong for a full explanation of these
stages and the criteria and tools to be used at each stage.
Case study: Segmentation by motivation in rural tourism: a Korean case study

The Korean government wants to use tourism as a means of economic development,
which is necessary because rural areas have been suffering for a number of reasons:
depopulation (as people leave for the cities), ageing of the rural population and the
government’s open market policy on agriculture, which has reduced support for farmers.
Among the resources that the government has developed to encourage rural tourism
is the development of a Rural Traditional Theme Village, for example. Accommodation
in rural areas is in homes that have been restored for tourism purposes and which use
traditional architecture and materials.
Although demographic and socio-economic characteristics had previously been used to
profile visitors, it was felt that these variables had not been very effective as a means
of predicting potential customers’ behaviour because they were only indirectly related
to purchase intentions. A more effective predictor of behaviour was considered to be
benefits and motivations. In the context of tourism, motivation refers to ‘a set of needs
that cause a person to participate in a tourism based activity’ (p.100), these motivations
can include: the physical (relaxation); cultural (history); interpersonal (meeting people);
prestige (self-esteem).
In order to assess motivations for this study, the researchers asked respondents to rate
24 general travel motivational statements in relation to trips that they had previously
undertaken as tourists. Statements included, for example, ‘get refreshed’, ‘share a familiar
place with others’, ‘visit places family came from’, and ‘experience solitude’. For each
statement respondents could answer on a scale that ranged from ‘not at all important’
to ‘very important’. The results were analysed in such a way that individuals could be
clustered within groups, so that responses within a group were more similar to each
other than those of people in other clusters. The findings allowed 24 statements to be
grouped into six main factors. For example, the ‘relaxation’ factor, comprised statements
such as ‘get refreshed’ and ‘escape from a busy job’. In contrast, the ‘socialisation’ factor
comprised items such as, ‘share a familiar place with others’ and ‘go to places friends
haven’t been’.
In conclusion the case identifies four segments: family togetherness seeker, passive
tourist, ‘want-it-all’ seeker and learning and excitement seeker. The passive tourist, for
example, comprised people who were relatively wealthy, college graduates and visited
tourism villages two to three times a year. However, they rated low on all the six factors.
In contrast the want-it-all tourists were likely to be high school graduates, with less
income than the passive tourists and who valued all six factors; in particular, agricultural
experience and visited rural tourist sites four times or more per year. The implication of
these findings was that marketing strategies should aim communities with agricultural
activities for want-it-all-tourists and sites with abundant natural resources for passive
tourists.
Park, D-B. and Y-S. Yoon ‘Segmentation by motivation in rural tourism: a Korean case
study’, Tourism Management 30(1) 2009, pp.99–108.
75
6.4 Problems in implementing segmentation

This section deals with some of the shortcomings of the normative view
of segmentation, it explains what may happen in practice and assesses the
reasons why. To begin with, Palmer and Millier (2004) identify some basic
concerns.
In order to undertake STP the market, customers, and competitors must be
defined but this may be quite a challenging task. Segmentation is carried
out at a point in time, but given the dynamic marketing environment, the
findings will become rapidly out of date. STP assumes that it is possible
to obtain relevant information, but it may either be unobservable or
unobtainable and even if it is obtained it may be ambiguous.
6.4.1 Product criteria versus distinct customer needs

Customer-focused or marketing-oriented segmentation is based on the
assumption that it is undertaken in order to differentiate between groups
of customers with differing needs. This allows the marketer to fulfil the
needs of each segment more specifically. In reality, market divisions may
be based on product criteria rather than reflecting distinctive customer
needs. Such groupings do not consist of customers with homogeneous
needs and buying behaviour. In the corporate banking sector, some banks
divide their customer base in terms of turnover and/or size criteria. This
is despite the fact that these banks talk about the resultant groupings
as if they are genuine customer segments; in practice they may fail to
delineate between customers in terms of product requirements and buying
behaviour.
The above approach is also described as being a sectorised view of the
market as opposed to a segmented view. A sectorised view is one which is
based on product criteria rather than on the needs of customers. A reason
for pursuing the sectorised view is because of industry norms, that may
also limit the extent to which segmentation can be undertaken effectively.
The UK car market represents a sectorised view of the market, which
is (or has been) segmented by marketers into ‘small’, ‘lower medium’,
‘upper medium’ and ‘large’; these segments may not actually correspond
to specific targeted groups of buyers but may reflect a convenient means
of dividing up the market. Also in this situation, if the entire car market
is geared towards producing and selling products for these sectors, it may
be difficult for one manufacturer to go against the trend. The sales force
of a company may also be geared towards the satisfaction of operational
considerations rather than marketing requirements. Salespeople may have
territories assigned to them on the basis of geography to make sales visits
more convenient, rather than type of customer, for example.1 1
Dibb and Simkin
(1994) also provide
6.4.2 Intuition versus planning some explanations as
to why marketers will
As you will have seen above, segmentation is supposed to be undertaken face implementation
on a planned and systematic basis. In real life, segments may also be problems with
developed on an unsystematic basis, based on marketers’ intuition and segmentation.
as a result of customer requests. Also, the basis of implementation may
be chosen because of such factors as the ease of implementation. Indeed
there can be a dichotomy between the most statistically valid segments
and those segments for which an effective marketing programme can
be developed. To this extent any segments that are developed will be
a compromise between addressing customer needs and the firm’s own
operational considerations.
76
Dibb and Simkin (1994) argue that a company’s structure, distribution

systems and sales force may limit the practicability of segmentation; they
also point out that companies adopt an ad hoc approach to segmentation;
for example, they may be motivated by customer requests and the costs of
identifying segments may be prohibitive.
In a study of segmentation, Danneels found that the implementation of
segmentation, targeting and positioning did not follow the normative
model. He says:
In the normative model, segmentation, targeting and retail mix
development occur sequentially. It was found that the normative
sequence – market segmentation, target selection and retail mix
development – is not respected by the apparel retailers in this
study. The interview data suggest that a cyclical, as opposed
to a sequential, process of adjustment of the retail mix would
more accurately reflect actual business practice. This suggests
that, in practice, the stages of the sequence are rearranged and
repeated.
(Danneels 1996, p.42)
Quinn et al. (2007) say that a reason for such compromises could be
because there is a paucity of practical guidelines for managers on how to
choose segments. As a result, they suggest that managerial intuition may
play a role instead, where managers’ experiences are used instead of data
and information. Intuition is defined by Weick (1995, p.88) as ‘compressed
expertise in which people arrive at an answer without understanding all
the steps that led up to it’ and this may become necessary where normative
analysis fails. There are two reasons given in support of following such
approaches. Firstly, it has been argued that every segmentation model
is itself an approximation of reality; and secondly, that even planned,
rational approaches may be arbitrary.
6.4.3 Validity of segmentation

Dibb and Stern (1995) consider the validity of segmentation as a
marketing tool. They argue that the process of segmentation makes a
number of assumptions that could be flawed. They identify three main
problems:
1. The market and its boundary may be pre-defined by the marketer and
this may not reflect reality (market definition).
2. Segments may not be stable with respect to time or competitor activity.
3. The process of segmentation itself may change the market’s response
to the dimensions of the segmentation technique (market stability).
There is an assumption that attitudinal responses correlate with
behavioural activity (attitudinal reliability), so there may be problems with
interpreting the output of cluster analysis. Moreover, can factor and cluster
analysis be relied upon?
6.4.4 Process led

Quinn et al. (2007) say that the positivistic premise underlying the idea
that homogeneous groups of consumers can be created – can also lead to
a process-driven understanding of market segmentation. They argue that
it is important to understand the factors that influence both the consumer
and the organisation. What this means is that purely by focusing on what
bases distinguish different segments, may not take into account why this
is the case and how changes in the marketing environment may diminish
the validity of segmentation bases that had previously been effective.
77
There are examples of consumers abandoning predictable patterns of

consumption. For example, in general only young people have bought
certain types of toys and games, but in recent years older men have been
buying such products as well (nostalgia market). Changes in lifestyle,
income and ethnic group are increasing the diversity of customer needs
and behaviour.
6.4.5 Questioning the substantiality criterion

Pires, Stanton and Stanton (2011), say that common interpretations of
substantiality focus on profitability or viability of the segment size in
terms of numbers and market potential, but there is imprecision about
what substantiality actually entails. Within consumer markets, substance
may refer to having a sufficient number of consumers to warrant tailoring
a product. Another approach is whether the profits from segmentation
outweigh the costs of focusing.
There are five ways to value a segmenting opportunity, on a more strategic
basis, without addressing profitability: sales potential, fit with the firm’s
existing resources, cost of segmenting, competition and growth. The issue
is not simply a matter of profits generated by the particular segment
(whether it has sufficient substance) but whether there is strategic
advantage in segmenting; that is, a long-term impact on the firm’s
competitive position.
6.4.6 Problems with geographic segmentation

There are also specific problems with geographic segmentation. None of
the above methods will work if it is possible for customers to buy in one
market and sell in another; this is also known as personal arbitrage.
The ability of the British government to impose high taxes on sales of
alcohol in the UK is being challenged by the ability of British drinkers to
drive to France and buy relatively cheap drinks, which they bring back
to the UK. But there are ways in which marketers can try to overcome
individuals’ ability to undertake personal arbitrage.
Geographic segmentation can be imposed where, for example, customers
will buy a certain product by force of habit. In the UK, the steering wheel
is on the right-hand side of the car and it is on the left in continental
Europe. Cars on the continent tend to be cheaper than those sold in the
UK. There is nothing stopping British drivers buying a car on the continent
and driving it in the UK. However, it is difficult to drive a left-hand car on
British roads so people do not do this.
Language can also help the marketer to keep geographic markets separate.
In various European countries cigarettes must carry the health warning in
the language of that country. This means that it is not possible for retailers
to buy cigarettes in countries where they are cheap and sell them in more
expensive countries. Finally, marketers can control their distribution
networks for example, by not offering warranties on products, which have
been bought in one country and then taken to another.
6.5 Positioning
Market positioning is the process of establishing a position for a product
relative to its competitors, using the different elements of the marketing
mix. The position of a product will be defined by how consumers view it
on important attributes.
78
There are a number of different ways in which marketers can differentiate

their offering from those of their competitors: product, services, personnel,
image, for example.
It becomes easier for marketers to promote their differences to customers
if these differences are: important to the customers; distinctive; higher
levels of benefits compared to those of competitors; communicable;
pre-emptive; affordable; and profitable.
In order to see the range of different positioning options available to
marketers, consider the washing powder market. You will note that some
brands are sold on the basis of price (they are cheap), others are sold on
the basis of performance (they produce whiter results). All of these are
benefits that customers want. However, because different market segments
attach different priorities to whiteness, cheapness and low temperature,
manufacturers are able to take advantage of this by offering different
products for each segment.
So far as cars are concerned, manufacturers offer different models in order
to cater for different segments that place varying emphasis on luxury, fuel
economy, passenger capacity, speed and a number of other factors.
You should note that in both of the examples above we have said that
customers attach different levels of importance to benefits. However, just
because someone attaches importance to luxury does not necessarily mean
to say that all the other benefits are now redundant – they just come lower
in the list of priorities.
As a concept for marketers, positioning is important because it takes for
granted the fact that there are other products that people can choose to
buy. Looking at the alternatives from the customers’ point of view, we
need to appreciate that customers will see the alternatives as occupying
different ‘positions’, in terms of what they can do, how much they cost and
what image they present, for example.
Fuchs and Diamantopoulos (2010) distinguish between intended, actual
and perceived positioning. They start by saying that when marketers
position their brands, they are effectively influencing customer perceptions
of those brands. Although we will examine branding in more detail in
Chapter 8, we need to refer to some brand concepts here in relation to
positioning. If you consider advertising for any product, for example, it
is seeking to establish in your mind a position compared to alternative
products for that brand. You should note that there is a difference
between brand position, where we are effectively comparing a brand to
the alternative, competitor brands. In contrast, with brand image the
comparison is absent.
Brand image has been defined as: ‘the concept of a brand that is held by
the consumer – which is largely a subjective and perceptual phenomenon
that is formed through consumer interpretation, whether reasoned or
emotional.’ (Dobni and Zinkhan, 1990, p.117). You will note that brand
image involves no reference to competitor brands.
In order to clarify what brand positioning is, Fuchs and Diamantopoulos
(2010) go on to explain the distinction between intended, actual and
perceived positioning. As the term suggests, intended positioning is how
the marketer intends to position the offering. So, for example, a watch
manufacturer may intend to position one of their models in the luxury
eveningwear space. This choice of position can be driven by such strategic
factors as the core competence of the wider organisation. At a brand level
it may be driven by the organisation having found a ‘gap in the market’
79
or perhaps a segment of customers who it feels are not adequately served

by existing offerings (for example, there may be luxury watches available,
but a segment of customers may have expressed an interest in something
that is suitable for evening use). Actual positioning is different to intended
positioning since it refers to the actual positioning information (via
marketing communications’) given to customers and this will depend on
how the communications campaign is actually executed. Finally, perceived
positioning depends not only on what the company communicates to the
customer, but also on what the customer hears via word of mouth from
other sources and their own past experience. Perceived positioning can
vary from customer to customer, depending on how each one of them
interprets the information given.
There are two key sources of error that can affect the effectiveness of
positioning. Firstly, the intended position may be misconstrued, so the
position that the organisation hopes to achieve for the brand does not
actually meet a valid customer want or does not adequately distinguish
the company’s offering from that of competitors. Secondly, the intended
position may be well defined, but the execution may not be effective so
consumers do not perceive the actual position the right way.
One of the decisions that marketers need to make is the type of positioning
to be used. The choices that are available are as follows:
• Features. The marketer emphasises the concrete attributes of the
brand. The advantage of this approach is that it is tangible and
measurable.
• Abstract. These are groups of attributes, but they may not be very
tangible.
• Direct. Emphasis is on the advantages to the consumer; for example,
whether the offering is more convenient or involves lower cost.
• Indirect. The emphasis here is on hedonic needs and the psycho-
social benefits to the customer; for example, that a product makes
someone look more attractive or respectable.
• Surrogate. Here potential customers are invited to make associations
between the brand and something else; for example, some watches
draw associations between the brand and famous personalities.

In this chapter we have described the normative approach to
segmentation, targeting and positioning and explained the generally
defined advantages of this approach to marketers. However, we have
also seen that there have been a number of criticisms levelled at STP. We
have investigated the nature of these criticisms and the reasons why they
may be valid. We concluded that STP may conceptually be a useful tool
and may provide managers with some answers to an important problem.
There are also rigorous approaches (as shown in the case study) that can
be used in order to undertake the process based on data and not intuition.
However, managers need to recognise the shortcomings inherent in this
approach.
80

• describe and explain the STP process
• evaluate the possible usefulness of segmentation, targeting and
positioning to STP marketing managers
• critically evaluate the arguments in favour of STP and the criticisms
levelled against it.

1. a. What segmentation variables are most commonly used in
consumer marketing? (10 marks)
b. How in target marketing would you decide which types of variable
are most suitable for segmenting your market? (15 marks)
2. a. Explain what you consider to be the advantages of undertaking
segmentation. (10 marks)
b. Using examples, discuss the problems that firms may face in
undertaking segmentation. (15 marks)
3. a. Distinguish between perceived, intended and actual positioning.
(10 marks)
b. How can marketers use the elements of the marketing mix to
ensure that actual positioning is the same as intended positioning?
(15 marks)
81
Notes
82
Chapter 7: Customer relationship marketing (CRM)
Chapter 7: Customer relationship

marketing (CRM)
7.1 Introduction
In this chapter we will study customer relationship marketing from two
different perspectives. First of all, we will look at the issues as presented
by Kotler and Armstrong – these take a managerial perspective and focus
on the methods that marketers can use in order to develop relationships.
Although we talk about CRM as one overarching activity, it does in fact
cover a range of different activities which vary in terms of the ‘depth’
or intensity to which a relationship is sustained. Therefore we need to
distinguish between different ‘types’ of relationships. We do this in terms
of recurrent contracting and relational contracting.
So, for the purposes of clarity, the overall topic of this chapter is customer
relationship marketing (CRM). Under the umbrella of CRM are two
major types of relationship: recurrent contracting and relational
contracting.
We have just briefly considered some of the common arguments as to why
CRM has become more popular in recent years (see Kotler and Armstrong,
2012). We will now focus on a specific aspect of this explanation. Our
focus will be on the concept of risk and the fact that using trust-based
relationships becomes more important where risk exists for both customers
and suppliers. We will explain how trust can overcome risk and will end
with a discussion of how different types of relationships may be required
for different marketing situations. Central to the discussion of the latter
topic is the seminal article by Ring and Van de Ven (1992), which is
Essential reading for this chapter.

• demonstrate the importance of customer relationship marketing
(CRM)
• explain the meaning and role of trust in customer relationships
• highlight four different ways in which transactions can be undertaken
and explain when they may be relevant for marketers to use
• highlight the role of asset specific investments in customer
relationships
• explain the liabilities of relationships.

• explain the link between customer value and satisfaction and the
relationship with customer relationship management
• distinguish between discrete market transactions, hierarchical
managerial transactions, recurrent contracting transactions and
relational contracting transactions
83
• describe the bases of the differences between the above types of

transactions and in particular the different assumptions regarding the
marketplace
• explain the role of risk and trust in determining the suitability of the
different methods of undertaking transactions in different situations
• identify which of the above methods of undertaking transactions will
be most effective in different situations
• apply these concepts to actual marketing situations in order to
understand business practice.

NJ: Pearson Prentice Hall, 2012) Chapters 1 and 2. Note that while two
chapters are recommended, you only need to read certain sections. Chapter
1 of Kotler and Armstrong, is titled, ‘Building customer relationships’;
however, the first major section ‘Customer relationship management’ deals
with material (on expectations and satisfaction) that is covered in the next
chapter of the subject guide and should be read to accompany that chapter.
For this chapter of the subject guide you should read the second major
section of Kotler and Armstrong Chapter 1, which is titled ‘The changing
nature of customer relationships’ and the one after, which is titled ‘Partner
relationship management’.
You should read Chapter 2, ‘Planning marketing: Partnering to build
customer relationships’. The amount of reading from the recommended text
is deliberately minimal, this is to allow you more time to read the following
article which is also recommended for this chapter.
organisations’, Strategic Management Journal 13 (1992), pp.483–98.

Singh, J., R.K. Jayanti, J.E. Kilgore, K. Agarwal and R.R. Gandarvakottai ‘What
goes around comes around: understanding trust–value dilemmas of market
relationships’, Journal of Public Policy & Marketing 24(1) 2005, pp.8–62.

Aldrich, H. and D.A. Whetten (1981) ‘Organisation sets, action sets and
networks: making the most of simplicity’. In P.C. Nystrom and W.H.
Starbuck (eds) Handbook of Organisational Design Vol 1. pp.385–408.
Birley, S., S. Cromie and A. Myers ‘Entrepreneurial networks: their emergence
in Ireland and overseas’, International Small Business Journal 9(4) 1991,
pp.56–74.
Boissevain, J. Friends of friends: networks, manipulators and coalitions. (Oxford:
Basil Blackwell, 1974).
Crosno, J.L. and R. Dahlstrom ‘A meta-analytic review of opportunism in
exchange relationships’, Journal of the Academy of Marketing Science 36
2008, pp.191–201.
Dnes, A. and N. Garoupa ‘Externality and the organisational choice in
franchising’. Journal of Economics and Business 57 2005, pp.139–149.
Evans, L., G. Guthrie and N. Quigley ‘Contemporary microeconomic
foundations for the structure and management of the public sector’,
New Zealand Treasury Working Paper 12/01, 2012, http://purl.oclc.org/
nzt/p-1446; available 12 June 2013.
Fang, E. ‘Customer participation and the trade-off between new product
innovativeness and speed to market’, Journal of Marketing 72 2008,
pp.90–104.
Granovetter, M. ‘The strength of weak ties’, American Journal of Sociology 78(6)
1973, pp.1360–80.
84
Hakansson, H. and D. Ford ‘How should companies interact in business

networks?’, Journal of Business Research 55 2002, pp.133–39.
transaction specific assets in conventional channels’, Journal of Marketing
52(1) 1988, pp.20–35.
Holmstrom, B. and J. Roberts ‘The boundaries of the firm revisited’, Journal of
Economic Perspectives 12(4) 1998, pp.73–94.
Johnston, A. ‘Governing externalities: the potential of reflexive corporate
social responsibility’. Working Paper No. 436, Centre for Business Research,
University of Cambridge, 2012.
Jyh-Shen., C. and C. Droge ‘Service quality, trust, specific asset investment, and
expertise: direct and indirect effects in a satisfaction-loyalty framework’,
Journal of the Academy of Marketing Science 34 (4) 2006 pp.613–27.
Kotler, P., S.H. Ang, S.M. Leong and C.T. Tan Marketing management – an Asian
perspective. (Singapore: Prentice Hall, 1996).
Olander, H., P. Hurmelinna-Laukkanen, K. Blomqvist and P. Ritala ‘The dynamics
of relational and contractual governance mechanisms in knowledge sharing
of collaborative R&D projects’, Knowledge and Process Management 17(4)
2010, pp.188–204.
Swaminathan, V. and C. Moorman ‘Marketing alliances, firm networks, and firm
value creation’, Journal of Marketing 73 2009, pp.52–69.
Williamson, O.E. Markets and hierachies: analysis and antitrust implications.
(New York: Free Press, 1975).
Williamson, O.E. The economic institutions of capitalism: firms, markets,
relational contracting. (New York: The Free Press, 1985).
Yu, H. X., S. Tawon and G.K. Ik-whan , ‘Do the magnitude and asymmetry
of specific asset investments matter in the supplier–buyer relationship?’,
Journal of Marketing Management 26(9–10) 2010, pp.858–77.

In this chapter we will see that relationship marketing can take different
forms. These distinctions are important to appreciate because firms in
different situations have differing needs. We will also see that relationship
marketing exchanges are alternatives to market-based transactions and
hierarchies and that the relevance of each mode of exchange depends
on the assumptions that are made about the marketplace. Central to the
role and importance of relationship marketing exchanges (recurrent and
relational) is the role of personal relationships and the use of interpersonal
trust. These two important features play a much more limited role in
market-based exchanges and hierarchies.
7.2 The development of relationship marketing

The traditional ‘Four P’ model of marketing (product, place, price and
promotion) was developed in the USA post-war era of the 1950s and
1960s when there had been a boom in the manufacture and sales
of consumer goods. These terms will be explained in more detail in
subsequent chapters. The underlying assumption of the marketing models
developed at that time was that firms’ efforts needed to focus on acquiring
customers. Limited attention was paid to keeping them. Since that time
the level of competition has increased and firms have realised that it can
be far more effective to keep existing customers than to expend all their
efforts on acquiring new ones.
There have been a number of ways that recognition of this has influenced
marketing practice. For example, there has been increased emphasis on
concepts such as segmentation and the tools relating to it (the recognition
that different groups of customers have different needs and therefore
85
require different products – see Chapter 6 of this subject guide). There has
also been recognition that corporate success will require not just one-off
sales to customers but long-term relationships with them. This is also the
reason presented by Kotler and Armstrong (2012) as to why customer
relationship marketing (CRM) has become more popular in recent years.
The study of relationships needs to take into account that they can exist
not just between firms and their consumers (consumer marketing), but
also between firms (business-to-business or industrial marketing). As will
be seen through the course of this chapter, the nature of relationships will
vary significantly depending on who they are with.
Relationships between organisations can emerge from their role as buyers
or sellers in a business-to-business marketing context, or through strategic
partnerships and alliances specifically established to enhance the offering
to customers. Most organisations are part of a complex network of
relationships – whether they intend to be or not – and relationships may
develop through third-party introductions and ‘networking’.
7.3 Building customer relationships and customer equity

Kotler and Armstrong (2012) focus on the idea that developing
relationships is a long-term proposition. In this respect, they argue that
firms should develop high levels of customer equity. This reflects the
combined customer lifetime values of all of the company’s customers –
hence the more loyal they are, the higher customer equity will be.
Kotler and Armstrong recognise that relationships can be maintained
at a number of different levels ranging from basic relationships to full
partnerships. The principle underlying the concept of different levels of
relationships is that firms do not need or want to spend the same amount
of time, effort and money developing relationships with all their customers
– some customers are more important than others. Similarly, some types
of customers will want deeper relationships with their suppliers than other
customers. This is a very important issue and we will consider this in far
more depth later in this chapter.
7.4 Planning marketing: partnering to build customer

relationships
In order to undertake CRM, firms need to practise partner relationship
management. This involves working with other company departments and
other companies in the marketing system. Within an organisation each
department can be seen as a link in a ‘value chain’.
In addition to looking at the internal value chain, organisations can also
benefit from analysing their value chain in terms of the contributions
made by other firms with whom they do business. For example, if a firm’s
supplier can reduce costs then that can help reduce the purchasers’ costs
and make them more competitive.
7.5 The role of trust in relationships

The degree to which a firm is trusted affects the extent to which the
exchange partners reciprocate and commit to the development of a
relationship (Singh et al., 2005). In this context trust is based on whether
or not a firm is considered dependable and can be relied on to deliver on
its promises and whether it is considered to give priority to the exchange
partners’ ‘best interests’. In the broader literature on trust these are often
86
referred to as ‘competence’ (having technical ability) and ‘benevolence’

(acting in the interests of the other party).
Relationships are more likely to occur where exchange partners perceive
that a firm’s trust and value contributions are in balance and are high
(namely, the firm is trusted to deliver on its promises), it is considered to
be benevolent and also the exchange partner believes that the benefits
from the exchange outweigh the costs (the standard assessment of value).
In contrast, exchange partners will have no motivation in continuing
with low trust value market relationships. However, since exchanges and
relationships are constantly evolving, trust and value contributions by
each party will vary during the course of these relationships. This may be
due to external factors; for example, changes in technology, the arrival of
new competitors and suppliers and the buyers’/sellers’ responses to these
changes. As a result, firms will need to re-assess the trust-value dynamics
in a firm’s market relationships.
Firms may sometimes have a dilemma as to how the trust-value
relationship is managed. The case below gives the example of 3M, whose
brand name was (and still is) highly trusted and who sold a product called
Scotchgard, which was considered to offer customers a high level of value
(in protecting carpets, fabrics and furnishings from stains). However,
recognition that Scotchgard used harmful chemicals (thereby damaging the
environment) meant that 3M had to consider how to respond in a way that
maintained both trust in the brand and also customers’ perception of value.
Activity 7.1: Building trust

Read the article by Singh, J. et al. ‘What goes around comes around: understanding trust–
value dilemmas of market relationships’, Journal of Public Policy & Marketing 24(1) 2005.
Start from p.42 from the heading, ‘3M’s Scotchgard: The Pullback’. The case ends on p.46.
The value of the case is that it shows the challenges organisations face in maintaining
relationships while protecting an organisation’s reputation. You should then answer the
following questions.
1. What was the economic value provided by Scotchgard to consumers?
2. Why did the product’s withdrawal affect industrial customers more than consumers?
3. What was the economic value that Scotchgard provided its 3M’s retailers and
distributors?
4. Why may have 3M’s move have affected the trust that distributors had in the
company?
7.6 Using relationships instead of markets or hierarchies

The discussion so far gives some insights into what CRM is. However, we
need to understand when it should be used and when alternative methods
of undertaking transactions may be more effective. In this section we will
explore the latter issue in more detail.
Williamson (1975) puts forward arguments as to why some transactions
are undertaken using markets (between independent firms) and others
take place in hierarchies (within organisations). If Singapore Airlines
has its own in-house catering operation this would be an example of a
hierarchical exchange. In a market-based exchange the above example
would change to Singapore Airlines buying meals for passengers from a
range of independent suppliers.
87
In recent years, however, researchers such as Peter Ring have presented

arguments as to why transactions need not just take place in either
markets or hierarchies, but use other modes of exchange, such as recurrent
or relational contracting, involving networks of firms. These alternatives
are characterised by cooperative agreements between firms, where there
are repeated transactions between the same buyer and (independent)
seller. In this respect, transaction cost economics is argued to be deficient
since it does not take adequate account of such issues as trust and equity
in the relationships that firms have with each other.
In order to understand the arguments surrounding the decision of
whether to use markets, hierarchies or networks it is important to be
aware of some important concepts. There are two important behavioural
concepts – bounded rationality and opportunism – and two principles of
organisational design – asset specificity and externality.
Bounded rationality refers to managers acting as economic agents
being intentionally rational but only to a limited extent. This is because
they are limited by the availability of information and their capacity to
process it. This assumption is important because it shows the limits in the
ability of an organisation to write contracts that fully protect its interests.
Williamson (1975) defines opportunism as ‘self-interest with guile’. In an
organisation, opportunism can refer to the practice of managers making
decisions in pursuit of objectives that are inconsistent with the aims of the
organisation (but which may be beneficial to the managers’ themselves).
As a result, opportunism may increase the cost of transactions carried
out within the organisation. Opportunistic agents offer incomplete or
biased information designed to mislead, obfuscate, or otherwise confuse
trading partners (Williamson, 1985). Their action includes active or
passive attempts to violate written or social contracts governing exchange.
Transaction cost-economics suggests opportunism will arise whenever
it is feasible and profitable. Asymmetric dependence (where one party
of a transaction has a greater dependence on its exchange partner than
the latter does) is more is likely to engender opportunism. Where there
is a dependence advantage the less dependent partner can appropriate
resources from the more dependent partner, resulting in a positive
relationship between a partner’s dependence and opportunism.
Among the methods organisations can use in order to reduce opportunistic
behaviour on the part of others is the use of coordination, where there is a
purposive organisation of activities, resources and information flows between
exchange parties. Coordination limits opportunism by curtailing adaptation
problems and establishing congruent goals. In addition, surveillance, or
monitoring of a partner’s action, limits opportunism by reducing information
asymmetry between partners (Crosno and Dahlstrom, 2008).
Activity 7.2
The concept of opportunism is important, as it explains one element of cost associated
with internalisation of transactions, that is, carrying them out within an organisation. Can
you identify examples of opportunism that you have come across?
The issue of transaction-specific investments is an important one. You

will find examples in many large organisations where they prefer to
undertake those exchanges in-house for which they have to make specific
investments. For example, a college may invest in its own classrooms and
lecture theatres since these are specific to the business of teaching and
88
cannot be used for anything else. You should also note that asset specificity
can also apply in consumer marketing. In their study of the marketing of
premium cosmetics Jyh-Shen and Droge (2006, p.625) asked purchasers
about the specific asset investments in their purchases of cosmetics brands.
The statements they asked consumers to rate included:
• If I switch to other cosmetics brands, I will lose social relationships
with XYZ.
• Cosmetic products from other brands may not fit my skin well because
I believe that my skin is used to XYZ brand.
• If I switch to other cosmetics brands, I have to spend a lot of time
understanding how to use their products.
As you will see from the nature of the statements, consumers may feel
that their investments in relationships with specific brands may mean
that should they choose to leave the relationship this may affect them
negatively in terms of, for example, their having to spend more time
learning about alternative brands. The value of this example is that it
shows that asset specific investments are not just a feature of business-to-
business marketing, but they can also feature in consumer purchases.
We will now look at what asset specific investments are and how they
influence relationships. Specific asset investments are defined as the
tangible or intangible human and physical assets ‘required to support
supplier–buyer relationships’ (Heide and John, 1988, p.21). According
to Yu et al. (2010), such assets have little value outside the partnership
between two organisations (for example, if it were to be ended) and as a
result they present an increased level of risk for either of the parties to the
relationship that has such assets. This may lead to opportunistic behaviour
by the other partner. In order to protect themselves, firms may expect the
partner organisation to undertake asset specific investments as well.
Specific asset investments are important because they can be a
distinguishing feature of close relationships between organisations. There
are also benefits for suppliers who make such investments; these may
include additional sales and more repeat business.
Johnston explains the concept of externality in the following way: ‘A
negative externality occurs where a decision is taken that results in an
event which has adverse, uncompensated effects on another party who
does not consent to it’ (Johnston, 2012, p.1). An illustration of this can be
seen in Dnes and Garupa’s (2005) example from the car rental industry,
where Avis is the franchisor whose car rental offices are sometimes
operated by franchisees. Some customers like the option of ‘one-way
rentals’, where a customer picks up the car from one office of the car
rental company (owned by one franchisee) and then leaves it at a second
office, which is likely to be in another city and which is owned by a second
franchisee. This provides convenience to the customer and benefits the Avis
brand; however, it imposes a cost (externality) to the affected offices and
as a result franchisees don’t like offering one-way rentals. Avis’s solution to
this problem has been to run such offices itself, i.e. vertical integration.
The characteristics of market-based transactions are as follows. The buyer
will be interested only in price since it is also assumed that suppliers sell
goods that are homogeneous (the same as each other). In such exchanges
buying from a supplier in one time period is no guarantee that the
customer will go back to the supplier in future time periods. Therefore
such exchanges are described as being relatively short-term, bargaining
relationships between highly autonomous buyers and sellers. The contracts
89
are described as being ‘sharp in and sharp out’. This means that it is clear
to both parties what the costs and benefits of the exchange will be in
money terms. Also when the deal finishes, that is the end of the matter;
there are no further obligations of either party to the other. There are no
social relations between parties and the state enforces contracts. If there
are disputes these are resolved between the organisations.
Before we deal with recurrent and relational contracts we will briefly look
at the advantages of markets versus hierarchies. This will also help to
highlight the advantages of relationship marketing.
Because of bounded rationality, many contracts with external suppliers,
under market governance, may be sub-optimal. It is impossible to write
long-term contracts that still properly reflect the interests of both parties
– we simply cannot cover the range of possibilities that far ahead. This
is particularly true for organisations operating in a rapidly changing
environment. Exclusivity clauses or minimum purchase requirements in
distributor contracts are examples of marketing contracts that can easily
become unfair if marketing conditions change.
For example, if a retailer agrees to stock a new product from a supplier,
but they want an exclusivity clause this will mean that they will be the
only retailer selling this product (for a certain period of time). This
arrangement could become unfair if it transpires that the product becomes
very popular indeed and the supplier could have sold far larger quantities
if they had been able to sell via other retailers and had not been restricted
to this one.
Under circumstances of uncertainty, hierarchical governance (namely,
carrying out activities in-house) may offer an organisation greater
protection and control than reliance on the market. Most organisations
choose to do certain activities in-house even if it may be possible, at
times, to purchase the good or service more cheaply from outside. This
is particularly likely if the activity is vital or of strategic value to the
organisation, and if the consequential cost of non-availability or poor
quality would be high.
Where a transaction involves a high level of asset specificity, the risks
are likely to be lower under hierarchical governance. Most organisations
want to keep their most skilled and experienced staff on their payroll
rather than contract for these skills or experience from outside firms. It
is unlikely, for example, a research-based chemical company would be
prepared to rely on the market to supply PhD chemists on a contract basis.
Externality is a particular risk in the area of distribution and reliance
on market governance can lead to loss of control. You can probably see
examples when you go shopping where the interests of the shop owners
are different to those of the brand owners whose products they are selling.
There are costs associated with hierarchical governance. You may be
familiar with situations where large organisations are criticised for their
‘bureaucracy’, and issues such as motivation and incentive can also
become a problem. You should note though that concepts such as ‘internal
marketing’ have also been developed in order to address these problems;
these will be discussed briefly in Chapter 8.
In this section we present the idea that customer relationship marketing
is a concept that fits in a wider discussion that distinguishes between
transactions being undertaken in markets, within hierarchies or using
some form of relationship, either relational or recurrent. This distinction
between markets, hierarchies and relationships is important because it
identifies the important assumptions underlying each mode of exchange
90
and helps provide an understanding of when the different types of

exchange will be more suitable than others. This is an important issue
because sometimes students can gain the impression that ‘relationship
marketing’ is ‘superior’ to other modes of transacting and should be
preferred at all times. This is not the case. Reading the Ring and Van de Ven
(1992) article is essential for this part of the chapter; we highlight the key
arguments, but you will find their detailed explanations useful.
Ring and Van de Ven (1992) argue that there has been a tendency to
emphasise that exchanges will take place in either markets or hierarchies.
They deal with what they refer to as ‘recurrent’ and ‘relational’ contracting.
Both of these types of exchange are alternatives to markets and hierarchies
and they make use of trust, which is useful where risk exists in transactions.
Recurrent contracts are described as repeated exchanges of assets that have
‘moderate degrees of asset specificity’; this means that there is a limited
extent to which the assets are specific to that particular exchange – for
the marketer this means that they can be used in exchanges with other
customers.
Relational contracts tend to involve long-term investments. The property,
products and service may be jointly developed and exchanged and these
will involve asset-specific investments. Also the nature of the exchange
may be impossible to specify or control in advance. Disputes are resolved
through internal negotiation in order to ensure that equity and efficiency
outcomes are recognised.
You should note that Ring and Van de Ven (1992) often refer to the type of
contract law that would be applicable in different types of exchange – that
discussion is beyond the scope of our interest and you should not study it in
detail.
Activity 7.3
Identify some situations where you believe the following are observed:
1. Market-based transactions
2. Hierarchical transactions
3. Recurrent transactions
4. Relational transactions.
Explain the reason for your choices.
Ring and Van de Ven (1992) make some important assumptions regarding
the role of risk and trust. Organisations face the following types of risk.
Commercial risk refers to the probabilities of finding commercial niches
in the marketplace. Technological risk refers to the probability of bringing
technology to the market. Engineering risks refer to the probabilities of
whether or not a technology will work. Ring and Van de Ven (1992) assume
that risk will rise proportionately as time, information and control decrease.
As far as trust is concerned, they say that some element of trust will be
required for any transaction. Furthermore, trust is likely to be built up over
time as firms and people develop reputations for their conduct. The link
between risk and type of relationship can be summarised in the following
way:
1. Where risk of a deal is low and there is low reliance on trust firms will
use market-based transactions.
2. Where risk of a deal is high and there is high reliance on trust firms will
use relational exchanges.
91
3. Where risk of a deal is high and there is low reliance on trust firms will
use hierarchical exchanges.
4. Where risk of a deal is low and there is high reliance on trust firms will
use recurrent exchanges.
In summary, in market-based transactions levels of risk are likely to be
low and as such the need to trust the other party is likely to be less. The
notion of control, or power, is explained in more detail in Chapter 12 of
this subject guide.
Activity 7.4
Think about the discussion for the previous activity and in particular consider whether the
market-based transaction undertaken by the petrol company could be changed by the
petrol company in order to make the business more profitable. You should consider real-
life examples to illustrate your answer.
Market-based transactions are shown as those where there is a low

amount of risk and a low amount of trust. This is because there are a
number of different suppliers from whom the customer can make their
purchase. Trust is not so important because the courts of law will be
adequate to resolve any problems. Nevertheless, firms can establish trust
in such transactions by not behaving in an opportunistic manner.
Where risk is high but levels of trust are low, firms will use hierarchical
modes of undertaking exchange. Here firms will perform the risky tasks
themselves. Other ways of achieving the same results as a hierarchy are
through acquisitions and mergers and the creation of joint ventures. The
need for trust in exchange partners is reduced since the firm will either
undertake the exchange in-house, or it will develop a business structure
that enables the exchange to be undertaken in-house to some degree.
Where the risks of the deal are low, but the reliance on trust is high, it is
argued that recurrent transactions will be used. Such transactions allow
both parties to build up trust in each other by demonstrating the extent
to which they will reciprocate and how equitable they are willing to be in
their transactions.
There are situations where the risks of the deal are high and the reliance
on trust is also high. Such situations will have high levels of asset
specificity and uncertainty. It is argued that instead of using hierarchy in
such situations, as transaction cost economics suggests, firms can instead
use informal, socially-embedded personal relationships. Such relationships
will produce stable relations of trust, obligation and custom among firms
that are formally independent.
It is apparent that given the high levels of risk that exist in such
transactions, high levels of trust are necessary. Moreover, firms will need to
develop safeguards between themselves by which they will mutually abide,
because they see their interests as converging. Ring and Van de Ven (1992)
also point out that this reliance on trust also means that firms need not
worry if any contracts between them do not cover all eventualities.
Relational contracting is particularly suited to situations where firms use
their resources to undertake joint research and development or product
development. There are lots of examples of contracting from around the
world that have characteristics of recurrent and relational contracting.
• In Japan, manufacturing firms traditionally use contractors to carry
out activities even where highly specific assets are involved. These
92
practices feature long-term, close relationships with a limited number

of independent suppliers that seem to mix elements of market
and hierarchy. Long-term relationships substitute for ownership
in protecting specific assets. This pattern, which is at odds with
transaction cost theory, is enabled by the long-term, repeated nature of
the interactions.
• Alliances can be an attractive source of governance in some industries.
In the airline industry, several airline ‘blocs’ are emerging. These
offer scale economies in reservations, route management and support
operations. Integration (hierarchical governance through takeover) is
generally not feasible because of regulations and anti-trust objections,
and alliances therefore present an alternative.
• Guanxi (good relations or connections) are used in Chinese society in
order to underpin business relationships and refer to family-like links
that individuals can have with each other. Such trust-based links can
be very useful in environments where there is a lack of rule of law and
transparency in rules and regulations. (Kotler et al., 1996)
The following quotation provides some description of relational
contracting:
Toyota, along with many other Japanese firms, maintains
a small stable set of ‘highly trusted’ dedicated (and often
exclusive) suppliers, restricts competition for the various orders
to these suppliers, caring for their profitability and rewarding
the best performing suppliers with a higher share of orders,
while replacing those that fail to deliver the extremely high
levels of contractible and non-contractible quality required. The
limits to competitive screening have a cost in terms of reduced
screening and therefore higher prices, but ensure sufficient
weight is placed on the future and a consequent cooperative
perspective in the supply relationship.
(Evans, Guthrie and Quigley 2012, p.43.)
The next case deals with relationship development and how a partner can
act in an opportunistic way.
Case study: Relationship development

This case deals with the relationship between a business customer and their chemical
supplier. The two had a relationship (in developing products) prior to the point where
the case starts. The customer’s trust in the supplier arose because the customer felt the
supplier could deliver the right level of technical capability and it was also considered
to be benevolent. The business customer wanted to improve one of its processes and it
wanted the supplier to produce chemicals that would help it to do this.
The result of the collaboration between the two firms would be an innovation and this
would require the two to share knowledge with each other. For example, the buyer
would tell the supplier how its machinery worked and the supplier was expected to sell
chemicals whose use could be tested in the machines. The contract that the two firms
signed made it clear that any knowledge that was generated would be jointly owned if it
affected the two businesses.
During the development phase the companies jointly tested the chemicals in the
customer’s facilities. The benefit of this collaboration to the supplier was that if the
development results were positive the supplier would have continued to supply the
technology they had jointly developed to the customer. As it happened, the customer did
not receive on-going information about the development of chemicals. The case firm
93
never received any detailed information about the chemicals being developed and it did
not ask for this information, because chemical development was not its core business.
However, towards the end of the development process the customer realised that
unknown to itself, the supplier had started the filing process for a patent for the invention
they had jointly developed. According to their partnership contract, this output should
have had joint ownership. Ultimately this did happen, but it required negotiation between
the two parties but the customer continued to believe that the supplier had behaved in
an opportunistic way and that this was not reasonable. The customer would be careful
about collaborating with this supplier in the future.
Adapted from: Olander, H., et al. ‘The dynamics of relational and contractual governance
mechanisms in knowledge sharing of collaborative R&D projects’, Knowledge and Process
Management 17(4) 2010, pp.188–204.
7.7 Networks and relationships

Here we will look at some of the challenges facing organisations that
seek to develop relationships with smaller numbers of organisations. In
doing this we will also introduce you to the concepts associated with
understanding networks. Such networks can exist between organisations
and are related to relationship marketing, but they can also exist between
people and are popularly known as ‘social networks’. You should be aware
that the social network site www.linkedin.com allows users to map their
networks in ways that correspond to the concepts (such as diversity and
density) explained below.
Hakansson and Ford (2002) identify three paradoxes of business networks:
• The first paradox deals with the content of the relationships linking
organisations. The stronger the relationships the more important they
will be to the organisation, but the more they will also restrict the
freedom of the node to change.
• The second paradox is that not only do organisations initiate
relationships, but the relationships themselves can influence the
organisation.
• The third paradox is that although companies try to control the
network that surrounds them, the more that a company achieves this
ambition of control, the less effective and innovative the network will
be.
In order to understand why the above may be the case, we need to
consider the concept of networks in more detail. A network can be
evaluated in terms of particular structural criteria, the commonly cited
ones are size, density, degree, centrality and clustering (Boissevain, 1974).
The person or organisation to whose network one is referring is called the
focal individual/organisation. Organisations with which there is direct
contact are those with whom there are direct ties (Aldrich and Whetten,
1981). Organisations connected to those with which there are direct ties
are those with whom there are indirect links. Size of a network refers to
the total or potential links in the network of an individual.
The density of a network measures whether the members organisation’s
network are in touch with each other, independently of the focal
organisation. The denser a network is, the more likely it is that the
information will pass rapidly within it, which is a positive factor. On the
other hand a dense network also means that ideas, norms and values are
far more likely to be similar throughout the network and so the network
will not yield the entrepreneur the diversity of opinion that may be needed
94
in a business context to arrive at objective decisions. Network density can

both strengthen and weaken value creation. At low to moderate levels,
increasing network density improves value creation from marketing
alliances. However, beyond moderate levels, increasing network density
becomes detrimental to firm value. This is because network density
makes it difficult for the firm to customise its management of a given
alliance, including the ability to selectively share information or resources
(Swaminathan and Moorman, 2009).
The diversity of a network refers to the proportion of contacts who
know each other well as a percentage of the potential number of close
associations, which would arise if all contacts knew every other contact
well (Birley et al, 1991). The diversity of a network is important since it
can determine the type of information that is received. The more people
within a network who know each other, the more likely it is that they will
hold similar views – this would be an example of a lack of diversity.
Indeed a network that is diverse allows the focal organisation/individual
to receive a variety of opinions. The notion of clusters is related to this.
Clusters are compartments of a particular network that have a higher
density than the rest of the network. For example, an individual may have
a network that comprises two distinct groups of people, with each group
having a higher density than the overall network. As Fang (2008, p.91)
says: ‘in the banking industry… [high network diversity]… facilitates firm
access to diverse information about the marketplace. This diverse market
information from retailers and distributors can help the development team
identify which marketing trends and opportunities to pursue.’
Figure 7.1 shows a diverse network where the focal individual (shown in
black) has network members (white circles) who do not know each other.
In contrast the dense network has the focal individual connected to the
same people, but this time they are all connected to each other as well.
Diverse Dense
Figure 7.1: Diverse and dense networks.
Density and diversity, which seem to be mutually exclusive, can co-
exist. Indeed such co-existence can be an optimal solution for the focal
person/organisation. Having a diverse network may be good for getting
disconfirming information; having a dense network may be good for
allowing the spread of information. If direct links are diverse and indirect
links are dense, the organisation may be able to get the best of both
worlds. Information can flow quickly in the periphery of the network and
come to the organisation from a range of others who do not know each
other, thus providing differing perspectives.
The more organisations the focal organisation can reach and the shorter
the aggregate distance to them, the higher the centrality of the focal
organisation. A central position in a network can provide access to
information and resources from the peripheral parts of a network, which
others cannot reach. Furthermore a central position can be the conduit
of information and resources to those on the periphery of a network.
Centrality and reachability show the number of other members a given
95
member can reach. While two organisations may have the same number of
network members one may be more central than the other, though having
a greater number of direct links. This issue leads onto that of power within
the network.
Network centrality gives the firm an opportunity to multiply alliance
benefits through both alliance-to-network transfers and network-to-
alliance transfers. Alliance-to-network transfers can offer opportunities for
growth as the central firm applies the particular product or activity from
the new alliance across its network. For example, IBM used its alliance
with Nortel to identify new data-networking solutions, which it applied to
its network of hardware and software vendors to create industry standards
for enterprise data centers. Network-to-alliance transfers offer the central
firm the opportunity to apply marketing processes or technologies
developed in the network for the benefit of the alliance. For example, Eli
Lilly applied experience from its network of alliances to create a successful
alliance with ICOS when developing the drug Cialis.
The seminal work on the strength of ties was undertaken by Granovetter
(1973), who studied how people get information about employment
opportunities. Strong ties are clearly important to network members
because they represent relations that can be relied upon for assistance and
advice. Weak ties typify relations with people that are not known so well;
however, Granovetter found that weak ties can have a unique value. His
Ph.D. study found that people we do not know so well, are more likely
to move in social circles that bring them into contact with information to
which we do not have access.
The above concept can be applied to organisations in the following way.
Network efficiency refers to the degree to which the firm’s network of
alliances involves firms that possess non-redundant knowledge, skills,
and capabilities. Highly efficient networks increase firm exposure to novel
information from allying with firms from different industries. In turn, this
increases the likelihood that the firm will find additional opportunities to
transfer what it has learned in the new alliance to other network members
and to bring novel new resources to bear on its management of the new
alliance.

In this chapter we have seen that relationship marketing can take
different forms and this distinction is important to appreciate because
firms in different situations have differing needs. We have also seen
that relationship marketing exchanges are alternatives to market-based
transactions and hierarchies. We have also seen that the relevance of each
mode of exchange depends on the assumptions that are made about the
marketplace. Central to the role and importance of relationship marketing
exchanges (recurrent and relational) is the role of personal relationships
and the use of interpersonal trust. These two important features play a
much more limited role in market-based exchanges and hierarchies.
96

• explain the link between customer value and satisfaction and the
relationship with customer relationship management
• distinguish between discrete market transactions, hierarchical
managerial transactions, recurrent contracting transactions and
relational contracting transactions
• describe the bases of the differences between the above types of
transactions and in particular the different assumptions regarding the
marketplace
• explain the role of risk and trust in determining the suitability of the
different methods of undertaking transactions in different situations
• identify which of the above methods of undertaking transactions will
be most effective in different situations
• apply these concepts to actual marketing situations in order to
understand business practice.

1. a. Explain what is meant by network centrality and diverse and
dense network ties. (10 marks)
b. What advantages and costs can accrue to organisations as a result
of such links? (15 marks)
2. a. Explain the characteristics of market-based exchanges. (10 marks)
b. Discuss the relevance of undifferentiated market coverage
strategies to such exchanges. (15 marks)
3. a. Explain the concept of asset specific investments and how these
can contribute to marketing relationships. (10 marks)
b. Give examples of how the different elements of the marketing mix
can be used to generate asset specific investments. (15 marks)
97
Notes
98
Chapter 8: Branding and product development
Chapter 8: Branding and product

development
8.1 Introduction
In this chapter we start by explaining what is meant by the term ‘value’
in marketing and how marketers can deliver value to customers. We then
look at one of the more recent developments in marketing – the way in
which customers can play a role in value delivery (co-creation).
The second major section in this chapter looks at quality and how this is
related to concepts such as expectations and satisfaction.
Our discussion then moves to understanding various different issues
related to branding. First we look at the importance of values to brands
and then we consider the different brand strategies that marketers can
pursue. In this discussion we look at some of the academic debate on line
extensions and brand extensions. This topic ends with a discussion of the
Ansoff matrix that has a conceptual relationship to the brand strategies
model.
The next topic deals with new product development and in particular we
look at the benefits and costs of ‘embeddedness’ to marketers (namely,
closeness to customers). The examination of the implications of different
business orientations is one of the themes of this text and this section
allows us the chance to examine one aspect of it more closely. This is an
interesting issue because being marketing oriented and close to customers
is sometimes considered to be positive. However, the discussion identifies a
range of reasons why this may not always be a good thing. This discussion
also highlights the impact of relationships (and the lack of relationships)
on organisations and as such it complements the examination of marketing
relationships in Chapter 7 of the subject guide.
We start the discussion of services marketing by critically considering
their supposed differences with products. This leads onto a discussion
of risk and we also examine the links with adverse selection and moral
hazard. The latter two concepts are also examined when we consider
the promotion topic in Chapter 10 of the subject guide. The section then
moves onto looking at services in a more holistic manner and we consider
the insights offered by the service dominant logic. The chapter ends with
some of the marketing implications for organisations selling services.

• explain the relationship between value, satisfaction and quality
• explore the role of branding in marketing and examine branding
decisions that marketers have to make
• highlight some of the factors that affect the new product development
process
• explain the differences between products and services and explore
related concepts such as intangibility and cues
• highlight the importance of the service dominant logic.
99

• explain what value is and how it can be created and delivered
• discuss the different approaches to quality and their implications
• evaluate some of the different brand strategies managers can pursue
and their implications
• explain the value and costs of embeddedness to the new product
development process
• critically evaluate the differences between products and services
• discuss the insights offered by the service dominant logic.

NJ: Pearson Prentice Hall, 2012) Chapters 8 and 9. Note: Chapter 1,
‘Marketing: creating and capturing customer value’, has material on value,
which is relevant to this chapter. You do not need to read the sub-section
titled ‘Customer relationship levels and tools’ or the following section. You
should read the next major section ‘Capturing value from customers’. You
should also read the major section ‘Customer relationship management’,
which deals with material on expectations and satisfaction. In Chapter 8
you need to read the section, ‘Branding strategy: building strong brands’.
Within that section you don’t need to read the sub-sections, ‘Brand
positioning’, ‘Brand name selection’ or ‘Brand sponsorship’. However, the
entire section titled ‘Brand development’ is important as is the section
‘Managing brands’ which is very short. In Chapter 9 you should read, ‘The
new product development process’.
innovation’, Journal of Marketing 75 2011 pp.34–52.

Gallarza, M.G., I Gil-Saura and M.B. Holbrook ‘The value of value: further
excursions on the meaning and role of customer value’, Journal of Consumer
Behaviour 10 2011 pp.179–91.

Bennett and Cooper ‘The misuse of marketing: an American tragedy’, Business
Horizons 24 1981, pp.51–61.
Chitturi, R., R. Raghunathan and V. Mahajan ‘Delight by design: the role of
hedonic versus utilitarian benefits’, Journal of Marketing 72 2008,
pp.48–63.
Davis, H.L. ‘Service characteristics, consumer search and the classification of
retail services’, Journal of Retailing 55(3) 1979.
Durgee, J.F., G.C. O’Connor and R.W. Veryzer ‘Observations: translating values
into product wants’, Journal of Advertising Research 36(6) 1996, pp.90–99.
Frambach, R.T. and N. Schillewaert ‘Organizational innovation adoption: 
a multi-level framework of determinants and opportunities for future
research’, Journal of Business Research 55 2002, pp.163–76.
Ghobadian, A., S. Speller and M. Jones ‘Service quality: concepts and models’,
International Journal of Quality and Reliability Management 11(9) 1994,
pp.43–66.
J.H. Donelly and W.R. George (eds) Proceedings of the American Marketing
Association. (Chicago, IL: American Marketing Association, 1981),
pp.200–04.
100
Halstead, D., C. Droge and M.B. Cooper ‘Product warranties and post-purchase
service’, Journal of Services Marketing 7(1) 1993, pp.33–40.
Higgs, B., M.J. Polonsky and M. Hollick ‘Measuring expectations: forecast
vs. ideal expectations. Does it really matter?’, Journal of Retailing and
Consumer Services 12(1) 2005, pp.49–64.
Holbrook, M.B. ‘The nature of customer value’ in R.T. Rust and R.L. Oliver
(eds) Service quality: new directions in theory and practice. (California: Sage
Publications, 1994) pp.21–71.
Jain, S.P and S.S. Posavac ‘Prepurchase attribute verifiability, source credibility,
and persuasion’, Journal of Consumer Psychology, 11(3) 2001, pp.169–80.
Keller, K.L. Strategic brand management: building measuring and managing
brand equity. (Englewood Cliffs, NJ: Prentice Hall, 1998).
Keller, K.L. ‘Conceptualizing, measuring and managing customer-based brand
equity’, Journal of Marketing Research 29 1993, pp.1–22.
Kirmani, A. and A.R. Rao, ‘No pain, no gain: a critical review of the literature
on signaling unobservable product quality’, Journal of Marketing 64 2000,
pp.66–79.
Kopalle, P.K. and D.R. Lehmann ‘Setting quality expectations when entering
a market: what should the promise be?’, Marketing Science 25(1) 2006,
pp.8–24.
Krishnan, H.S. ‘Characteristics of memory associations: a consumer-based
brand equity perspective’, International Journal of Research in Marketing
13(4) 1996, pp.389–405.
Kyoung-Nan, K. and D.W. Schumann ‘Consumers’ expectations on value
perception and purchase intention’, Advances in Consumer Research 28
2006, pp.316–22.
Lemke, F., M. Clark and H. Wilson ‘Customer experience quality: an exploration
in business and consumer contexts using repertory grid technique’, Journal
of the Academy of Marketing Science 39, 2011 pp.846–69.
Palazón-Vidal, Mariola and Elena Delgado-Ballester ‘Sales promotions effects
on consumer-based brand equity’, International Journal of Market Research
47(2) 2005, p.181.
McDougall, G.H.G. ‘The intangibility of services: measurement and competitive
perspectives’, Journal of Services Marketing 4(4) 1990, pp.27–40.
Morgan, N.A. and L.L. Rego ‘Brand portfolio strategy and firm performance’,
Journal of Marketing 59(73) 2009, pp.59–74.
Nayyar, P.R. ‘Information asymmetries: a source of competitive advantage
for diversified service firms’, Strategic Management Journal 11(7) 1990,
pp.513–19.
Nelson, P. ‘Advertising as information’, Journal of Political Economy 83 1974,
pp.729–54.
Nijssen, E.J. ‘Success factors of line extensions of fast-moving consumer goods’,
Olson, J.C. ‘Cue utilisation in the quality perceptions process’ in Venkatesan,
M. (ed.) Third Annual Conference of the Association for Consumer Research.
(Chicago: Association for Consumer Research, 1972), pp.167–79.
Parasuraman, A., V.A. Zeithaml and L.L. Berry ‘A conceptual model of service
quality and its implications for future research’, Journal of Marketing 49(4)
1985, pp.41–50.
Rokeach, M. The nature of human values. (New York: The Free Press, 1973).
Schreier, M., C. Fuchs and D.W. Dahl ‘The innovation effect of user design:
exploring consumers’ innovation perceptions of firms selling products
designed by users’, Journal of Marketing 76 2012, pp.18–32.
Shimp, T.A. and W.O. Bearden ‘Warranty and other extrinsic cue effects on
consumers’ risk perceptions’, Journal of Consumer Research 9(1) 1982,
pp.38–46.
Tynan, C., S. McKechnie and C. Chhuon ‘Co-creating value for luxury brands’,
101
Vargo, S. and R. Lusch ‘Evolving to a new dominant logic for marketing’,

Viswanathan, M., J.A. Rosa and J.A. Ruth ‘Exchanges in marketing systems:
the case of subsistence consumer–merchants in Chennai, India’, Journal of
Marketing 74 2010, pp.1–17.
Yorkston, E.A., J.C. Nunes and S. Matta ‘The malleable brand: the role of
implicit theories in evaluating brand extensions’, Journal of Marketing 74
2010, pp.80–93.

This chapter starts with a discussion of what value is and its importance
in marketing. We then look at how customers can contribute to the
value creation process. We then examine quality and the links with
related concepts, such as expectations and satisfaction. We also look
at the role of cues in customers’ assessments of quality. The discussion
then moves to branding and branding decisions that marketers make;
links with the product market expansion grid are also drawn. For new
product development (NPD) the focus of this subject guide is on certain
factors that influence it and we rely on Kotler and Armstrong to provide
the material on the NPD process. The chapter ends with a discussion of
services marketing and the current interest in service dominant logic.
8.2 Value
The importance of value to marketing can be gauged from the following
definition that Kotler and Armstrong (2012, p.16) provide of customer
relationship management: ‘overall process of building and maintaining
profitable customer relationships by delivering superior customer value
and satisfaction.’ According to them, developing relationships requires
certain building blocks and these are identified as customer value and
customer satisfaction.
Marketer
Promotion Product Place
Enhance customers’ Value offered via Value delivered via e.g.
perception of value benefits, etc. convenience
Value
Value offered in terms of

revenue to the marketer
Price
Customer
Figure 8.1: Deliver value and extract profit.
The notion of value is an important one in marketing. It takes into account
not only the benefits that a customer enjoys as a result of making a
purchase, but also that in making the purchase the customer will have
incurred both money and non-money costs – for example, the time and
effort that it takes to go out and make the purchase. Value is the difference
between the total costs of making a purchase and the total benefits
received. For marketers this concept is an important one because they
102
can consider how they can offer customers ‘value’. Some marketers will,
for example, add additional features to a product so that it delivers more
benefits. If the increase in value is considerably more than that offered
by competitors, the marketer may be able to charge a higher price and
thereby improve profit margins. Figure 8.1 shows how product, place and
promotion can be used to deliver value to customers and how marketers
can extract profit from the last ‘p’ of the Four P model; price.
According to Gallarza, Gil-Saura and Holbrook (2011), there is an ethical
dimension to the notion of value. If people are willing to make sacrifices
in order to attain higher levels of value, then marketing activities must be
socially justified (if we ignore economic externalities to third parties).
A key distinction between value and satisfaction comes from the role of
price, when customers make an assessment of their satisfaction; there is
no reference to price paid whereas value determination depends partly on
price paid. It is similarly possible to distinguish between quality and value.
Quality is argued to be a single stimulus (all positive), whereas value has
a negative component as well (in terms of benefits less costs). Quality is
a major ‘get’ component of value, (namely, it is what the customer gets in
return for the money that they have paid).
There are other ways of looking at value. Kyoung-Nan and Schumann
(2001) distinguish between acquisition and transaction value.
Acquisition value is the expected benefit that customers hope to obtain
from buying a product, compared to the net cost of paying for it. Looked
at another way, acquisition value is the difference between the price
the customer pays and what they would be prepared to pay. In contrast,
transaction value arises from the customer feeling that they have
received a bargain (regardless of quality). The total value that customers
receive is the sum of acquisition and transaction value.
There are obvious managerial applications of the above distinctions. When
marketers run sales and promotions they are emphasising transaction
value. On the other hand when marketers run advertising that emphasises
the benefits of what is being sold, that would be classified as acquisition
value.
The distinction between utilitarian and hedonic benefits is examined
next. This will be particularly useful in future chapters when we look at
how promotion campaigns may need to differ between utilitarian and
hedonic goods. According to Chitturi, Raghunathan and Mahajan (2008),
utilitarian benefits are functional and practical, whereas hedonic benefits
are aesthetic and emotional. In the case of cellphones the length of the
battery life is a utilitarian benefit; the shape and colour are more likely to
be hedonic benefits. Two points of view regarding these benefits are that
customers attach more weight to hedonic benefits, but only after a certain
minimum amount of utilitarian benefits have been delivered. Another view
is that customers attach more weight to utilitarian benefits, unless they
feel that they have earned the right to enjoy the hedonic benefits.
Now that we have seen what value is, we can move onto a discussion
about how value can be delivered to customers and the role that customers
themselves can play in the creation and delivery of value.
8.3 Co-creation and value

A recent development in the field of marketing has been the notion of
co-creation. This holds that customers are not just the passive recipients of
value that is created by marketers, but rather that value is co-created by
103
customers and marketers as they interact with each other and engage in
dialogue. Another important concept in this approach is that of ‘value-in-
use’ instead of ‘value-in-exchange’ (that is, customers acquire value from
products and services as they use them rather than at the point at which
the exchange with the marketer is undertaken). Indeed the co-creation
of value happens throughout the life of the service. In addition, it is not
just the customer who is involved in the value-co-creating process. Other
parties can include members of the customers’ and suppliers’ networks.
For example, the customer’s friends and family members can become
involved or the people who contribute to your pages on social networking
sites. Also members of brand communities (people who share a similar
passion for the brand) can contribute to the value co-creation process.
For example, there are websites where people who are interested in the
same brands of camera can share experiences of using them. Marketers
can therefore focus more on the experience enjoyed by customers as they
consume the product or service. Tynan, McKechnie and Chhuon (2010,
p.1160) illustrate this emphasis on the value derived from use, in their
study of co-creation by luxury brands. To quote one of their respondents,
the director of a luxury brand: ‘It is all about providing the customer with
an experience. Customers no longer define themselves by what they own
or what they buy because their wealth means they can acquire almost any
assets but they define (themselves) more by experiences, whether it’s a
trip to South Pole or it’s a balloon flying over the Andes or it’s to talk to the
designer of the Brand X.’
8.4 Quality in marketing

The importance of quality in marketing is directly related to the previous
discussion about expectations and satisfaction, which we saw were crucial
to enable marketers to develop long-term relationships with customers. As
we shall see below, quality can mean ‘conforming to requirements’ (that is,
meeting expectations and for that reason if marketers can develop and sell
quality products and services they may be better able to meet expectations
and thereby develop relationships with customers).
Perceived product quality is defined as the perceived ability of a product
to provide satisfaction relative to the available alternatives. Customers’
perceived quality of a brand depends on the perceived quality of
competing brands.
Perceived quality depends on, for example, personal factors such as
involvement, prior knowledge and the individual’s level of education.
This is an important point because it highlights the idea that for the same
product two different people may perceive different levels of quality
and the reason for the difference could be their ‘prior knowledge’, which
could include such factors as the extent to which they had been exposed
to competing products in the past. Figure 8.2 (opposite) shows the
relationships between quality, expectations and satisfaction (considered
in more detail in Chapter 7 of the subject guide). Here we will look at the
links between expectations, satisfaction and quality.
8.4.1 Expectations, satisfaction and quality

Prior to making a purchase, customers have expectations about what
they are going to buy. These expectations will depend on, among other
factors, the marketers’ advertising, that of competitors, as well as the
customer’s previous experience of making that purchase. If the purchase
meets expectations, the customer will be satisfied and in marketing terms
104
feel that they have made a quality buy. Satisfaction is important because
it can lead to customers trusting the brand that they have just bought and
being encouraged to buy it on future occasions. If the purchase does not
meet expectations, then the customer will be dissatisfied and may buy
another brand next time. This concept is also important in terms of the
implications for marketers – they need to ensure that their products and
services meet the promises made by their marketing communications.
Past experience
Expectations
Forecast Ideal
Exposure to Exposure to
marketing Normative Minimum competitors’
(feasible) tolerable
mix marketing
Frame of referencee by which people make judgements
judgement about whether
or not they are satisfied
Satisfaction: Dissatisfaction:
it was a Quality Purchase it was not a
purchase experience Quality purchase
Perceived Product User Value Operations
Figure 8.2: Expectations, quality and satisfaction.

According to Higgs et al. (2005), expectations are important because
they form the frame of reference by which people will make judgments
about whether or not they are satisfied. Expectations have been studied
from two different perspectives: the consumer satisfaction literature,
which deals with satisfaction for both products and services, and the
services marketing literature, which focuses specifically on services. In the
satisfaction literature there has been an emphasis on forecast or normative
definitions (namely, those dealing with expectations at the brand level).
In the customer satisfaction literature four categories of expectations have
been identified:
• forecast (expected)
• normative
• ideal
• minimum tolerable.
Forecast expectations refer to consumers’ beliefs about what will occur in a
specific forthcoming transaction. Normative expectations refer to what the
customer should expect (namely, in terms of what is feasible). Normative
expectations and forecast expectations are said to be ‘brand-cued’ – people
form these expectations in relation to the forthcoming purchase of a
specific brand. Ideal expectations refer to the standard that represents
the highest level of performance attainable by a premier service provider
in that product category. Minimum tolerable expectations refer to the
baseline performance for any provider in the product category. Ideal and
minimum tolerable expectations function at the level of the product class,
since they focus on comparisons between different marketers.
105
Gallarza, Gil-Saura and Holbrook (2011) distinguish between service

quality and customer satisfaction in the following way. Firstly, service
quality does not depend on experience, whereas customer satisfaction
does (consumption has to take place). Secondly, service quality is based
on various specific (mainly cognitive) dimensions; in contrast customer
satisfaction dimensions are broader, since they can be affective as well as
cognitive (among which are components related to quality).
Given the importance of expectations in determining perceptions
of satisfaction and quality, it is important for marketers to manage
expectations – even very modest marketers can do this. Viswanathan,
Rosa and Ruth (2010) give the example of an Indian flower-seller
(hawker)whose garlands are used for (religious) devotional practice. In
her marketing communications (talking to her customers), she is upfront
about the quality of the offering, and tells customers when she has left
gaps between flowers, due to the high price of flowers from her suppliers.
She offers this explanation instead of raising her own prices. This
approach may even win her some sympathy from her regular customers,
since she is promising to return to her usual practice of tight bundles of
flowers as soon as the wholesale prices allow her to do so.
8.4.2 Service quality literature perspective of satisfaction

In contrast to the customer satisfaction literature, the service quality
literature has focused on the model of service quality developed by
Parasuraman et al. (1985). Here expectations refer to what customers feel
the service provider should offer, rather than what they would offer (that
is, it has a normative role). This model measures the difference between
perceptions and expectations as a measure of service quality. SERVQUAL
measures perceived importance and performance along key service
dimensions: reliability, responsiveness, assurance and empathy. These are
assessed using a 22-item scale. Examples of specific items are as follows.
Reliability is assessed in terms of, for example, service delivered when
promised and service being ‘right first time’. Responsiveness is measured
in terms of staff willingness to help and convenient operating hours, for
example.
8.4.3 Expectations and quality claims

One of the factors that can influence customers’ expectations are
marketers’ advertising claims. These can be ‘overstated’, where the
marketer promises more than can be delivered, and they can be
‘understated’, where the promises are less than what can be offered.
According to Kopalle and Lehmann (2006), the situations when marketers
should understate quality are when the value of future sales is high,
customers weight advertising heavily, customers are more sensitive to
the difference between actual and expected quality, customers do not
discount the advertised quality (as with the case of well-known firms) and
customers have a low base level of satisfaction.
On the other hand, overstating quality may be effective where: customers
are slow to update their expectations (when the base level of satisfaction is
high).
Activity 8.1
Take a minute to think about the word ‘quality’. Write down what you understand it to
mean.
106
Perceived
This approach is based on a view of quality as innate excellence. Quality
is ‘something that you know when you see it’. So a Rolls Royce can
be recognised as a quality car. Similarly, Wedgwood is perceived to be
quality pottery, and a Rolex is a quality watch. Such superior quality can
be identified by its look, its touch, its feel and so on. Where a service is
involved, judging quality may rely on even more ethereal criteria, like the
atmosphere in a restaurant.
Product-based
This approach views quality in terms of superior product attributes that
can be designed and precisely measured. Quality is seen as a measurable
set of characteristics. Thus the quality of a car can be determined by
its performance as measured by its top speed, its acceleration, its fuel
consumption and so on.
User-based
This approach sees quality as fitness for use from the customer’s
perspective. Thus this is based on a marketing view that customers
ultimately decide what quality means. However, particularly in mass
markets there can be a danger that an individual customer’s view may run
counter to any collective view obtained by aggregating all customer views.
Operations-based
This approach sees quality in terms of conforming to a specification
of a product or service. In this way, quality is achieved if all activities
are carried out right first time and error-free. Thus any product can be
considered to be a quality product if it conforms to its specification.
Value-based
This approach modifies the user-based approach by introducing the notion
of cost or price into the consideration of quality. Quality is thus considered
to be the best value for money for a given purpose. Different customers
may be prepared to accept a product offering with a lower specification
if the price is low. The success of budget airlines, like easyJet or Ryanair,
stems from the fact that many travellers are quite happy to forgo the
higher levels of service provided by traditional airlines. Being able to
afford to travel to their desired destinations is far more important to them
than complimentary food and drink, in-flight entertainment, executive
lounges and so on.
Activity 8.2
Which of these approaches to quality would you expect to find in a marketing-oriented
company? And what are the limitations associated with each of them?
8.4.4 Intrinsic and extrinsic cues

To conclude this discussion of quality, we should also consider the ways
in which consumers assess the levels of quality in different products and
services. How does a customer tell whether they have bought a ‘quality’
product? Physical product characteristics are referred to as intrinsic cues;
they cannot be changed without changing the physical product itself.
Non-physical product characteristics are referred to as extrinsic cues (for
example, price and warranties, brand name, country of origin, store name).
107
Extrinsic cues are particularly important when a product’s intrinsic

cues have low confidence and predictive values (that is, in the case
of intangible products/services where customers cannot tell how the
product/service will perform, they will tend to depend on price/warranty
and other cues (Olson, 1972)). For utilitarian products (everyday items
which are not bought for image or fashion purposes) intrinsic cues are
more important; for image products, extrinsic cues are more important. So
for fashionwear stores, their image plays an important role.
An extrinsic cue available to marketers is warranties. Warranties can help
reduce customers’ perception of risk by offering them the possibility of
redress when the product/service does not perform to expectations. This
may be particularly important where the inherent risk is great (Shimp
and Bearden, 1982). However, it has been said that warranties can lead
to expectations of greater product/service quality, increased value and
enhanced post-purchase service (Halstead et al., 1993).
The implications of customers’ ability to assess quality in terms of the
potential for adverse selection and moral hazard are as follows. Kirmani
and Rao (2000) say that customers can face information asymmetry in
two situations: where there is adverse selection and where there is moral
hazard. Adverse selection takes place where elements of sellers’ product/
service quality cannot be observed and is fixed and does not change from
purchase to purchase. Moral hazard can arise where sellers are able to
change quality from one purchase to another. The way in which buyers can
address information asymmetry will be different in each situation. Where
there is adverse selection the problem with information asymmetry can
be addressed by providing customers with information; the quality of the
offering will not change from one sale to the next. So high-quality sellers
will gain from encouraging buyers to see and try their product. High-
quality firms will provide signals about how good their offerings are and
firms selling low-quality offerings won’t provide signals, because it is not
profitable for them to do so.
There are reasons why quality may need to be assessed over a period of
time rather than at one point in time. The notion of a ‘customer journey’
suggests that customer experiences are not static, but that they start
before the service encounter; for example, through exposure to marketing
communications, word of mouth messages and seeing other people
experience the service. The experience can continue after the service has
been delivered. Lemke, Clark and Wilson (2011, p.846), thus define the
customer experience as: ‘the customer’s subjective response to the holistic
direct and indirect encounter with the firm, including but not necessarily
limited to the communication encounter, the service encounter and the
consumption encounter’.
8.5 Branding
There are a number of different ways in which brands can be identified,
from a name to a symbol. Branding is used to enable the marketer to
differentiate their product from the competition.
In order to understand the role of branding, you should consider the
difference between an unbranded product and a branded one. With the
former there are no means of knowing who made it, and if you want to
buy the product again you do not know who you could go back to. When
a product is branded the marketer is explicitly identifying itself. Because
of this, branding enables promises to be made by the marketer, for those
promises to be fulfilled, and for trust/loyalty to be established.
108
Keller (1993, 1998) defined brand equity as ‘the differential effect that
brand knowledge has on consumer response to the marketing of that
brand’. So brand equity is based on the associations that people attach to a
particular brand. These can vary in terms of number, valence (attractions
or aversion felt by an individual) and uniqueness. Brands with higher
levels of brand equity will have more associations and more net positive
and unique associations Krishnan (1996).
Once this happens the marketer can benefit from repeat sales. So branding
is the foundation for relationship marketing. As part of the differentiation
of its brand from those of competitors, marketers can make use of the fact
that brands can communicate values and personality to the customer. The
notion of ‘values’ used here is very important and we will now examine it
in more detail. First of all we will look at a definition of the term ‘value’,
but from a wider social science perspective.
A value is an enduring belief that a specific mode of conduct or

end-state of existence is personally or socially preferable to an
opposite or converse mode of conduct or end state of existence.
(Rokeach, 1973)
What this definition is saying is that if we believe that a specific mode of

conduct or end-date is preferable to the opposite and that belief lasts for
a long time, then it is a ‘value’ that we hold. For example, we may believe
that the importance of education is preferable to the opposite (valuing
leisure time), and this may be a long-term belief. As a result, we could
describe it as a value. For marketers it can be important to understand
the values of their customers. In societies where the values emphasise
the importance of education, the marketing of educational services and
products will be relatively more successful than in societies where such
values are held less highly. Brand values are guiding principles (namely,
what the brand believes in), but they will only distinguish a brand from
competitors if they are unique. This discussion highlights the fact that the
concept of values is not specific to brands, but to consumers and to whole
societies. Individual brands therefore need to make sure that their values
are consonant with those of the societies in which they are being sold. We
will develop this idea below when we consider core and peripheral values.
You should note that, consumer values are deeply held, enduring beliefs,
whereas consumer value results from the trade-off of the benefits and
sacrifices associated with a particular good or service (Holbrook, 1994).
Brand values are important because they can be considered by consumers
to reflect their own, personal values. According to Durgee et al. (1996,
p.90), ‘Marketers are interested in values because they are thought to
influence behaviour.’ Research has been undertaken, for example, into
whether Ford owners have more conservative values than Chevrolet
owners. In the past researchers have sought to ask consumers about
important product attributes and then consumers are probed (for example,
by asking why those attributes are important) until the researcher finds
out the values the consumer associates with that product.1
Added values augment an offering from a commodity to a brand and
differentiate the brand from competitors. For example, the British
manufacturer Rolls Royce says on its website that its brand values are
‘reliability, integrity and innovation’. Added values can be emotional and/
or functional. Rolls Royce’s added values are ‘24-hour services support’
(which is a functional value) and the confidence that it inspires in
customers (which is an emotional value). See Figure 8.4.
109
You should note that an organisation can have core and peripheral
values (see Figure 8.3). The former remain constant while peripheral
values are susceptible to change, depending on changes in the marketing
environment. Hewlett Packard’s core value of providing customers with
products and services ‘of the highest quality’ has remained unchanged,
whereas its peripheral value of sharing success with its staff had to adapt
when the organisation moved into the computer market and needed to
recruit specialist staff externally rather than promoting from within.
External
environment
Peripheral values
environment
environment
External
External
Core
values
environment
External
Figure 8.3: Core and peripheral values.

Our definition of a brand talks about relevant added values. This repeats
the importance of being marketing-oriented (i.e. the added values should
be relevant to customers and not necessarily to marketing managers).
Values also need to be sustainable, but it has become increasingly difficult
to sustain, for a significant amount of time, the uniqueness of a brand’s
functional added values (Figure 8.4). The airline market provides a
good example of the problem of sustaining functionalism. For example,
an airline launches more comfortable beds, only for another to follow
suit soon afterwards. In contrast, it is more difficult to copy a brand’s
emotional added values. While there are many high-quality academic
institutions, the emotional added values associated with the brands
‘Oxford University’ or ‘Cambridge University’ are much more difficult to
copy. This is partly because of their long history and consistent reputation
over that time.
Figure 8.4: Added values and branding.

110
8.5.1 Branding decisions

One of the branding decisions marketers need to make is the extent to
which they use the same brand name across different products.
Brands enjoy customers’ trust. The further that trust can be stretched,
potentially the more profitable this can be for the company. However, there
are limits to which customers will accept such ‘brand extensions’. Brand
extensions work on the principle of ‘stimulus generalisation’. Customers
make the same response to slightly different stimuli. Success depends
on relevance of the new product to the marketplace image of the brand
name. The greater the similarity between the primary product and the
brand extension, the greater the transfer of positive evaluations to the new
product. We are more likely to trust finance company HSBC’s brand name
when it is extended to new financial services than if it were extended to a
new clothing range.
Existing
Brand
Brand name
Line extension
extension
Multibrands New brands

New
Existing New
Product category
Figure 8.5: Brand strategies.
Figure 8.5 shows the different strategies that a firm can pursue in order
to grow the business in terms of how it manages the brand and/or the
product categories in which it competes. These two variables are the focus
of analysis in this model.
First of all it is important to be clear about the meaning of the term,
‘product category’. The synonymous term ‘product class’ is defined by
the American Marketing Association as, ‘A group of products that are
homogeneous or generally considered as substitutes for each other. The
class is considered as narrow or broad depending on how substitutable
the various products are. For example, a narrow product class of breakfast
meats might be bacon, ham, and sausage. A broad class would include all
other meat and meat substitutes even occasionally sold for breakfast use.’
(www.marketingpower.com/_layouts/Dictionary.aspx?dLetter=P). This
definition is important because it focuses on the key difference between
product categories being customers’ perception of whether or not they are
substitutes for each other. So, for example, if customers perceive that an
mp3 player is not a substitute for a desktop computer, then we can say that
Apple’s entry into the mp3 player market (from previously just making
computers) could be considered a ‘new category’. Was the use of the brand
name ‘ipod’ a new brand or an existing brand? Since Apple used the name
Apple for both products and since ‘i’ prefixed both mac and pod, we could
argue that this was the use of an existing brand name, people could easily
associate the two products. In contrast when Toyota (as a manufacturer
of mid-range cars) entered the luxury car market it could be said that this
111
was also a ‘new product’ since buyers of mid-market cars would not usually
consider a luxury car as a substitute when making their buying decision.
In this case Toyota also chose a radically different brand name (Lexus)
since they did not feel that the Toyota brand equity would help them to
compete in this new category. One of the ways in which we can consider
the attractiveness of the different options is in terms of their ‘riskiness’
and that is what we will do here. This option is argued to be relatively less
risky than the others for the following reasons: the firm knows how the
customer will react to the brand name; it knows the amount of trust the
brand name enjoys; and how competitors react to it. In short, the firm has
a lot of information about how the brand name ‘works’ in the marketplace.
In addition, the firm knows the product category into which the new
product is to be launched, it knows the customers and competitors and
it knows how to manage the elements of the marketing mix. Assuming a
stable marketing environment, given all these ‘knowns’ regarding the brand
name and the product category, this option is considered to be relatively
less risky than the others. However, Nijssen (1999, p.452) points out that,
‘many line extensions differentiate supply rather than address new needs
and generate new sales’. Driving such an approach may be what he refers
to as the increasing problem of predicting consumer behaviour.
Of course, the potential for sales and profits may be limited for other
reasons, such as the fact that the new offering may be so similar to
the firm’s existing products that any sales of the new product are
at the expense of lost sales of existing products, also referred to as
‘cannibalisation’.
Nelson (1974) explained the difference between search qualities (those
which can be determined by inspection before purchase) and experience
qualities (which cannot be determined before purchase). According to Jain
and Posavac (2001) for new experience goods consumers will use a known
brand name in order to infer quality and this means that brand extensions
will be more valuable for experience goods. Where it is not possible to use
brands in this way, marketers may resort to using other cues, such as price
and warranties.
Activity 8.3
Based on the previous discussion, how would you assess the riskiness of the ‘new brand’
option in Figure 8.5?
Looking at the options the marketers face in terms of their riskiness is

useful because, as we shall see, a similar analysis can be undertaken with
another model widely used in marketing when considering firm growth
strategies. The product/market expansion grid, or Ansoff matrix, is usually
associated with marketing strategy, but we refer to it here because it
helps to emphasise the importance of risk, trust and information when
considering strategies for growth.
Figure 8.6 shows the Ansoff matrix. This model shows that a firm can grow
by either innovating its products and/or the markets that it serves. As with
the branding model, the top left-hand quadrant has the option where both
variables (product and market) remain the same – the company carries on
doing what it has done before and this option has relatively low levels of
risk because the firm focuses on what it knows (where it has information).
In contrast, the ‘diversification’ option is relatively higher risk because
both options (product and market) are new and the firm may not have
experience in either of them.
112
Existing
Market Product
penetration development
Market
Market
New
Diversification
development
Existing New
Product
Figure 8.6: Product market expansion grid – the Ansoff matrix.
Of course, with both models what greatly influences the riskiness of each
option is the marketing environment. For example, if there are strong
competitors entering an industry, a strategy of innovating may be less risky
than one where nothing at all is done.
So far we have presented the argument for one of the key topics to be
discussed in this chapter. In the next section the broad subject matter of
managing the product/brand will continue but we will examine the issue
of how two seemingly different models relate to each other. This is an
important topic because, as a result of the discussion, we will see how two
different perspectives on a specific issue give two different insights.
We now look at what line extensions are and identify some of the
advantages and costs associated with them. The notion of fit is an
important one and also applies to brand extensions. Fit can be assessed in
terms of the similarity of features and attributes between the parent brand
and the extension. Alternatively, it could be in terms of brand specific
associations or goal congruency (Yorkston, Nunes and Matta, 2010).
One of the objectives behind line extensions is to help an organisation
develop a portfolio of brands that can enable it to gain greater market
share. However, brand portfolios can have disadvantages associated with
them one of which is the notion of intra-portfolio competition, which
refers to the extent to which different brands within the same portfolio
compete for the same consumer spending. Among the disadvantages
are lower price premiums from channel members and consumers,
the decreased effectiveness of advertising expenditure as consumer
demand is spread across different brands in the portfolio and decreased
administrative efficiency.
There are, however, various advantages associated with such competition.
Resource allocation by the organisation may be improved, barriers to
entry for competitors can be created and the strategy can take advantage
of variety seeking behaviour on the part of consumers. Morgan and Rego
(2009) point to the example of Unilever and Proctor and Gamble in the
US laundry detergent market where one firm pursues a policy of a limited
intra-portfolio and the other one does not. The same difference in strategy
is observed when comparing the intra-portfolios of Diageo and Pernod
Ricard in the blended scotch market.
113
8.6 New product development

You should read Chapter 9 of Kotler and Armstrong (2012), which deals
with new product development. You do not need to read the section
dealing with additional product and service considerations.
Our focus in the following discussion will be on the impact that close
ties (with customers and other stakeholders) have on the innovation
undertaken by marketers. This theme builds on the concept of the
marketing orientation that we have previously studied. In theory having
close or embedded relationships with customers should be a good thing.
However, as the discussion below points out, this is not always the case
and you will see some of the reasons why.
Activity 8.4
Read the extract from C.S. Noordhoff et al. ‘The bright side and dark side of embedded
ties in business-to-business innovation’, Journal of Marketing 75 2011, pp.34–52.
You should start from the section titled ‘The conflicting effects of embedded ties on
innovation’ on p.35 and read to the end of that section on p.36. You should then read the
two sections, ‘The bright side: embedded ties strengthen the impact of supplier innovation
knowledge’ and ‘The dark side: embedded ties weaken the impact of customer innovation
knowledge’ on pp.37–38.
Then answer the questions below:
1. What is argued to be one of the benefits of embeddedness?
2. What risks do suppliers face when they have embedded customers?
3. Why can embedded ties allow firms to test innovations early in the development
process?
4. When ties between two firms are strong and customers are knowledgeable, what are
the two problems that may occur?
The points made above can also be applied to other organisational

relationships; for example, with distributors and retailers. The notions of
network diversity and homogeneity can be useful here, and ties with a
broad or diverse range of organisations may be more effective than close
ties with a more homogeneous group.
8.7 Organisational adoption of innovation

Frambach and Schillewaert (2002) describe various factors that have been
found to affect adoption at the organisational level.
The perceived characteristics of the innovation and organisational adopter
characteristics drive the adoption process and are, in turn, influenced by
external variables (namely, the potential adopter’s environment and social
network, and the supplier of the innovation). The perceived innovation
characteristics can be considered as cognitive indices (or beliefs) reflected
in an attitude towards the innovation.
The perceptions of an innovation by members of an organisation’s
decision-making unit (DMU) affect their evaluation of, and propensity, to
adopt a new product. These include the fact that the economic incentives
of adopting the innovation should exceed that of alternatives. Other
innovation characteristics that influence the adoption decision include
perceived compatibility, complexity, observability and trialability as well as
perceived uncertainty.
114
Organisational characteristics such as organisation size, organisation

structure and organisational innovativeness also influence the adoption
decision. Size is positively related to innovation adoption. This, it is
argued, is because larger organisations feel a greater need to adopt
innovations in order to support and improve their performance. On the
other hand, it is argued also that smaller organisations are more flexible
and innovative, resulting in an enhanced receptiveness towards new
products. These apparently contrary relations and results may be largely
attributable to the correlation of organisation size with other variables,
such as structure, strategy and culture. More formalised and centralised
organisations (often larger firms) are less likely to initiate innovation
adoption decisions, but are better equipped to implement an innovation.
Supplier marketing activity can significantly influence the probability that
an innovation will be adopted by organisations (Frambach et al., 2002).
Three main factors are important: the targeting of the innovation, its
communication and the activities the supplier undertakes to reduce the
perceived risk of the potential customer.
Careful and specific targeting of an innovation towards selected potential
adopters can facilitate acceptance in the market. Potential adopters such
as innovative organisations and individuals, heavy users of the product
category or heavy users of the preceding technology may be more
receptive to the innovation than others.
As innovation adoption is largely an information-processing activity, supplier
communication activities will not only create awareness, they also influence
potential customers’ perceptions of the innovation. In this way, marketing
communications indirectly affect potential adopters’ propensity to adoption.
By reducing the risks associated with early adoption of an innovation,
including implementation (use) risk, financial risk and operation risk,
the adoption of an innovation can be stimulated. The innovation may be
offered on trial for a certain period of time or the supplier may absorb
some of the major risks of adoption by offering the potential adopters the
innovation at a low introduction price. In high technology markets, this
may even be necessary to gain market acceptance.
The interaction, in terms of frequency and richness, between members of a
social network can also enhance the speed and rate of innovation adoption.
The participation of members of an organisation in informal networks
facilitates the spread of information about an innovation, which may
positively influence the probability of adoption (so long as the information is
positive!). Such informal networks may either connect organisations within
the industry or organisations in different industries. The degree to which
organisations share information with others is referred to as their degree of
interconnectedness. The higher the degree of (informal) information sharing,
the more likely organisations are exposed to new ideas and products.
In addition to social influences, the business environment affects adoption
behaviour in different ways. First, a potential adopter may derive an
intrinsic benefit from the fact that business partners within their network
have previously adopted the innovation (namely, a form of network
externality). Also, competitive pressures may promote adoption.
Organisations may adopt an innovation based on the number of other
interrelated organisations in their market environment that have adopted
the focal innovation. In the literature, these external contingencies have
been conceptualised in terms of network externalities or critical mass. The
theory is that the value of an innovation and, hence, its adoption probability,
is determined by the number of other users. In the case of organisational
115
adoption, positive network externalities exist when the intrinsic utility of

an innovation increases when a firm’s suppliers, customers, competitors, or
other organisations (for example, government) also use the innovation. For
example, information systems investments (for example, extranets or EDI)
may generate greater value and gain importance once a sufficient number of
business partners use these systems.
In highly competitive markets, innovation adoption may be necessary
to maintain one’s market position. Non-adoption of an innovation that
is adopted by others in such an environment may result in competitive
disadvantage. This depends on the strategic importance of the innovation
and its potential implications for the effectiveness and efficiency of the
firm’s activities.
8.8 Common design by users

Traditionally firms employed designers to design products. However
‘common design by users’ is being seen as attractive to marketers (Schreier,
Fuchs and Dahl, 2012). This is where a firm empowers its community
of users to generate ideas for new products. This can be considered to
be an application of the co-creation concept. This is in contrast to mass
customisation where consumers may customise the marketer’s offerings,
but only for their own personal use. Common design has become popular
because it has been observed that innovations that arise as a result of it are
attractive to a broad group of customers and not just the customer who came
up with the innovation. This is not wholly intuitive, however, because it has
been observed by Bennett and Cooper (1981) that consumers may not be
able to come up with innovations that are beyond their immediate experience
(an argument that can be used to criticise the marketing orientation). New
products can often be where customers undertake design for a firm and it
may be possible that this does not decrease consumers’ perceptions of the
firm’s innovation ability, but rather it increases it. Examples of commercial
user innovation include open source software and Threadless, a fashion
company that mass markets user-designed T-shirts. There are four defining
characteristics underlying successful customer design:
1. The number of consumers. People perceive that there are more people
involved in firms that use common design by users, compared to firms
that use company designers.
2. The diversity of their background. Consumers may perceive a
community of users to be more diverse than a group of designers and
diversity may influence perspectives and ideas.
3. Consumer designers use the designed product. Consumers may
associate common design users with higher innovation ability and thus
are able to understand customers needs and wants.
4. Lack of company constraints. Users may be less constrained by
organisation factors in their ability to be innovative.
In their study Schreier et al. (2012) found that there were two important
boundary variables. Firstly, the innovation effect of user design depends on
consumers’ familiarity with user innovation; for example, whether or not
the consumer themselves have ideas for modifying existing products. Where
familiarity is low the effect of user design is reduced. Product complexity is
also important as common design by users may not be considered effective
by consumers when the underlying design task is considered to be too
complicated.
116
8.9 Introduction to services marketing

As the marketing discipline has matured over the past 30 years,
practitioners and academics have realised that concepts which are
effective for understanding the situation facing some marketers are
unsuitable for addressing the needs of others. While marketing originally
addressed the needs of marketers selling consumer products, there was a
subsequent development in industrial marketing dealing specifically with
the marketing needs of those who sell to other business organisations. In
recent years there has also been growing interest in the marketing needs
of those firms that sell services and product support services. This has
given rise to a host of concepts and models that can help service marketers
understand the situation they face and address the problems involved.
Consumer marketing led to the development of notions such as the
‘four Ps’ (product, place, price and promotion). It will become readily
apparent, however, that the four Ps alone are not suited to the marketing
of something that is intangible (that is, something which cannot be seen,
felt or heard).
In recent years the need to develop marketing concepts for intangibles
has grown as the importance of the service sector has increased within
industrialised economies. Principles which are adequate for products will
not suffice for services.
However, it has increasingly become the case that marketing principles can
be used for services, people, ideas and organisations. Indeed, wherever
there are customers with needs, marketing can play a role.
8.9.1 Characteristics of services

The differences between products and services are explained in the section
titled ‘Services marketing of Kotler and Armstrong’ (2012). You should
read all of that relatively short section.
8.9.2 The differences between products and services: real

or imagined?
In this analysis we will refer to some of the concepts regarding risk that
were first explained in Chapter 6 of the subject guide. If perceived risk is
determined by the amount that is at stake and the certainty with which
consumers can regard the outcome of the purchase as favourable, then
it should be possible to consider different products and services by these
criteria. Tangible purchases, which can be seen, felt, even used before
purchase, ought to have limited outcome risk. On the other hand, with
intangible purchases, the customers do not know what they will get until
they have made the purchase; consequently, the degree of outcome risk
is high. With tangible products/services therefore, there is little need for
there to be trust between seller and buyer. The purchaser of a tangible
good is not placing herself in any position of vulnerability to the seller.
With intangibles, however, the customer is vulnerable to the quality of
promises made by the seller and so trust does need to exist to facilitate
exchange.
Davis (1979) discusses other factors which distinguish services and
products and which force customers to rely on personal sources of
information. For instance, there is no transfer of ownership in the sale
of a service; the buyer is dependent on the participation of the seller for
consumption to take place. Their ‘in-being nature’ means that services
cannot be itemised. Furthermore, performance standards are more difficult
to achieve in the production of services. Guseman (1981) has found that
117
services were perceived as having more risk than products, and consumers
use risk relievers (actions used to allay perceived risk) in different
proportions for services.
It is possible to derive a risk continuum from tangible to intangible
(McDougall, 1990). At the tangible end one finds products like salt, with
a progression towards the more intangible: from soft drinks to clothes to
bank loans to teaching, and medical diagnosis (see Figure 8.7). However,
this tangibility scale provides some interesting comparisons. A fast-food
lunch (service) is perceived to be more tangible than buying a used car
(product). Eggert (2006) has made an additional observation that the
implication of intangibility is that customers are not able to perceive the
characteristics of what will be offered before the service is performed.
Very intangible
Mainly
Perceived risk
services
rising Customers
have more Need for trust
information falling
Intangibility
means less
information
Mainly
products
Very tangible
Figure 8.7: Product service continuum.
In Chapter 3 of the subject guide we looked at the difference between
clients and customers, where clients rely on the marketer to identify their
needs. It should be clear from the preceding discussion, that clients are
purchasing services that have relatively high intangibility. We will look
at the difference between services and products and we will also see the
implications for marketers who provide intangible offerings (those which
customers are not able to experience before purchase). As you will see
from the later discussion, the greater the client’s reliance on the marketer
to make decisions on their behalf, the greater the intangibility of the
offering will be.
8.9.3 Adverse selection and moral hazard

Nayyar (1990) provides an explanation of the impact of information
asymmetries for services marketers. One of the implications arising from
intangibility is the difficulty customers face in evaluating the quality of
what is on offer. The following discussion explains how customers’ lack
of information can be considered in terms of adverse selection and moral
hazard (this concept was introduced earlier in this chapter in the section
on intrinsic and extrinsic cues).
In order to make buying decisions, customers need information before
and after their purchases, which can relate to the price and the quality
of the offering, for example. However, gathering such information about
services is difficult, because of their intangibility and also because their
consumption takes place simultaneously with their production and
also because of their variability from one person to another. Gathering
118
information can be costly for buyers and as a result there can be

information asymmetries between buyers and sellers. Therefore, there
can be low-quality goods and services as well as high-quality offerings in
the market place. Customers face two problems as a result of information
asymmetry: moral hazard and adverse selection. Moral hazard arises
because the buyer cannot observe the actions of the seller and as a
result cannot tell if the sellers’ actions are in line with what was being
promised. In the case of services, quality can be hard to judge. Customers
face adverse selection problems when they cannot observe the sellers’
characteristics (are they really competent?) and also the situation facing
the seller (did the customer really need the services that were provided?).
Where this happens, marketers offering bad-quality products and services
can drive out those offering good quality by lowering prices to such a level
that the good quality marketers cannot compete.
8.9.4 Service dominant logic

In recent years there has been a significant amount of discussion around
the notion of service-dominant logic. In their 2004 article, Vargo and
Lusch say that ‘goods-centred’ marketing has traditionally focused on the
making and distribution of goods. In order to compete with rivals, the
marketers’ role concentrated on creating benefits and value for customers.
The ‘service centred’ view on the other hand emphasises to organisations
that they should identify or develop core competencies, and that their
customers are those who could benefit from these competencies. You
should note that this goes beyond the basic difference between goods
and services. Organisations need to become involved in ‘developing
customised, competitively compelling value propositions to meet specific
needs’ (Vargo and Lusch, 2004, p.5).
There are various implications arising from this, among them are:
• Tangible goods are appliances for service provision, rather than ends
in themselves; for example, zipcar.com has taken the view that some
people only need wheels (car transport services) on an occasional
basis, they don’t necessarily need to own a car, so the company offers
drivers access to cars locally which they can use for a fixed annual fee
and an hourly charge.
• The customer is an operant resource – a collaborative partner who
co-creates value. This is in contrast to the goods dominant logic, where
the customer is seen as an operand resource, something that could be
acted upon, using the elements of the marketing mix.
• The role of the 4Ps changes (Vargo and Lusch, 2004):
Products become service flows – where products provide services.
Promotion may need to move from being one-way to becoming a
dialogue, where questions are asked and answered.
Price becomes a value proposition created by both sides of the
exchange.
Place is replaced by value networks and processes.
It is worth stressing that this development in the marketing discipline
should be of value to more than just services marketers. Vargo and Lusch
(2004) go to some lengths to stress that when they refer to ‘service-
dominant logic’, they are actually talking not just about services in the
traditional sense (that is, those things which are not products). They are
talking about the application of specialised competencies (knowledge
and skills) through deeds, processes and performances for the benefit
119
of another entity or the entity itself. Vargo and Lusch (2004, p.16)
give the case of Cargill, a firm ostensibly involved in the trading of a
tangible commodity, agricultural products, such as grains. However the
organisation sees itself as a service business with an emphasis on ‘ideas,
knowledge and expertise’. A specific example is of how Cargill responded
to a customer request for healthier bread by developing a recipe that met
this need. So the agricultural commodity becomes a vehicle for service
provision.
This background should have given you some idea of the domain where
co-production and co-creation are grounded. In general terms they
represent a worldview that sees consumers as being integral to value
creation and which sees various orthodox marketing concepts as being
anachronistic.

This chapter started with a discussion of what value is and its importance
in marketing. We then looked at how customers can contribute to the
value creation process. We then examined quality and the links with
related concepts such as expectations and satisfaction. We also looked at
the role of cues in customers’ assessments of quality. The discussion then
moved to branding and branding decisions that marketers make; links
with the product market expansion grid were also drawn. For new product
development (NPD), the focus of this subject guide is on certain factors
that influence it and we rely on Kotler and Armstrong to provide students
with material on the NPD process. The chapter ends with a discussion of
services marketing and the current interest in service dominant logic.

• explain what value is and how it can be created and delivered
• discuss the different approaches to quality and their implications
• evaluate some of the different brand strategies managers can pursue
and their implications
• explain the value and costs of embeddedness to the new product
development process
• critically evaluate the differences between products and services
• discuss the insights offered by the service dominant logic.

1. a. Using appropriate examples, explain what is meant by the
following terms: intangibility, extrinsic cues, intrinsic cues, adverse
selection. (15 marks)
b. Why may firms that sell intangible offerings find adverse selection
to be a problem? (5 marks)
c. How can extrinsic cues be used to overcome the adverse selection
problem? (5 marks)
2. a. What do you understand by the terms: ‘brand extension’, ‘line
extension’ and ‘fit’? (10 marks)
120
b. Why is the notion of fit important for firms undertaking such

extensions? (10 marks)
c. Why may firms undertake extensions even where there is little
‘fit’? (5 marks)
3. a. In new product development, using appropriate examples, explain
what is meant by the term ‘embedded’. (10 marks)
b. Critically assess the value of embeddedness to marketers.
(15 marks)
121
Notes
122
Chapter 9: Product innovation and the life cycle approach
Chapter 9: Product innovation and the

life cycle approach
9.1 Introduction
In Chapter 8 of the subject guide we learned about delivering value, the
management of individual brands, services and the development of new
products. At the same time, we looked at certain newer developments
such as the co-creation of value. New products and brand development,
as noted by Kotler and Armstrong, are the lifeblood of an organisation.
However, differentiating your product from competitors and investing
in new products and service development can be risky for a firm, as the
majority of new products fail. Often two products are introduced, which
are practically identical, yet one succeeds and the other fails. At other
times a product or service has an extremely quick success in the market on
entry and then fades from view as quickly as it has arrived. Why?
In this chapter we will explore why products/services succeed or fail
through a discussion on product diffusion and the customer adoption
process, models related to product adoption/diffusion as well as the
concept of the product life cycle (PLC). One of the most widely held
theories of communication in marketing is diffusion theory (Wright
and Charlett, 1995). Here, the communication is about innovation or
something that is new to the social system or members of the population.
According to Gatignon and Robertson (1985), diffusion theory helps
explain the flow of new ideas/practices and the adoption of new products
and services throughout a social system. This discussion is linked with the
customer product/service adoption process. We then examine how every
product or service has a PLC that is unique to it, but that the PLC also
follows several stages. We shall also see how firms can anticipate changes
in a PLC and therefore devise policies which can allow it to adapt to, or
alter, the PLC.

• highlight the product innovation concept and the differences between
open and closed innovation
• highlight how the innovation concept aligns with the new product
development process
• highlight the reasons why some products are more successful than
others and related models and concepts
• emphasise that marketing models can explain seemingly irrational
consumer choice behaviour, such as following the herd, and show that
such behaviour does have a ‘rational’ basis.

• discuss the new product development process and the associated issues
of product innovation and diffusion
• discuss how marketers can model the rate of adoption of an innovation
in the market
123
• discuss the economic perspectives on product success especially

network externalities, bandwagon effects and informational cascades
• discuss the PLC concept, the PLC types and describe the five stages
involved
• explain how a firm’s response or behaviour differs at each stage of the
product life cycle.

Pearson Prentice Hall, 2012) Chapter 9.
Note: All aspects of Chapter 9 are important since it deals primarily with
new product development and the life cycle approach. The only section that
you don’t have to cover in Kotler and Armstrong, Chapter 9 is ‘Additional
product and service considerations’.

Bikhchandani, S., D. Hirshleifer and I. Welch ‘Learning from the behaviour of
others: conformity, fads, and informational cascades’, Journal of Economic
Perspectives 12(3) 1998, pp.151–70.
Bryson, A., R. Gomez and P. Willman ‘From the two faces of unionism to the
Facebook society’, Labor and Employment Relations Association Series,
Proceedings of the 60th Annual Meeting, (2008) pp.51–60. Downloadable:
http://cep.lse.ac.uk/pubs/download/mhrldp0006.pdf
‘Console wars’, The Economist 20 June 2002; www.economist.com/
Chesbrough, H. Open innovation: the new imperative for creating and profiting
from technology. (Boston, MA: Harvard Business School Press, 2003).
David, P.A. ‘Clio and the economics of QWERTY’, American Economic Review
75(2) 1985, p.332.
Gale, D. ‘What have we learned from social learning?’, European Economic
Review 40(3–5) April 1996, pp.617–28.
Gatignon, H. and T.S. Robertson, ‘A propositional inventory for new diffusion
research’, Journal of Consumer Research 11, 1985 pp.849–67.
Gourville, J.T. ‘Eager sellers and stony buyers: understanding the psychology of
new-product adoption’, Harvard Business Review 84(6) 2006.
Hanson, W.A. and D.S. Putler ‘Hits and misses: herd behavior and online
product popularity’, Marketing Letters 7(4) 1996, pp.297–305.
Kotler, P. Marketing management. (Englewood Cliffs, New Jersey: PrenticeHall,
1991) seventh edition.
Lambin, J. Market driven management: strategic and operational marketing.
(Basingstoke: Macmillan, 2000).
Lambin, J. and I. Schuiling Market-driven management: strategic and operational
marketing. (Basingstoke: Palgrave Macmillan, 2012) third edition.
Liebenstein, H. ‘Bandwagon, snob and Veblen effects’, Quarterly Journal of
Economics 64(2) 1950, pp.165–201.
O’Rand, A.M. and M.L. Krecker. ‘Concepts of the lifecycle: their history,
meanings, and uses in the social sciences’, Annual Review of Sociology 16,
1990, pp.241–62.
Rogers, E.M. Diffusion of Innovations. (London: Free Press, 1983) third edition;
(London: Free Press, 1995) fourth edition; (London: Free Press, 2003) fifth
edition.
Rogers, E. and R. Shoemaker Communications of innovations. (New York: Free
Press, 1972).
Rohlfs, I. ‘A Theory of interdependent demand for a communications service’,
Bell Journal of Economics and Management Science 5(1) 1974, pp.16–37.
Schnaars, S.P. Marketing strategy: customers and competition. (New York: Free
Press, 1998) second edition.
124
Trott, P. Innovation management and new product development. (Harlow:

Pearson, 2012) fifth edition.
West, D., J. Ford and E. Ibrahim Strategic marketing: creating competitive
advantage. (Oxford: Oxford University Press, 2006).
West, J. and S. Gallagher ‘Challenges of open innovation: the paradox of
firm investment in open-source software’, R&D Management 36(3) 2006,
pp.319–31.
Wright, M. and D. Charlett ‘New product diffusion models in marketing: an
assessment of two approaches’, Marketing Bulletin 6 1995, pp.32–41.
9.1.5 Useful website

www.info-cascades.info/
Provides a listing of all papers related to informational cascades titled
‘Informational cascades and rational herding: an annotated bibliography
and resource reference’.

This chapter starts with a discussion of what product innovation is and
the typologies of such innovations. We also establish linkages between
innovation and the new product development process and highlight the
importance of open innovation over closed-innovation models. We would
like to highlight here that the new product development process has
been covered extensively in Chapter 9 of Kotler and Armstrong, thus the
discussion in the subject guide revolves more on other complementary
aspects. The discussion then moves on to how some products diffuse better
than others in the market and looks at some conceptual understanding in
this area (such as Rogers’ diffusion curve). Thereafter, we bring in some
economic perspectives on product success such as bandwagon effects,
network externalities and informational cascades. Finally, this chapter
discusses another area which has been discussed extensively by Kotler and
Armstrong and thus our approach is complementary to theirs.
9.2 Product innovation

Firms must be able to adapt and evolve if they wish to survive.
Competition will inevitably launch a product that changes both market
and consumer dynamics. Apple’s iTunes is an example of an innovation
that has caused deep anguish to many companies (for example, HMV)
and their market shares. Thus, the ability to change and evolve is a
basic tenet of firm survival. Innovation itself is a broad concept that can
be understood in a variety of ways. According to Trott (2012), most
researchers differentiate between invention and innovation by stating that
the latter is concerned with the commercial and practical application of
ideas or inventions. Thus, invention is the conception of the idea, whereas
innovation is the subsequent translation of the invention into the economy
(Trott, 2012). He provides an equation to help elucidate the relationship
between the terms:
Innovation = theoretical conception + technical invention + commercial
exploitation
Just like beauty lies in the eyes of the beholder, whether a ‘new’ product
or service is an innovation also depends on consumer perception. If a
consumer does not believe a product is innovative enough, it casts a doubt
on the future success of the product. Rogers and Shoemaker (1972) make
an interesting observation here. According to them, ‘It matters little, as far
as human behaviour is concerned, whether or not an idea is “objectively”
new as measured by the lapse of time since its first use or discovery…If the
idea seems new and different to the individual, it is an innovation.’
125
Thus, apart from the role played by technology and design in innovation,
marketers may also need to focus on other aspects of the marketing mix
to convey innovation from a tangible as well as intangible perspective. In
fact, innovation within marketing can be of various types, as highlighted in
Table 9.1 below.
Type of innovation Example

Additions to existing lines Coke adding ‘Coke Zero’ to its range of soft drinks
Improvements/revisions Apple introducing iPhone 5 with a larger screen to
enhance user experience
New product lines Google adding mobiles phones to its product portfolio
Cost-reduction Introduction of low-cost airlines in a market
New-to-the-world Virgin Galactica launching flights into ‘space’
Repositions Domino’s Pizza’s attempt to switch their reputation
from fast delivery to high quality
Table 9.1: Typology of innovations (based on West, Ford and Ibrahim (2006)).
Irrespective of the type of innovation being introduced into the market,
marketers tend to follow a structured product development process as
highlighted by Kotler and Armstrong (see Figure 9.1 in their textbook).
They highlight eight major steps utilised by organisations. These steps
include:
• idea generation
• idea screening
• concept development and testing
• marketing strategy development
• business analysis
• product development
• test marketing and commercialisation.
According to Lambin and Schuiling (2012), the basic philosophy of this
sequential process is to go slowly, to avoid product failure and postpone
heavy spending until it is clear that the product concept will be successful.
However, Schnaars (1998, pp.168–70) mentions various reasons why
marketers have had to speed up this process in the last few years. These
include:
• competitive advantage not being sustainable
• increased competition in developed and emerging markets
• shorter product life cycles.
Thus, it is imperative that marketers focus on increasing the ‘speed to
market’ of its products. Some companies such as Apple have benefited
greatly from this doctrine. Apple did not take a long time to launch the
iPod and this was mainly because of the openness and speed demonstrated
by the company. Tony Fadell, an entrepreneur, approached Apple with an
overall idea for the iPod and within eight weeks came out with the iPod/
iTunes product solution. Apple hired Fadell to create and lead a 35-person
team and, within a short span of time, the team launched a very successful
product. This also brings in to focus another parallel development within
product-innovation research: open innovation as opposed to closed
innovation (Chesbrough, 2003).
126
The underlying assumption of the closed innovation model (see Figure

9.1 below) is that ‘successful innovation requires control’ (Chesbrough
2003). It is a logic that is strongly internally focused, since it is not
guaranteed that others’ technologies or ideas are available and of sufficient
quality (Chesbrough, 2003). This self-reliance is rooted in certain implicit
rules (Chesbrough, 2003) as stated below:
• A company should hire the best people.
• To ensure profits, a firm should discover, develop and market
everything itself.
• Being first to market requires that research discoveries originate within
the firm.
• Being first to market also ensures that the firm will win the
competition.
• Leading the industry in R&D investments results in coming up with
the best and greatest number of ideas and eventually in winning the
competition.
• Restrictive Intellectual Property management must prevent other firms
from profiting from the firm’s ideas and technologies.
Research Development
Firm’s
market
Cancelled ideas
Firm Boundary
Commercialised
ideas/innovations
Figure 9.1: Closed innovation model (based on Chesbrough, 2003).

However, as mentioned above, time to market and speed is now of the
essence and adopting a closed innovation model may slow down the
process for many firms. Firms such as Apple, acting in an environment of
rapid technological change, are often dependent on external enterprise
in order to generate radical innovations. Until recently, many firms
(for example, pharmaceutical firms) were completely reliant on a
closed innovation model since there was a fear that if they allowed
external people access to their drug innovation process, it would lead to
intellectual property related problems. However, many innovative firms
have successfully adopted open innovation, which can be defined as
an approach to innovation management (see Figure 9.2, below) which
involves ‘systematically encouraging and exploring a wide range of
internal and external sources for innovation opportunities, consciously
integrating that exploration with firm capabilities and resources, and
broadly exploiting those opportunities through multiple channels’ (West
and Gallagher, 2006, p.320).
127
Other firm’s market;

licence, spinoff
or divest
Internal
technology Research Development
base
Firm’s
market
Cancelled idea
External
Firm boundary
technology Commercialised
base ideas/innovations
Figure 9.2: Open innovation model (based on Chesbrough, 2003).
Why do some products diffuse better than others in the market?

Most new products fail to become commercially successful. According to
Gourville (2006), products fail at a remarkable rate of between 40 per
cent and 90 per cent (depending on the category). As an example, the VW
Beetle in its first avatar was a very successful product, but the Citroen 2CV,
which was launched around the same time and with a comparable design,
did not reach anywhere close to the cult status achieved by the Beetle.
Thus, if we use the metaphor of diffusion1 within the marketing context, 1 The spread of
some products diffuse more successfully within the market whereas something more widely.
others don’t diffuse as well. Diffusion theory is one of the most widely
held theories of communication within marketing (Wright and Charlett,
1995). According to Gatignon and Robertson (1985), diffusion literature
has developed across a number of disciplines to explain the flow of new
ideas and practices and the adoption of new products and services within
markets and across cultures.
According to Rogers (1983), the diffusion process consists of four key
elements: an innovation, the social system on which the innovation
impacts, the communication channels of that social system, and time.
According to Wright and Charlett (1995), diffusion theory’s main focus is
on the means by which information about an innovation is disseminated
to, or within, the social system and more specifically on mass media and
interpersonal communication channels.
Thus, the three main aspects within product diffusion are:
• Transfer of information about the innovation.
• Decision by customer to adopt.
• Eventual saturation of the market.
128
9.3 Modelling the rate of adoption of an innovation

9.3.1 Rogers diffusion curve
Various researchers have attempted to model the product diffusion process
and one of the first was Everett Rogers who in 1962 came up with the
‘diffusion curve’. This curve (see Figure 9.3) is based on the classical
‘bell-shaped’ normal distribution curve, which represents the number of
consumers adopting a product over time, and if a cumulative number of
adopters are plotted, the result is an S-shaped pattern (Wright and Charlett,
1995).
According to Rogers (1983, p.244), ‘many human traits are normally
distributed, whether the trait is a physical characteristic, such as weight
or height, or a behavioural trait such as intelligence or the learning of
information. Hence, a variable such as innovativeness might be expected to
be normally distributed’. Further, he defines innovativeness as ‘the degree to
which an individual or other unit of adoption is relatively earlier in adopting
new ideas than other members of a social system’.
Rogers (1983) mentions that personal interaction between adopters and
non-adopters creates learning within the social system and this leads to an
increase in the number of adopters over a period of time.
Rogers classifies adopters into five overall categories (as can be seen in
Figure 9.3 below) and these categories according to him reflect the overall
market. These categories are:
• innovators (2.5 per cent)
• early adopters (13.5 per cent)
• early majority (34 per cent)
• late majority (34 per cent)
• laggards (16 per cent).
Figure 9.3 shows that as successive groups of consumers adopt a product,
its market share will eventually reach a saturation level. Rogers stresses
that these adopters are ‘ideal types’ and the classifications are based on
demographic, socioeconomic, personality characteristics and in some way
are analogous to the clustering of consumers in a market segmentation
study (Wright and Charlett, 1995). For example, as highlighted by Wright
and Charlett (1995), innovators are ‘venturesome’ and tend to be better
educated, willing to take risks and are more socially mobile than their peers.
Thus, these characteristics may cause such innovators to be the first ones
to adopt the product. Rogers further adds that people can fall into different
categories for different innovations – an avid smartphone user may be an
early adopter of the latest mobile phone, but may be a late majority adopter
of another innovation (for example, electric cars).
Thus, from an operational marketing perspective, apart from first targeting
the early adopters, marketers should apply strategies that will enable the
flow of information between these early adopters and the other adopter
categories so as to generate word of mouth and help the process of product
adoption across categories. This is primarily because later adopters tend to
be more influenced by such communications within the social system rather
than broadcast media directly. It should also be remembered that greater
marketing resource is required to influence the early/late majority since
they are considered to be very measured and pragmatic in their purchase
decisions. However, targeting these categories (and in the process the mass
market) is an imperative for long-term sustainability of the business.
129
Innovators Early Early Late Laggards

2.5% adopters majority majority 16%
13.5% 34% 34%
Figure 9.3: Rogers’ diffusion curve.

Rogers does acknowledge that adopter profiles are product-specific;
however, he falls short of providing a method for predicting how these
profiles may vary across industries (Wright and Charlett, 1995). Also, the
personal influence assumption may not hold for low involvement products
that generate limited word of mouth communication (Gatignon and
Robertson, 1985). At the same time, one of the significant weaknesses of
Rogers’ approach is that since the model is based on a distribution about
the mean time of adoption, the calculation of the mean and standard
deviation, as well as the identification of adopter categories, cannot
take place until the diffusion process is completed (Wright and Charlett,
1995). This highlights a weakness from a marketing strategy perspective
(especially speed of decision-making) since marketers would be keen to
know adopter categories much earlier so as to influence them rather than
after the diffusion process is complete. Thus, for a marketing manager, the
focus is more on forecasting the innovation’s diffusion as early as possible
rather than deep into the diffusion cycle.
Product-based characteristics of diffusion

Rogers (1995) also highlights the important role played by product-based characteristics
in determining the successful diffusion of products into the market. These characteristics
are:
1. Relative advantage: ‘The degree to which an innovation is perceived as being better
than the idea it supersedes’ (p.212).
2. Compatibility: ‘The degree to which an innovation is perceived as consistent with
existing values and values of the potential adopter’ (p.224).
3. Complexity: ‘The degree to which an innovation is perceived as relatively difficult to
understand and use’ (p. 242).
4. Trialability: ‘The degree to which an innovation may be experimented with on a
limited basis’ (p.243).
5. Observability: ‘The degree to which the results of an innovation are visible to others’
(p.244).
9.4 Economic perspectives on product success

From time to time, you hear rumours about music artists and authors
buying their own albums and books to influence charts, sales or give them
away free to fans as promotion, etc. Similar accounts of attempting to
control the process of social influence occur elsewhere:
• In ancient Rome professional mourners were hired to follow a funeral
procession.
• Claque is a group of people hired to clap or heckle at a performance.
130
• In 1996, Disney invested in New York Times Square at a time when the
area had a bad reputation for drugs and criminal activity; many other
entertainment companies followed.
• Hennessey Cognac Co. hired professional models to order their
product at fashionable bistros in New York.
The reasons for these types of activity are varied. The two most intuitive
answers are:
• Informational effects of learning from others (namely, when we see
others doing something we may learn and partake in that activity as
well).
• Preference effects (that is, wanting to fit in). Seeing others purchasing
a product or doing something makes us want to do it as well.
However, these arguments cannot really explain why two very similar
products that emerge at the same time often have differing fates. There
are in-depth arguments as to why some products generate excess demand
or a queue and others do not.
9.4.1 Network externalities and bandwagon effects

Positive network externalities are the benefits accrued to a consumer from
being part of a network of users who consume the same good or service.
Maybe you buy a book or go to see a film not because it has an intrinsic
quality, but because you want or need to talk about it with others. This
is different from just wanting to fit in; externalities imply that there are
real benefits from being part of a large network. This in turn explains the
need for firms to move quickly and be the first to launch a product (so-
called ‘first-mover advantage’) and why we observe different outcomes
for seemingly similar products, where one fails and the other succeeds
tremendously. An important reason for this could be attributable to the
successful product’s capture of the network effect.
Writing over 60 years ago, Harvey Leibenstein (1950) analysed what he
called the ‘bandwagon effect’, by which he meant ‘the extent to which the
demand for a commodity is increased due to the fact that others are also
consuming the same commodity.’ It represented in his mind the desire of
people to purchase a commodity in order to get into ‘the swim of things’;
in order to conform with the people they wish to be associated with; in
order to be fashionable or stylish; or, in order to appear to be ‘one of the
boys’ (Leibenstein, 1950, pp.115–16).
Leibenstein was not too concerned with real world industry examples and
therefore never specified the types of goods that he had in mind, other
than to suggest that they were ‘fashion goods’. The bandwagon effect
remained largely unexplored for another 20 years or so. At that point,
economists interested in the development of telephone networks, which
clearly are subject to bandwagon effects, began to explore the issue in
some detail using modern game theory.
For example, Rohlfs observed in 1974 that:
The utility that a subscriber derives from a communications
service increases as others join the system. This is a classic case
of external economies in consumption and has fundamental
importance for the analysis of the communications industry.
Rohlfs then applied this insight to the origins and development of
communications networks. But it was not until the 1980s that researchers
began to explore these issues in the context of the economics of
standardisation. A very famous paper in this regard was Paul David’s
131
(1985) ‘Clio and the Economics of QWERTY’, which explained why it is

that the standard for keyboards in most countries is composed of a letter
layout that is actually suboptimal from the point of view that the most
common letters employed are separated from each other too widely (that
is, the top left-hand row of the keyboard has the letters QWERTY; when
was the last time you used these letters together?).
The reason for this seemingly random placement is that the original
mechanical typewriter would jam up when the arm used to print the letter
on the page hit another that was too close by. Hence, the need to separate
the letters most commonly used from each other so as to prevent jamming.
Today of course, there is no need to space the letters in this way, but since
several generations of users have already learned how to type using the
QWERTY keyboard, other placements like ‘Clio’, which cluster commonly
used letters together, have never taken off. This particular paper by
David stimulated considerable interest in the topic, with the result that
literally hundreds of papers devoted to network industries and so-called
bandwagons have been published.
Today a bandwagon effect is defined as a positive network externality
in which an individual demands a good partly because many other
people have the good as well. It can occur for two reasons. First, it can
occur when people consume a good/service if they get positive benefits
from knowing that others have consumed it as well. This refers to the
‘sociological’ need to be in style, to have a good because almost everyone
else has it, or to indulge in a fad. The bandwagon effect is associated
with fads and fashions, but a positive network externality can arise for
other reasons. The ‘intrinsic’ value of some goods to their owners is
greater, the greater the number of other people who own the goods. The
case of ‘the stock purchase’ is an obvious one. My stock is worth more
when others purchase it as well. But it is also true in consumer goods: if
I am the only person to own a DVD player, it will not be economical for
companies to produce DVDs, and without DVDs, the DVD player will be of
little value to me. The more people who own DVD players, the more DVDs
that will be produced and so on, so companies may want to lower prices,
or give initial stock away to initial customers, so as to induce a bandwagon
effect.
9.4.2 Sources of network effects (direct and indirect positive network

externalities)
As noted above, network externalities exist when the value of a product
to any user is greater the larger the number is of other users of the same
product. There are basically two types of such externalities:
• Direct network externalities exist when an increase in the size of
a network increases the number of others with whom one can
‘communicate’ or benefit from directly.
• Indirect network externalities exist when an increase in the size of a
network expands the range of complementary products available to
the members of the network.
Many industries exhibit either or both types of positive network
externalities. Some examples are:
• Social networking websites such as Facebook (Bryson et al., 2008),
which depend critically on direct externalities related to the number
of people on the electronic network. In order for members to receive
full benefits from being on the social networking site, membership size
increases the individual benefit to the member.
132
• Wikipedia, which is an online encyclopedia, that depends on direct

externalities related to users who adapt, edit and create content. The
more users, the more complete and authoritative the content becomes.
• Communication and information technology, where the network
externalities are direct in that the value that any user places on
subscribing depends on the number of others with whom they can
communicate.
• Car dealerships, where the network externalities are indirect in that
the larger the dealer network the greater the number is of dealerships
at which a car can be serviced, and hence the greater the value is of
the dealer network to any user.
• Computer operating systems, for example, the Apple network or
Windows operating systems, where there are direct benefits associated
with simpler file transfers and indirect benefits associated with access
to a wider range of applications’ software as the size of the network
grows.
• High-definition DVD players, which exhibit what are probably small
direct benefits from the ability to exchange DVDs and much larger
indirect benefits from being able to purchase or download a wider
variety of recorded film and television media that employ the same
format.
9.4.3 Snob goods (negative network externalities)

The ‘snob effect’ is another similar application of network externalities,
except in this case it works the other way. The network externalities here
are negative. The quantity demanded decreases when more people have
the product. Expensive cars and high-end fashion brands are examples
of products that enjoy a snob effect, a negative network externality that
refers to the decrease in the quality of a good that is demanded as more
consumers buy it. It is important for some consumers to be one of the few
to own a particular type of product/brand and thus snob effects may arise.
9.5 Informational cascades

There is a theory known as informational cascades that may explain
why some products take off and others ‘drown’, even though viewed from
the outside the products may appear almost identical.
Let us begin hypothetically with three people: Aaron, Barbara and
Clarence. Each decides in sequence to adopt a certain action. The action
is adopted with information drawn from a signal (which is either high or
low). Aaron chooses action V, based on a high signal. Barbara now has two
pieces of information upon which to base a decision; the private signal
and the signal inferred from Aaron. We know that Aaron would not have
chosen action V if the signal had been low.
Barbara now has to decide, on the basis of her private information and
the decision of Aaron. If she receives a high signal about action V, then it
is two pieces of high (H) information and her decision is easy. However, if
she receives a low (L) private signal, then she has one H and one L piece
of information. Presumably, she would flip a coin to decide, and in this
case it is H.
Now it is the turn of Clarence, and he has three possibilities to deal with:
both predecessors adopted, both rejected or one adopted and the other
rejected. In the first case, where both are adopted, he adopts (two H
signals outweigh even one private L signal). Clarence’s decision provides
133
no new information to anyone coming after. So, now a fourth person,

Donna, adopts regardless of her own private signal. Everyone after and
including Clarence is said to be in an informational cascade and following
the herd. In this case, the cascade was up because the first and second
person chose action V (namely to purchase the good).
What the model basically states is that rather than go through a costly
process of searching to try to find out whether a product is of high quality
or not, it may make sense instead to observe what others do in the market
and follow their behaviour. This is especially true if the information about
whether the decision is correct or not is costly to obtain and the consumer
believes that others are more informed about the decision.
There are in fact four conditions under which the cascade model works
very well to explain why some products succeed in generating huge sales
and cascade-type behaviour.
The type of product/service/adoption or investment decision.
Any decision which is taken infrequently and where the outcome is
uncertain, that is, ‘an experiential decision’.
For the purchase decision of products or services in which quality is hard
to judge before purchase and that you consume infrequently. These goods
are called experience goods.
There is also another, similar class of goods and services, for which this
theory works even better. These goods are known as credence goods, and
these are goods in which even after purchase, a typical consumer requires
expert opinion to determine quality (for example, financial investments,
medical operation, car mechanic repair).
The type of market setting. Paradoxically, when faced with too much
choice, persons are more likely to follow external cues of quality and
thereby be more likely to queue behind an existing standard.
The implication is that if you give consumers a bit less choice, they will
rely on their own sampling history and will not have to queue up for as
long.
The individualistic/collective nature of a society. The more
individualistic and less tied to social constraints consumers are, the less
social conformity will be present, but the more ‘herding’ will occur via the
cascade effect.
The type of consumer. The more informed and knowledgeable
consumers are, the less likely it is that a cascade effect will occur. There
are several important implications of the cascade model for marketers.
9.5.1 Differing information precision and fashion leaders

The importance (and in some cases drawback) of starting with the
best informed has not been lost. Why, for example, do judges in the US
Army court-martials office, vote in reverse order of seniority? This is a
convention designed to reduce the natural influence of older judges on the
decisions of junior judges.
There is also a danger of a bad or duplicitous ‘fashion leader’ causing
others to fall into a negative informational cascade. Jack Grubman, a
telecommunications analyst for Salomon Smith Barney (now Morgan
Stanley Smith Barney LLC), misled clients and Wall Street Journal readers
on which shares to buy, and in part caused the famous Worldcom and
Global Crossing scandals (see the case study below); this is an example of
where following others’ actions and recommendations can be dangerous.
134
9.5.2 The importance of the first decision

Social psychologists consistently find that people defer to and imitate the
actions of those who appear to have expertise. This probably underlies
the success of product endorsements in which athletes are seen to use a
particular brand of athletic shoes or tennis racket (for example, Roger
Federer’s association with Nike).
9.5.3 Differing preferences and pay-offs

Above we saw the impact of someone observed to have expertise
endorsing a product (Roger Federer and Nike) leading to a bandwagon
effect. What if you cannot observe the type of first mover? Trying to
understand that initial decision is hard – and perhaps even harder
for the person undertaking the initial decision. Indeed, do you have a
clear understanding of yourself? Why do you choose one action over
another? Take the case of a software programmer who may commit to a
programming language. This decision may be because he/she:
• is optimistic about the software’s prospects (favourable signal)
• is tolerant of the risks (heterogeneous preferences)
• thinks the firm’s profits will be high if the programming language
catches on (heterogeneous pay-offs)
• made a mistake (imperfect rationality).
An individual making a decision after the first mover cannot be sure why
they adopted the software and this makes the decision ‘noisy’. Cascades
can still form under these conditions but the point is that they may take
longer when we have unobserved preferences and pay-offs.
9.5.4 Costly information and network externalities

In our first example with Aaron, etc., we assumed that private information
was free. But what if private information is costly? Then in our example,
cascades can start immediately. In other words, Barbara would have
followed Aaron’s action without looking at her own private information,
if doing her own research would have been too costly.
An interesting and very pertinent application of the above occurs in
the financial sector. Frequently investors lack information and rely on
independent analysts to make buying or selling decisions. The case study
below shows how cascades are dependent on costly information and the
influence of a few important fashion leaders, who may or may not be
right. The case should serve as a warning to those who believe that share
prices always reflect the best information of the market at every point in
time.
Case study: Playing follow the leader can be risky business

Should investors do their own homework, spending hours researching firms or should
they rely on specialised analysts in the financial field to make recommendations about
what to buy and sell? Based on the theory of cascades and what you are about to read,
you may think twice about playing follow the leader with your investments. What makes
some stocks more valued than others may be the result of a few influential ‘fashion’
leaders, whose credibility is often suspect.
In the late 1990s, telecommunications stocks enjoyed a terrific rise in their value. But
when the boom turned to bust between 2000 and 2002, the investment dollars lost were
extreme: more than half a trillion dollars (US) in market value were lost in less than two
years. The telecommunications overexpansion and abrupt contraction reverberated across
the entire US economy.
135
As Salomon Smith Barney’s telecom analyst, Jack Grubman was at the heart of the
telecom stock market meltdown. He earned about $20 million a year, making him Wall
Street’s highest-paid analyst ever. In the years leading up to the telecom boom and bust,
he forged a reputation for penetrating analysis. He developed relationships with all the
key players in the sector and had access to the best information. He had influence over
companies and money managers and came to be seen as the authority of all that was
going on in global telecom.
His judgments could make a stock fall or be successful. If Jack said it was good, it had
to be good. Indeed, his investment column in the Wall Street Journal also persuaded
hundreds of thousands of ordinary readers to follow his investment advice for the sector.
And his advice as a supposedly dispassionate analyst usually was the same: buy!
But Grubman wasn’t just any analyst, especially given his distinctive role in the industry’s
rise and fall. His stature helped vault Salomon Smith Barney into a powerful position in
telecommunications just as it was taking off. Behind the scenes, he also advised CEOs
on takeovers. Whenever Grubman was quizzed about his closeness to the firms he was
analysing, he would always respond that what used to be viewed as a conflict was
now a synergy. His definition of the word ‘objective’ was simply another word for being
uninformed.
Investors hung on his every utterance. Salomon Smith Barney’s army of nearly 13,000
brokers shared his selections with clients. When Grubman’s email updates hit the news
wires, they were picked up on television stations such as CNN and CNBC. And when he
spoke, stocks moved.
According to Elliot Dorbian – a former broker at Salomon who is now president of AJ
Investment Advisors – Grubman’s wonderful words about a company were like
‘a narcotic’ in that everybody wanted to hear them.
In one case, after Grubman raised his price target on fibre-optic networker Level 3, its
stock rose 12 per cent, increasing its market value by $4.9 billion in only one day.
Grubman continued to champion the highly risky telecommunications sector even after it
began to plummet. In spring 2001 he issued a report titled ‘Grubman’s state of the union:
does he ever stop talking?’ that proclaimed, ‘Over the next 12 to 18 months, investors
will look back at current prices of the leading players and wish that they had bought
stock at these prices.’ Of the 10 companies he picked, five now trade below $1 a share.
Three of those – Global Crossing, McLeodUSA and Winstar Communications – filed for
bankruptcy.
Perhaps no telecommunications company is more emblematic of the industry’s collapse,
and Grubman’s role, better than Global Crossing. It was founded in 1997, it had
the grandiose plan of laying all the fibre-optic pipes over which data would be sent
worldwide. In 1998 Salomon Smith Barney helped take the firm from a small private
company to a public one trading in stocks, jointly raising $397 million. Grubman’s
ties to the firm were tight. He advised it on successful buyouts of other firms in the
industry. From September 1998 through to June 2001, Grubman issued at least 16 buy
recommendations on the stock. At first the stock soared, hitting a high of $61.38 in
1999. At that point the stock was trading at 33 times the company’s sales, but Grubman
wasn’t worried. In early 2000, when the stock began to slip, he continued to recommend
buying the stock. In April 2001 he recommended it again, this time in a report entitled
‘Don’t panic: emerging telecom model is still valid.’ A month later, he reiterated his buy
rating, calling Global Crossing one of ‘the new breed’ and ‘well funded’.
The reality of Global Crossing’s finances, for those that cared to look and do their own
research, was quite different. In October 2001, when the stock had collapsed to around
$1 and the firm was on its fifth CEO in four years, Grubman finally cut his rating from buy
to neutral. On 28 January 2002 Global Crossing filed for bankruptcy. In total, more than
$55 billion in paper wealth had evaporated. The day after the bankruptcy filing, Grubman
issued a short note saying that he had discontinued coverage of the stock.
136
Who’s ultimately to blame? Of course, investors must accept their share of the blame.
Kent Womack, a professor of finance at Dartmouth, who studies analysts’ conflicts of
interest has his opinion. He believes that when consumers watch a television commercial
for a consumer product, they usually are aware that companies are putting the most
positive spin on their products possible. Consumers, in other words, are naturally
sceptical. Professor Womack’s point is that investment research should be no different,
consumers need to be as sceptical or even more so of the investment advice provided by
people like Grubman and the institutions they work for.
In short, consumers should do their own homework and stop following the leader
whenever important investment decisions are at stake.
(Case study created using data from various news stories in MoneyWeek magazine, The
New York Times and Time.)
9.6 What is a product life cycle?

Life cycle is among the most widely used concepts in business and in social
sciences in general. According to O’Rand and Krecker (1990), the idea of
the life cycle emerged at the end of the 19th century as a complex notion
incorporating earlier ideas at the organismic or individual level about
inheritance and development and at the species or population level about
adaptation, survival and extinction. Thus, the variety of meanings and uses
is indicative of the concept’s wide appeal as a framework for the study
of development. Extending the life cycle concept within marketing, it is
assumed that every product launched in the market follows a certain path.
This path can be short or long, but according to researchers follows five
distinctive stages, as shown below and in Figure 9.4).
• Introduction: The uptake of a new product is often slow. There are
several reasons for this. Technology is new and uncertain. Distributors
still have contracts for older products. Buyers are still unaware of the
new product or are uncertain of its benefits. Competition from other
brands and products is low at this stage. For example, in the initial
stages of the home personal computer, companies like Olivetti were
major players while giants like IBM were more concerned with large
mainframe and institutional computers.
• Growth phase: Growth of sales occurs at an accelerating rate. The
causes of growth can be varied but one can surmise that if first users
are satisfied they then pass on favourable word-of-mouth for the
product. Wider distribution and more visibility increase sales. More
competitors enter but actually expand the market. For example, the
growth of car technology in the early 20th century allowed more than
200 domestic car companies to exist in the USA in 1905 compared to
only a handful of domestic car manufacturers today.
• Shake-out phase: Demand is still increasing but at a slower rate.
The weakest competitors are leaving the market. Concentration and
merger activity begin. Airlines and passenger air travel witnessed
numerous mergers and failures following the terrorist attacks on 11
September 2001, which drastically reduced passenger travel.
• Maturity: Market penetration is now very high. Most consumers
have bought the product. Technology has stabilised and only minor
modifications are possible. There is little room for growth but neither
is there much decline.
• Decline: New, more technologically-advanced products make their
appearance and substitute for the original product. Changes in the
consumers’ needs or external changes (perhaps in complementary
137
technology) could make products obsolete. For example, if the price

of petrol increases, this may make obsolete the internal combustion
engine and cause permanent decline in petrol-powered car sales.
Originally, the product life cycle (PLC) was conceived as the quantitative
expression of unit sales volume of a specific product category (or class)
from introduction to market demise. Product category (or class) refers
to the total product line. For example, televisions would be a product
category, whereas LCD or LED televisions are substitutable forms of the
product. As such, the new product form will take over a portion of the
product category; later it may also get displaced by another form of the
product.
The PLC is considered as a useful tool for understanding a product’s
success or failure. It is usually represented in a diagram that relates time
on the horizontal axis to some measure of product success (such as sales)
on the vertical axis. In Figure 9.4, the diagram shows the five stages in a
product’s PLC. We shall see in a moment that as product markets grow,
mature and decline over time, a firm’s marketing strategy must evolve
to the changes in a buyer’s behaviour and the changing competitive
environment. Because a PLC is dynamic and involves two variables (time
and sales) it is best shown graphically.
Sales
1 2 3 4 5 What happens next?
Time
Figure 9.4: The product life cycle.
In most cases the PLC’s fifth stage is shown with sales declining to
zero. However, what happens after a product begins to decline is not
predestined. Indeed, as we shall see below, firms can do much to relaunch
the product or forestall its decline in this last stage. Indeed, a sixth stage is
possible with two possible outcomes:
• Re-launch or demise: Some technologies and products find new
uses in different markets or contexts. For example, the original Mini
Cooper was first introduced in the late 1950s. By 1990, however,
the Mini was scheduled for decommissioning due to lack of sales. It
was not until BMW bought the brand from the Rover Group and re-
launched it as a modern fuel-efficient icon that it survived. Otherwise
it would have been a dead brand relegated to the history books.
9.6.1 Real-world application of the PLC

An important feature to note about the PLC is that despite its name, it
can also be used to account for what happens to a specific technology,
or what happens in an entire industry or market segment over time. As
an example, examine Figure 9.5 to see what has happened to the global
market for recorded music since the 1970s.
138
Sales
LP
CD
45s
Tapes
1970 1975 1980 1985 1990 1995 2000 2005

Time
Graph created using data from Lambin (2000, p.284).

Figure 9.5: An example of PLC behaviour in the audio market.
There are several important points of interest in Figure 9.5. Notice, for
example, how tapes were given a ‘second life’ when CDs were introduced.
Why? The answer is simple. Blank tape cassettes (before the advent of
digital downloading and mp3 technology) were complementary to CDs.
This was not the case with vinyl LPs and 45s. These were substitutes and
overtaken by CDs.
But what is missing from this PLC diagram for the recorded music
industry? Looking at Figure 9.5, it would appear that recorded music has
reached its decline stage and will disappear. Perhaps people have stopped
listening to music? But is this really the case, or rather, have consumers
simply begun switching to a new technology in order to sample recorded
music? The answer, of course, is that digital technology in the form of
the mp3 and digital downloading has made listening to music more
convenient and cheaper than the old format as represented by the CD. So
the answer is not that the recorded music industry is dying, but that the
old way of obtaining music has changed and has been replaced by a new
form.
9.6.2 Are other PLC profiles possible?

One question is whether the PLC seen in Figure 9.4, with its neat and
scripted five stages, is true for every product and service. The answer is
no. There are many variations of PLC profiles: below we describe three
possible PLC profiles, and in keeping with our recorded music theme,
describe a musical genre and artist that fit with each of the profiles in
Figure 9.6.
139
Sales
High-learning product
Time
Sales A fad: low-learning product with a

short shelf-life
Time
Sales Low-learning product with a
long shelf-life
Time
Figure 9.6: Different PLC profiles.
9.6.3 Applying PLC profiles to music genres and artists

A high-learning product may be very new to the market and has many
attributes and features that are hard to observe. In the case of a product
like software or an epic novel, it may be complex and involve a large
commitment in effort and time to appreciate its value. This means that
consumers have to take time to learn about the product and sample it
before purchasing. Sometimes the typical consumer of such a product is
older than average. In terms of music, what genre is emblematic of this
type of PLC profile? Typically we associate classical music with complexity
and subtlety that requires a listener to exert patience and time to
appreciate fully.
Classical music, a form of music developed in Western Europe with a
long tradition (and whose central norms became codified from the 16th
century), is still listened to by fans today. Wolfgang Amadeus Mozart
(1715–1774), even had a burst of popularity almost two centuries after his
death when the film Amadeus became a huge success in 1984. Although
sales of classical music are not comparable to those of contemporary
popular bands, classical music sells consistently. Typically, the buyer
of classical music is older, again reflecting possibly the difficulty in
immediately grasping all the subtlety and complexity of classical music.
A fad is a product with a quick take-off and an equally quick decline in
sales. It is known as a fad because of its properties of being purchased
almost blindly without regard to real intrinsic needs on the part of the
consumer or because of attributes that are not truly needed or innovative.
A product with a quick take-off and equally quick decline also typically
has attributes that are easy to sample, see and inspect and so consumers
do not have to learn much about it before purchasing. What kind of
musical genre or performer conforms to this kind of profile? Typically the
music that appeals to a very young audience has this faddish PLC profile.
140
Many artists that cater to younger audiences with a less well-developed

appreciation for musical complexity often have brief careers. Do any of
you remember the biggest hit of 2003? It was a song called ‘Not gonna get
us’ by a Russian duo named tATu. Still don’t remember? Well, that is the
nature of a faddish good – it’s here today and gone tomorrow.
Finally, a low-learning product with a long shelf life describes a product
that has attributes of a fad, in that it does not take the consumer long to
start buying the product, but it also has a staying power in the market of
the kind seen with a high-learning product. Which band in recent history
has had this kind of profile? In the autumn of 2000, the Beatles had the
number one album in the world with their collection of number one hits.
What makes this interesting, of course, is that the Beatles first appeared on
the scene almost 40 years earlier. At the time of their first hit single, The
Beatles had the appearance of a fad, but their music has continued to sell
long after the first fans purchased their music. The headline below was
typical of many articles written at the time:
Beatles album is Number One around world…in 2000!
‘Beatlemania; returned 30 years after the group broke up – their
greatest-hits album topped the charts in 30 countries around the
world in the autumn and winter of 2000. Just five weeks after
being released, the album of their 27 chart hits sold 12 million
copies in the United States alone. Billboard magazine said:
‘Decades after their original releases, these songs still resonate
with a potency and vibrancy that simply doesn’t exist in a lot of
today’s pop music. Truly the best from the best.’
How did this happen?According to Howard Goodall, a composer and
musicologist from Britain, the reason for the long shelf life of Beatles’
recordings is that their music combined elements of popular forms (which
have easy-to-like melodies and arrangements) with more complicated
musical structures of the classical tradition. It was this unique combination
that makes Beatles’ music popular year after year. Goodall argues that
classical composition lost its way in the years leading up to the Beatles’
popularity, by breaking with the traditional ‘language’ of Western music
that listeners understood. The Beatles, he says, threw music a lifeline
by building on foundations abandoned by the modernists (see: www.
howardgoodall.co.uk/).
Activity 9.1
Next time there is a concert in your town or city, examine the crowd and attempt to form
a profile of the typical audience member. Does it conform to the type of music being
played?

This chapter started with a discussion around product innovation and
the typologies of such innovations. We then established linkages between
innovation and the new product development process and highlighted
the importance of open innovation over closed innovation models. As the
new product development process has been covered extensively in Kotler
and Armstrong, we discussed other important complementary aspects.
The discussion then moved on to how some products diffuse better than
others in the market and looked at some conceptual understanding in
this area (mainly Rogers’ diffusion curve). Thereafter we brought in some
economic perspectives on product success such as bandwagon effects,
141
network externalities and informational cascades. Finally, this chapter

discussed another area which has been discussed extensively by Kotler and
Armstrong and thus our approach was complementary to theirs.

• discuss the new product development process and the associated issues
of product innovation and diffusion
• discuss how marketers can model the rate of adoption of an innovation
in the market
• discuss the economic perspectives on product success especially
network externalities, bandwagon effects and informational cascades
• discuss the PLC concept, the PLC types and describe the five stages
involved
• explain how a firm’s response or behaviour differs at each stage of the
product life cycle.

1. How can service marketers make use of the concepts of network
externalities and bandwagon effects to market their services?
(25 marks)
2. a. Can a product be revived after its PLC profile suggests it is in the
decline stage? (10 marks)
b. Explain the new product development process using examples
where appropriate. (15 marks)
142
Chapter 10: Promotion
10.1 Introduction
In this chapter we start with a discussion of a hierarchy of effects
model linked to marketing communications, which postulates how
consumers respond to marketing communications. We then examine
the different elements of the promotion mix. Emphasis is placed on the
difference between the cognitive, affective and behavioural aspects of
communications. This chapter ends with a discussion of communications
and relationships that emphasises issues initially raised in Chapter 7 of the
subject guide about the ways in which relationship–based exchanges can
be different to the alternatives.

• provide an overview of the effects that marketers can achieve with
marketing communications
• give some insights into the outcomes associated with different
elements of the communications mix
• relate marketing communications to the broader topic of relationships.

• discuss what is meant by promotion and the promotional mix
• describe and evaluate the various types of promotional techniques and
tools
• relate the transactions/relationships distinction to marketing
communications.

Pearson Prentice Hall, 2012) Chapters 14, 15 and 16. Note: Chapters 14
and 15 should be read in their entirety whereas in Chapter 16 the section
on ‘Managing the sales force’ can be skipped.
and advertising effectiveness’, International Journal of Advertising 30(5)
2011, pp.889–914.

Adman, R. Morris Hite’s methods for winning the ad game. (Dallas, TX: E-Heart
Press, 1988).
Berger, J., A.T. Sorensen and S.J. Rasmussen ‘Positive effects of negative
publicity’, Marketing Science 29(5) 2010, pp.815–27.
Buil I., L. de Chernatony and E. Martinez ‘Examining the role of advertising
and sales promotions in brand equity creation’, Journal of Business Research
66(1) 2013, pp.115–22
Chandon, P., B. Wansink and G. Laurent ‘Hedonic and utilitarian consumer
benefits of sales promotions’, Marketing Science Institute Working Paper
1999, pp.99–109.
Dichter, E. ‘How word of mouth advertising works’, Harvard Business Review
44(6) 1966, pp.147–61.
143
Duncan, T. and S.E. Moriarty ‘A communication-based marketing model for

managing relationships’, Journal of Marketing 62 1998, pp.1–13.
Erdem, T., M.P. Keane and B. Sun ‘The impact of advertising on consumer
price sensitivity in experience goods markets’, Quantitative Marketing &
Economics 6 2008, pp.139–76.
Finne, A. and C. Grönroos ‘Rethinking marketing communications: from
integrated marketing communication to relationship communication’,
Journal of Marketing Communication 15(2–3) 2009, pp.179–95.
Gullett, J., L. Do, M. Canuto-Carranco, M. Brister, S. Turner and C. Caldwell
‘The buyer-seller relationship: an integrative model of ethics and trust’,
Homer, P.M. ‘Relationships among ad-induced affect, beliefs and attitudes –
another look’, Journal of Advertising 35(1) 2006, pp.35–51.
Hutt, M., B. Walker and G. Frankwick ‘Hurdle the cross-functional barriers to
strategic change’, Sloan Management Review 1995, pp.20–22.
Keller, K.L. Strategic brand management: building measuring and managing
brand equity. (Englewood Cliffs, NJ: Prentice Hall, 1998).
Kozinets, R.V., K. de Valck, A.C. Wojnicki and S.J.S. Wilner ‘Networked
narratives: understanding word-of-mouth marketing in online
communities’, Journal of Marketing 74 2010, pp.71–89.
Lasswell, H. ‘The structure and function of communication in society’, in
Bryson, L. (ed.) The communication of ideas. (New York: Institute for
Religious and Social Studies, 1948) pp.37–51.
Lavidge, R.J. and G.A. Steiner ‘A model for predictive measurements of
advertising effectiveness’, Journal of Marketing 25(4) 1961, pp.59–62.
Liu, Y. ‘Developing a scale to measure the interactivity of websites’, Journal of
Advertising Research 43(2) 2003, pp.207–16.
Liu, Y. and L.J. Shrum ‘What is interactivity and is it always a good thing?
Implications of definition, person, and situation for the influence of
interactivity on advertising effectiveness’, Journal of Advertising 31(4) 2002,
pp.53–64.
Mehta, N., X. (Jack) Chen and O. Narasimhan ‘Disentangling the multiple
effects of advertising on brand choice decisions’ Marketing Science 27(3)
2008, pp.334–55.
Nunes, J.C. and C.W. Park ‘Incommensurate resources: not just more of the
same’, Journal of Market Research Vol.XL 2003, pp.26–38.
Palazón, M., V.E. Delgado-Ballester ‘Sales promotions effects on consumer-
based brand equity’, International Journal of Market Research 47(2) 2005,
pp.179–204.
Raghubir, P., J.J. Inman and H. Grande ‘The three faces of consumer
promotions’, California Management Review 46(4) 2004.
Schoorman, F.D., R.C. Meyer and J.H. Davis ‘An integrative model of
organizational trust: past, present and future’, Academy of Management
Review 32(2) 2007, pp.344–54.
Smith, R.E., J. Chen and X. Yang ‘The impact of advertising creativity on the
hierarchy of effects’, Journal of Advertising 37(4) 2008, pp.47–61.
Strong, E.K., Jr. ‘Theories of selling’, Journal of Applied Psychology 9 1925,
pp.75–86.
Wilmshust, J. The fundamentals of advertising (London: Published on behalf
of the Institute of Marketing and the CAM Foundation, 1985) [ISBN
0750615621].
Wilson, D. ‘Deep relationships: the case of the vanishing salesperson’, Institute
for the Study of Business Markets, Pennysylvania State University, Report
10-1999.
144

In this chapter we will examine promotion, which is also referred to as
marketing communications. Advertising is only one of the components of
the promotional tool kit. There’s a ‘communication/persuasion’ component
of promotions (namely, advertising, PR, etc.) and an ‘incentives’ portion of
promotions (that is, price discounts).
This chapter will not attempt to replicate or distil the Kotler and
Armstrong approach, which is focused on the design of a proper marketing
communications mix for the firm. Instead we will explain some important
phenomena observed in the field regarding the promotional and
advertising behaviour of firms.
10.2 What is promotion?

The American Marketing Association defines advertising in the following
way:
The placement of announcements and persuasive messages in

time or space purchased in any of the mass media by business
firms, nonprofit organizations, government agencies, and
individuals who seek to inform and/ or persuade members of
a particular target market or audience about their products,
services, organizations, or ideas.
www.marketingpower.com/_layouts/Dictionary.aspx?dLetter=A
It is important to pay attention to such definitions because they identify

the essential characteristics of a concept and also give some indication of
its important features. So, in this instance, the definition makes clear that
advertising is paid for, that it can be used by a variety of organisations
and that it can perform functions ranging from announcing, informing
and persuading. It is useful to consider these points because they can help
distinguish advertising from other elements of the promotion mix.
As well as advertising, other promotional mix tools include sales, public
relations, personal selling and direct marketing. These are explained and
defined in greater detail in Kotler and Armstrong (2012, p.426).
The key to making the promotional mix effective is the implementation
of an integrated marketing communications strategy, whereby a ‘firm
carefully integrates and coordinates its many communication channels to
deliver a clear, consistent, and compelling message about the organisation
and its product’ (Kotler and Armstrong, 2012, p.429).
We start by looking at some of the basic concepts in communication.
The traditional communication model (Lasswell, 1948), shows how a
marketer’s message passes to their intended audience (Figure 10.1).
The marketer is referred to as the source of the message, who encodes
it using images and language that may attract the audience’s attention.
The marketer also chooses the channel or medium through which the
message is transmitted, with noise that interferes with the communication
processing, a receiver (usually a potential customer) decodes the message,
and provides feedback that sends the receiver’s response back to the
source.
145
SAYS TO
WHO? HOW?
WHAT? WHOM?
Encodess Message Decodes

Sender Receiver
messages
es Media message
Noise
FEEDBACK RESPONSE
Figure 10.1: The Lasswell Model (adapted).
According to Schramm (1973. p.38) information is ‘the stuff of
communication,’ and more precisely is defined as ‘whatever content will
help people structure or organise some aspects of their environment that
are relevant to a situation in which they must act.’ According to Duncan
and Moriarty (1998), information helps decision-making since it reduces
uncertainty. As a result the processing of information by customers and
its management, integration and control by marketers has been of central
interest to marketing communication. Having seen the process by which
communication can be transmitted, we will now look in a little detail at
how it can affect customers.
10.2.1 Hierarchy of effects

The hierarchy of effects models attempt to explain how audiences process
the communications that they receive. The value of these models is that
they allow the marketer to acknowledge that potential audiences may
need to follow a certain number of steps before they actually make a
purchase. One of the earliest and simplest of such models is referred to as
AIDA (Strong, 1925). The acronym stands for attention, interest, desire
and action. AIDA was conceived for use by salespeople whose challenge
was to attract the potential customer’s attention, engage their interest in
the marketing communication and thereby engender desire for the product
or service and ultimately lead the target to action, purchasing the product.
Lavidge and Steiner in 1961 developed a hierarchy of effects model, which
was designed to help advertisers with communications strategies:
• awareness
• knowledge
• liking
• preference
• conviction
• purchase.
This particular model saw advertising as moving people ‘up a series
of steps’. People at the bottom of the steps have no awareness of the
existence of the product or service, slightly higher up are those who are
aware of the existence of the product (awareness), but who have no
intention to buy. Higher still are people who know what the product is for
(knowledge). On the next step are people who have both knowledge and
also a positive attitude (liking). A higher degree of liking will distinguish
those people who have a ‘preference’ for a particular brand. Coupling
146
preference with a desire to buy gives people ‘conviction’. At the top of the
steps are those people who consummate their conviction with a ‘purchase’.
According to Smith, Chen and Yang (2008) these models describe the
stages that consumers go through while forming or changing brand
attitudes and purchase intentions. Duncan and Moriarty (1998) point
out that information-flow, processing and sharing are relevant to both
consumer behaviour and communications. If marketers can understand
how information is received and processed by customers, they can be
better placed to design the way in which it is communicated. There are a
number of such models and the common theme underlying them is that
a consumer’s response process can be divided into sequential stages; in
broad terms these are:
• Cognition – which can involve, attention and/or learning.
• Affect – where consumers’ attitudes are influenced.
• Intentions (behavioural) – which involve actions such as
recommending a brand or purchasing it.
5 stage buyer New Product Lavidge and AIDA

process Adoption Steiner
Cognitive Problem recognition Awareness Awareness Awareness
Affective Information search Interest Knowledge Interest
Evaluation Evaluation Liking Desire
Behavioural Purchase Trial Preference Action
Adoption Adoption Conviction
Purchase
Purchae
Figure 10.2: Different hierarchy of effects models.

The Lavidge and Steiner and AIDA models referred to above are shown
in Figure 10.2. For ease of reference and to show that the notion of
the hierarchy of effects has applications wider than just marketing
communications, we also show the five stage buyer process model (which
shows the stages consumers can pass before buying a complex product/
service) and the new product adoption process model. The five-stage
buyer process model and the new product decision process model are
explained in Chapter 5 of Kotler and Armstrong (2012). The Lavidge
and Steiner model is referred to as the ‘Buyer-Readiness Stages’ model
by Kotler and Armstrong and is covered in Chapter 14 of their book. You
should note that while the marketing communications models (Lavidge
and Steiner and AIDA) provide implications for the communications mix,
the other two models have implications for the entire marketing mix used
by marketers.
The main criticism of these models is the linearity and chronological
depiction of the consumer response process. Different advertising
messages may alter the consumer response sequence, and some of the
phases may therefore overlap or may even be omitted, or the audience
may remain passive (Wilmshurst, 1985).
147
10.3 Advertising
We can now turn our attention to the way in which marketers can use the
hierarchy of effects (HoE) in the design of marketing communications.
According to Smith, Chen and Yang (2008), typically in HoE models, in the
first stage, the customer has no awareness of the brand being advertised.
Marketers therefore need to attract the customer’s attention, so that they
will give consideration to information about the brand being promoted. If
the advertisement is of interest to the customer it will hold their interest
so that the customer establishes a ‘link between the new brand and the
product category’ (Smith, Chen and Yang, 2008). This link is important
because the next time the customer identifies a need for a product within
that category, they will consider this brand as well. The next stage is for
the marketer to help the customer learn and remember the claims made
in the advertisement – which will ultimately form the customer’s brand
beliefs. If the brand is associated with features that the customer considers
are attractive, then the customer will have a positive opinion about the
brand. HoE models can include a stage that involves people accepting
the claims made in an advertisement (simply being told them does not
necessarily mean that the customer will accept them). Acceptance is based
on people comparing messages to their existing beliefs and values. The
cognitive response to advertising is often negative because customers are
known to discount those sources of information, which have a financial
incentive to make a claim for a product or service (for example, when we
know a salesperson is working on a commission basis we are less likely to
believe their recommendations than if the same recommendation is made
by someone who we know is not being paid). Creating favourable brand
attitudes is important since it will lead to brand preferences. The final
stage in HoE models involves intention, where the customer moves past
liking the product and prefers it to alternatives and includes behaviours
such as recommending or buying the brand.
10.3.1 Advertising effectiveness

Having seen the relationship between advertising and the hierarchy of
effects we will now look in more depth at the way in which advertising
communications can be made more effective.
There are three main types of consumer response to advertising (cognitive,
affective or behavioural/conative) and marketers can stimulate them
in different ways. A cognitive response can be elicited via information,
whereas an affective response, where the customer develops liking for an
offering, can be gained by changing attitudes and feelings. Affect refers
to emotional responses and feelings engendered by an attitude object; in
contrast cognition represents thoughts, beliefs and judgments about an
attitude object. This range of possible advertising objectives, highlights
the fact that increased sales are only one of a variety of possible outcomes
from a communications campaign.
To underline the importance of awareness, we can look at the case that
has been made for the positive impact for marketers of bad publicity. The
argument relates to the issue of customer ‘awareness’. Berger et al. (2010)
argue that consumers are often in the position that they are not aware at
all that a new book, music album or movie has been launched. Or, even
if awareness does exist, the product may not be at the top of their mind,
when the customer is in a position to make a purchase; for example, when
they are in a store (this is referred to as accessibility). Bad publicity can
overcome this by raising awareness and improving accessibility, where
148
consumers are able to remember the availability of a product at a time

when they are about to make a purchase. However, where awareness
already exists bad publicity may have a wholly negative effect.
Homer (2006) says that the importance of affect, cognition and attitude
is undisputed in advertising. However, there is debate about the relative
role of cognition versus affect in brand attitude formation. One approach,
referred to as the means-end chain approach, holds that consumers
organise product information at various levels of abstraction, ranging from
simple product attributes to complex personal values. In the case of a car,
a simple product attribute can be the fuel efficiency. For the same product
class a more abstract attribute can be whether it is stylish. When buyers try
to assess benefits from these simple attributes it can involve higher order
processing. The resulting higher order beliefs have the advantage that they
are more generalisable across different product categories.
The economics-based view of marketing provides other insights into
advertising. One of these deals with the distinction between the
‘information view’ of advertising and the ‘market power view’. The
information view holds that advertising makes consumers more aware
of their buying options and this leads to demand becoming more price
elastic (people become more sensitive to prices) and less brand loyal. The
market power view on the other hand holds that advertising increases
the perceived differentiation between brands and this can help improve
customer loyalty. Customers thereby become less price sensitive (demand
becomes more price inelastic) (Erdem, Keane and Sun, 2008). This
distinction is also a useful one to remember when you read about the
societal orientation and corporate social responsibility, because it reflects
both positive and negative views of marketing behaviour.
Activity 10.1
Read the article by Yilmaz et al. (2011), listed under Essential reading, starting from p.892
with, ‘Being the two distinctive features of an advertisement, ‘likeability’ and ‘credibility’
of a message source have also attracted the greatest attention.’ And ending on p.893 up
to and including Figure 1.
You should now answer the following questions:
1. What is meant by the phrase ‘source likeability’ and how is it different to ‘source
credibility’?
2. Why are both of these concepts important to marketers?
10.4 Sales promotions

The distinguishing characteristic of sales promotions is that they involve
giving an incentive (usually short-term) to a customer, in order to
encourage them to make a purchase. Sales promotions include money-
off coupons, rebates, free offers, patronage rewards and other incentives.
Promotions can also be aimed at the members of a distribution channel
(trade promotions), where the aim is to encourage stocking of particular
brands. Consumer promotions can be considered as ‘pull’ promotions
in that they directly entice the consumer to purchase the product,
thereby pulling the brand through the channel. Trade promotions can
be considered as ‘push’ promotions since they provide incentives for the
retailer to offer special deals and push the product through the channel.
Promotions may not always represent simply an economic incentive to
purchase, but they may also have other effects on a consumers’ evaluation
149
of the deal being offered by the marketer. Promotions may also influence
customer attitudes towards a brand and purchase intentions. These effects
may not always be the ones that the marketer intended to achieve.
We will now look at the different types of costs and benefits that
consumers can incur when they receive sales promotions.
The Chandon, Wansink, and Laurent model (CWL) (1999) proposes that
sales promotions provide utilitarian benefits including savings, quality,
convenience and hedonic benefits including value expression, exploration
and entertainment. Raghubir, Inman and Brand (2004) add to the CWL
framework, with additional utilitarian benefits (which they call economic
benefits), and also what they refer to as affective benefits (including
additional hedonic benefits and negative affective benefits). They argue
that there are three ways by which sales promotion influences consumers.
They can affect the economic utility (economic) that customers receive
from the purchase; they can influence customer beliefs about the brand
(informative); and they can affect customer emotions (affective).
Their argument can be represented with the following example. If a soft-
drinks manufacturer offers consumers a $1 coupon for a can of drink, the
following effects will take place. The purchase cost of the drink will fall
(positive economic effect), the consumer’s decision-making as to which
brand to buy will be made easier (positive economic effect of reducing
information processing time), the consumer may buy and consume more
drink than they otherwise would have done (negative economic effect for
the consumer). The consumer may also believe that the drink is usually
over-priced (negative industry reputation effect) and also make the
consumer feel good about having found the discount (positive effect), but
they may also feel dissatisfied at having to undertake the extra effort in
getting the discount (negative effect).
The managerial implications of this approach are that marketers should be
able to assess the positive and negative implications of the promotions that
they plan to undertake.
Having seen some of the broader issues involved with sales promotions,
we can now focus on some differences; in particular, the distinction
between monetary and non-monetary promotions. Monetary promotions
(often seen as utilitarian) can have a negative influence on perceived
quality. This is because consumers use price as an extrinsic cue to infer
product quality, and an emphasis on price as an element of the marketing
mix can encourage customers to think about the price rather than the
brand, when making the purchase. In contrast, non-monetary promotions
may help reinforce brand equity. Because non-monetary promotions
do not influence consumers’ internal reference prices (for example, the
customer’s recollection of the price they last paid), they are less likely to
create a negative influence on perceived quality. In addition, non-monetary
promotions (which can be hedonic) can help marketers differentiate their
brands from that of competitors’ brands. Non-monetary promotions can
be used to differentiate brands, emphasise brand attributes and develop
brand equity. The hedonic nature of non-monetary promotions can help to
develop brand personality (Palazón and Delgado-Ballester, 2005).
Palazón and Delgado-Ballester (2005) say that in contrast to the above,
monetary promotions emphasise only one association with a brand – the
link with price and as a result, are less effective in building brand equity.
As Nunes and Park (2003) remark, the use of discounts places a greater
emphasis on price, leading people to assess the incentive relative to what
they pay, while non-monetary promotions, such as premiums, should
150
take the focus away from price. Given their utilitarian nature, monetary
promotions are also more tangible than non-monetary promotions and
according to Keller (1998), abstract associations are more evaluative
and memorable. For example, when the purchase decision has hedonic
motivations, the fun, enjoyment or sensory stimulation influence brand
perceptions and make the consumer’s attitude more favourable. Therefore,
when promotion experience is linked to these kinds of feelings, thoughts
and benefits, more favourable and positive brand associations are linked to
the brand.
10.5 Personal selling

David Wilson (1999) distinguishes between a transactions-based model
of selling to one which is relationship-based (though where there are
‘deep relationships’ the salesperson can become unnecessary). Deep
relationships rely on cooperation between buyer and seller and are based
on trust, whereas transactions-based exchanges are adversarial. The
characteristics of the latter include playing suppliers off against each other
to obtain lower prices or other concessions. This is despite the fact that the
exchange could be undertaken over a period of many years and there may
be cordial relations between individuals in both organisations. In turn, the
type of exchange being undertaken has an impact on the skills required of
salespeople.
Wilson (1999) distinguishes between three different types of sales
relationships.
• Transactions-based relationships are undertaken through
formal means of customer acquisition; for example, via advertising.
Value is achieved by the buyer through lower prices from a range of
offerings that may be seen as substitutes and all contact between the
two organisations is between the buyer and the seller. There is an
emphasis on following established procedures.
• Facilitative relationships. In such relationships, value is created
for both buyer and seller by the buyer giving a large proportion
of their business to the seller and as a result the seller can reduce
their marketing costs, thereby lowering operating costs for both
organisations. In these relationships the role of the traditional
salesperson can be replaced by someone who manages the relationship
and soft-sells new products. The seller’s representative has a closer
physical relationship with the buying organisation (since they may
actually be based within the buying organisation). This gives the
salesperson a better opportunity to identify the customer’s needs and
indeed the customer may consider them to be solving the customer’s
problems. As such, their actions may not be considered to be wholly
instrumental (driven by the need to make profits) by the buyer.
• Integrative relationships. These relationships exist where the
buyer wants to work with a supplier who can add significant value to
the buyer’s product or processes. Value will also be achieved via lower
costs. Such relationships have been described as being ‘integrative
cross-functional’ relationships. A salesperson is no longer needed in the
buying organisation, the selling which does take place is consultative
in nature and undertaken in order to help the buyer solve problems.
The sales organisation’s focus is to have their offering designed into
the new generation of the buyer’s products.
151
Trust has been considered to be an important element of the personal

selling process. Trustworthiness has been defined as a measure of the
ability, integrity and benevolence of the other party, and is based upon
one’s subjective perception of that other party’s behaviours (Schoorman
et al., 2007). Ability refers to the trustor’s belief that the other party is
competent. Someone is considered to have integrity if it is believed that
they will act in a manner consistent with personal norms and values in
society, and benevolence refers to the extent to which a trustee is believed
to want to do good to the trustor.
10.6 Word of mouth

Unlike marketing communications instigated by marketers themselves,
word of mouth is considered to be ‘organic’ because it takes place
between one customer and another without direct prompting, influence
or measurement by marketers. Generally, word of mouth (WOM) is
motivated by people wanting to help others or warn them about poor
quality. The model of linear influence held that some consumers were
viewed as potential ‘opinion leaders’ who smart marketers could target
and influence. Working through these customers, marketers focus on
‘the friend who recommends a tried and trusted product’ rather than the
‘salesman who tries to get rid of merchandise’ (Dichter, 1966, p.165).
According to Kozinets et al. (2010), marketers have become interested
in directly managing WOM activity through targeted one-to-one seeding
and communication programs, with the internet allowing unprecedented
new levels of management and measurement of these campaigns, and
new professional organisations allowing the efficient development and
diffusion of WOM knowledge.
10.7 Digital marketing communications

The following characteristics have been identified as distinguishing web-
based commercial communication from traditional media (Liu and Shrum,
2002):
• Interactivity – two way dialogue.
• Flexibility – modification of the communication message.
• Addressability – personalisation of communications for individuals.
• Accessibility – information permanently accessible for all stakeholders.
Interactivity has been defined as: ‘the degree to which two or more
communication parties can act on each other, on the communication
medium and on the messages and the degree to which influences are
synchronised’ Liu and Shrum (2002, p.54). The dimensions of interactivity
have been defined as:
• Active control – where the user can undertake voluntary and
instrumental action that directly affects their experience of a
website. For example, this can happen where a user can choose what
information about a product or organisation they access when visiting
a website.
• Two-way communication – this happens where website visitors can
contact the organisation using a variety of different technologies.
• Synchronicity – this is the degree to which users can synchronously
communicate with an organisation; for example, via live online chat.
Different elements of a website can be categorised and assessed using
these variables. Unsolicited email (where an organisation sends an email
152
to someone which they have not asked for) will be rated quite low on
all the above three measures, since receivers have very little control
over whether or not they receive the communication. In contrast web-
communities (where people with a common interest in an activity or
brand gather online, for example, on websites and bulletin boards)
are ranked quite high on all three variables. While corporate websites
provide information about brands, the corporate mission statement and
information for investors, web communities fulfil a different function.
They provide a platform for customer interaction with the brand; for
example, in terms of how products can be used and they may also offer
a forum for customers to interact with each other. By definition, the
individual’s experience relies on their being pro-active users of such sites,
so there is scope for two-way interaction between the customer and the
organisation and depending on the software used, there is also scope for
synchronicity of communication.
According to Liu (2003, p.12), ‘Banner ads are rectangular ads that usually
appear at the top or bottom of a web page and are downloaded with
the page content. Different from websites, exposure to banner ads is not
directly controlled by Internet users. The ads merely come with the web
pages the users are visiting.’ In contrast pop-up ads, ‘directly interfere
with users’ online activities and take control out of users’ hand. To avoid
a pop-up ad, users have to manually close the pop-up window. Therefore,
from the active control point of view, pop-up ads are less interactive than
banner ads’ (Liu, 2003, p.12).
One of the themes that we are exploring in this subject guide is the idea
that marketing can be undertaken on the basis of developing relationships
between buyer and seller or alternatively the exchanges can be focused
on one-off sales. This distinction can also be studied when it comes to
communications and the following section examines it more closely.
10.8 Communications and relationships

Duncan and Moriarty (1998) argue the case for looking at the role
of communications in developing relationships. They present a
communication-based model of relationship marketing and emphasise the
importance of communication rather than persuasion, which is short-term,
transaction focused, and primarily a one-way mode of communication.
Finne and Gronroos (2009, p.180) define relationship communication as
‘any type of marketing communication that influences the receiver’s long-
term commitment to the sender by facilitating meaning creation through
integration with the receiver’s time and situational context’. The ‘time
context’ refers to the receiver’s perception of the history and envisioned
future of his/her relationship with the sender. The ‘situational context’
refers to the other elements internal or external to the receiver. In the
discussion of some of the elements of the communication mix below, we
also consider how they can be used to develop relationships as well as
effecting shorter-term transactions.
Duncan and Moriarty (1998) say that communications exchange is a
two-way process that involves conversation and dialogue. They draw
parallels between this and the broader relationship approach to marketing
that emphasises close, long-term, two-way relationships. They refer to
the relationship approach as being ‘transactional’, whereas the opposite
that emphasises buying and selling is referred to as ‘transaction’ focused.
In communications they argue the transactional approach involves two-
way communication, which involves balance, symmetry and reciprocity
153
(which they consider analogous to interactivity). These aspects of

communication lead to a shared understanding between buyer and seller
that is a prerequisite for relationship building. Shared understanding has
been described as, ‘a shared language that reflects similarities in members’
interpretations, understanding and response to information’ (Hutt, Walker
and Frankwick, 1995, p.23).
You should take away the following main points from the above
discussion:
• The nature of communication can vary depending on whether or not
the marketer wishes to develop long-term relationships.
• In particular, two-way communications are important where the aim is
to build relationships.

In this chapter we examined promotion and the different elements of
the promotion mix. In each instance we examined some key issues in the
subject guide, while leaving the introductions to these topics to Kotler and
Armstrong.

• discuss what is meant by promotion and the promotional mix
• describe and evaluate the various types of promotional techniques and
tools
• relate the transactions/relationships distinction to marketing
communications.

1. a. What is meant by the term source credibility? (5 marks)
b. Discuss why source credibility is more likely to be important in
some marketing communications than others (10 marks)
c. In what other ways can marketers make use of credibility as a
component of their marketing communications? (10 marks)
2. a. Explain what is meant by the terms ‘hedonic’ and ‘utilitarian
benefits’ in marketing. (10 marks)
b. Explain what is meant by the term sales promotion. (5 marks)
c. How does this distinction between hedonic and utilitarian benefits
affect the usage of sales promotion? (10 marks)
3. a. Compare and contrast market-based transactions with
relationships. (10 marks)
b. Critically assess how marketers can use the three different types of
sales relationships: transactions-based; facilitative; integrative.
(15 marks)
4. a. Explain what is meant by the terms: interactivity, flexibility,
addressability and accessibility. (10 marks)
b. Critically assess, using examples, how they can be effectively used
by marketers. (15 marks)
154
Chapter 11: Pricing
Chapter 11: Pricing
11.1 Introduction
Price can be broadly defined as the value of what is exchanged in terms
of a customer’s utility, which either comes from tangible (for example,
functional) or intangible (for example, prestige) factors. More narrowly,
price is simply defined as the amount of money charged for a product
or service. Despite the association made between marketing and other
parts of the marketing mix such as advertising, price is still one of the
most important marketing tools available. As pointed out by Kotler and
Armstrong (2012, p.314), price is the only part of the marketing mix that
produces revenue directly, as all other marketing mix elements, such as
promotion, represent costs.
The purpose of this chapter is to outline some of the theory and practice
of pricing policy and strategy. Hence, the theoretical (mostly business
and managerial economics) approach to pricing policy will be examined
first, followed by the marketing pricing practices and strategies that are
applicable to business reality. Reading this chapter in the subject guide
as well as the Essential reading, you will realise that with regard to
pricing theory, two overall perspectives emerge: classical pricing theory
and concepts based on behavioural science. The former is rooted in
microeconomics where price is interpreted as an objective variable and a
consumer’s price response is analysed with quantitative models (Homburg
et al., 2009). The basic assumption here is that individuals are rational
and maximise their utility. The latter is rooted in psychology and focuses
on how prices are perceived by individuals. Here, the objective price and
the way it is perceived are seen as different (Homburg et al., 2009).
We will begin by examining why pricing is so important, which factors
are related to the pricing decisions of firms, and the strategies that firms
employ in order to make the most profitable pricing decisions possible.

• show the key aspects of determining prices in a complex setting
• make you aware of the range of choices that firms have regarding
pricing, and how each pricing decision actually involves its own costs
and benefits
• show how firms can often use their pricing strategies (for example,
very low prices on selected items) to define their brand image.

• explain the importance of pricing
• state what factors, both internal and external to the firm, determine
the pricing decisions of firms
• describe what is meant by terms such as ‘economies of scale’, ‘learning
curve’ and ‘price sensitivity’
• explain how consumer heterogeneity can influence the pricing
decisions of firms.
155

Pearson Prentice Hall, 2012) Chapters 10 and 11. Note: You do not have
to read up the section ‘Public policy and marketing’ in Chapter 11 of Kotler
and Armstrong. Apart from this section, everything else is important.

Baker, M.J. Marketing strategy and management. (Basingstoke: Palgrave
Macmillan, 2007) fourth edition.
Coase, R. ‘The lighthouse in economics’, Journal of Law and Economics 17(2)
1974, pp.357–76.
Cram, T. ‘Pricing’, in Baker, M.J. and S.J. Hart (eds) The marketing book.
(Oxford: Butterworth, 2008) sixth edition.
Fishman, C. ‘The Wal-Mart you don’t know’, FastCompany Magazine 77,
December 2007; www.fastcompany.com/magazine/77/walmart.html
Homburg, C., S. Keuster and H. Krohmer Marketing management: a
contemporary perspective. (London: McGraw-Hill, 2009).
Kuhlmeijer, H.J. Managerial marketing. (Leiden: Stenfert Kroese, 1975)
Klemperer, P. ‘Markets with consumer switching costs’, Quarterly Journal of
Economics 102(2) 1987, pp.375–94.
Nagle, T. and R.K. Holden The strategy and tactics of pricing: a guide to
profitable decision making. (Englewood Cliffs, NJ: Prentice Hall, 1994).
Nagle, T. and R.K. Holden The strategy and tactics of pricing: a guide
to growing more profitably. (Upper Saddle River, NJ: Prentice Hall, 2006).
Salkever, A. ‘Byte of the apple’, Business Week, 21 April 2004.
Samuelson, P.A. Economics: an introductory analysis. (New York: McGraw-Hill,
1994).
Varian, H. ‘Differential pricing and efficiency’, First Monday: The Internet Peer
Reviewed Magazine 2 (1996); www.firstmonday.org/htbin/cgiwrap/bin/ojs/
index.php/fm/article/view/473.

www.pricingsociety.com
The Professional Pricing Society’s website includes pricing information
resources and sample case studies.

This chapter starts with highlighting the importance of price from a
marketing perspective and then moves onto the internal and external
factors that affect a firm’s pricing decisions. We then discuss the
different types of pricing policies, namely uniform pricing, perfect
price discrimination, direct segment discrimination and indirect price
discrimination. There is some reflection on the varying informational
requirements for the four policies highlighted as well as an overview of
other aspects such as price skimming and price penetration strategy. We
would like to mention here that apart from the subject guide, Kotler and
Armstrong’s Chapters 10 and 11 have been extensively written and are
important for this topic. You do not have to read up the section ‘Public
policy and marketing’ in Chapter 11 of Kotler and Armstrong. Apart from
this section, everything else is useful.
11.2 Why is pricing important?

Price is of major importance to the marketer since according to Kuhlmeijer
(1975), it is the only marketing strategy variable that generates income.
All the other variables in the mix – advertising, product development,
sales promotion – generate costs. Pricing is often treated as the last stage
156
Chapter 11: Pricing
in the marketing mix, which means that all the investment in product
development, the positioning and distribution that precedes it hinges on
getting the pricing decision right. Marketing practitioners often say that
for the firm to profit from the value it creates it must price properly, for a
bad pricing strategy can ‘leave money on the table’ or kill a product.
Apple Inc, which has emerged as a seemingly invincible electronics
giant, was not always as formidable in the past when compared to other
manufacturers such as IBM and Compaq. In the first half of 2002, the
company launched an ambitious campaign to lure customers away from
PCs. This campaign – known as the ‘switch campaign’ – was launched
with a lot of fanfare and used celebrities such as Will Ferrell to convince
existing PC users to become Mac users. Apple even established a dedicated
website that highlighted the virtues of switching to Apple. However,
this campaign was not very successful and was phased out gradually in
2003. The problem, according to many market analysts was the same old
problem of pricing the product too high in the first instance or during
launch. Consumers were deterred from buying a Mac in the first instance
since there was a general perception that it was too expensive. Business
Week reporter Alex Salkever (2004) highlights this issue too:
Apple needs to learn that price is determined by market demand
and not its own perception of what products are worth. Its
prospects look brighter now than at any point in recent memory,
and it still boasts some of the fattest margins – if not the fattest
– in the business for its PCs. Jobs and Co. has the tools to really
turn Apple into a mainstream player if they can boost computers
sales by dropping prices.
The above issue, coupled with the fact that over time and use, switching
costs develop for experience goods such as laptops (in this case for non-
Apple products), making it very hard for consumers to switch.1 This case 1
Klemperer (1987)
is illustrative of a more general point: when firms have some degree of points out three sources
of switching costs.
brand identity and monopoly power, they have choices with regard to
The first is transaction
how to price their good and/or services. Their pricing choices also have costs. An example is
to take account of rival behaviour. In the case of a perfectly competitive the costs incurred when
industry, where all products are the same (or perceived to be the same by switching from one bank
consumers), no firm can set a price lower or higher than its rivals. Why? to another, involving
The answer is simple. In perfect competition, firms are making normal the closing of one set
of accounts and the
profits and hence if they lower the price, they are pricing below cost
opening of another set
and going out of business. If they raise the price, they lose all their sales in the other bank. The
to their competitors and hence go out of business. So there is only one second is learning costs.
real price that firms can charge and that is the market-wide price that is An example is the costs
equal to marginal cost. This is illustrative of how market structure – the incurred when getting to
know a new computer
degree of competition and whether one is in a monopoly or a perfectly
operating system (for
competitive market – can affect a firm’s pricing decisions. example, Windows
Below we highlight the factors, including market structure and rival Vista). The third is
pricing behaviour, which firms must take into account before making their artificial switching costs.
These costs could arise
pricing decisions.
as a result of a firm’s
actions. Examples of
11.2.1 Factors affecting a firm’s pricing decisions such actions include
The factors that affect a firm’s pricing decisions and strategy can be both frequent-flyer programs
internal and external. Internal factors refer to those inside the firm (such and penalties attached
to cancelling mobile
as the marketing mix strategy or the organisational goals) that affect the
phone contracts.
prices charged by a firm for its goods and services. External factors are
factors that lie outside of the direct control of the firms such as market
structure seen above, the price actions of rivals or the demand elasticity
of consumers. Although recognising that in pricing decisions, the external
157
factors are more often than not the biggest determinants of a firm’s pricing
strategy, we will deal with each set of factors in turn.
Internal factors affecting a firm’s pricing decisions

There are several internal factors that influence pricing behaviour, such as
the firm’s marketing objectives, marketing mix strategy and cost structure.
The last of these, however, is often a function of factors external to the
firm and so we will deal with cost structure in our study of the external
market structure.
Let us start with overall marketing objectives and see how they may
influence pricing decisions. Take the case of a firm that wishes to establish
a ‘beachhead’ in the marketplace and therefore wants to acquire market
share as its primary goal. In such a case, the firm may want to adopt an
aggressive pricing structure that emphasises low prices above all else.
If, in turn, the firm has sufficient scale and a distribution marketing mix
that is efficient, which facilitates this pricing strategy, it may be able to
build its brand reputation on providing the lowest prices on all goods
and services all the time. A company that has done this successfully, amid
much controversy, is Wal-Mart, the American retailer giant that is now the
world’s largest single private sector employer in the world.
Case study: For Wal-Mart, low prices is how you keep customers happy and
suppliers and retail competitors mad!
Wal-Mart is not just the world’s largest retailer. It’s the world’s largest company – bigger
than ExxonMobil, General Motors and General Electric. The scale can be hard to absorb.
Wal-Mart sold $244.5 billion worth of goods in 2004. In three months, it sells what
America’s number-two retailer, Home Depot, sells in a year. In its own category of general
merchandise and groceries, Wal-Mart no longer has any real rivals. In the USA, the largest
single consumer market in the world, it does more business than Target, Sears, Kmart, J.C.
Penney, Safeway and Kroger combined.
How has Wal-Mart achieved this stunning success? The answer, according to its
executives, is through Wal-Mart’s pricing philosophy, which is very simple: offer the lowest
price on all goods 365 days of the year. Rather than focus on targeted discounts and
costly promotions, Wal-Mart builds simple stores which are very large, and sells at very
low prices. The pricing philosophy is also, in many respects, its organisational philosophy
and certainly underlies its marketing mix strategy. The overall goal of offering the lowest
price of any retailer for well-known branded items is what determines Wal-Mart’s
distribution and channel decisions as well. It has become the largest importer of Chinese
goods in the world (bigger than any nation in fact!).
One of the most illustrative examples of what this commitment to everyday low prices has
had on well-known brands is the effect Wal-Mart had on the Vlasic Pickle Company.
Wal-Mart priced a 12-gallon (approx. 30 litres) jar of Vlasic pickles at $2.97 – that’s
a year’s supply of pickles for less than $3! ‘They were using it as a “statement” item,’
says one retail observer, ‘Wal-Mart was putting the jar before consumers, saying, “This
represents what Wal-Mart’s about. You can buy a stinkin’ gallon of pickles for $2.97. And
it’s the nation’s number-one brand.”’
According to journalist Charles Fishman (2003), ‘Therein lies the basic problem of doing
business with the world’s largest retailer. By selling a gallon of kosher dills for less than
most grocers sell a small jar, Wal-Mart may have provided a service for its customers. But
what did it do for Vlasic? The pickle maker had spent decades convincing customers that
they should pay a premium for its brand. Now Wal-Mart was practically giving them away.
And the fevered buying spree that resulted distorted every aspect of Vlasic’s operations,
from farm field to factory to financial statement.’
158
Chapter 11: Pricing
Indeed, as many companies including Vlasic have discovered, the real story of
Wal-Mart that often never gets told is the story of the pressure the biggest retailer
in the world relentlessly applies to its suppliers and retail competitors in the name of
bringing consumers everyday low prices. It is the story of what that pressure does to the
companies Wal-Mart does business with, to United States manufacturing, and to the
economy as a whole. That story, according to Fishman, ‘can be found floating in a gallon
jar of pickles at Wal-Mart’.
Activity 11.1
Is it too simplistic to state that Wal-Mart is beneficial to consumers because it offers such
low prices and so we should not care about what it does to its competitors, suppliers and
even the rest of the economy?
Other internal marketing mix decisions may affect pricing. For example, a
company may decide that it wants to associate its product or service with a
‘premium’ or ‘high-quality’ image. If the company’s pricing decisions are not
coordinated with this promotional or market positioning decision, the firm
may confuse consumers and lessen the impact of its positioning strategy.
In particular, if the company prices its product below what consumers
associate with quality, it can lead to a major loss of potential sales as the
product will dissuade cost-conscious consumers with the premium price
image, and alienate premium-image consumers with the low-quality price.
It is often the case that consumers associate quality with price and hence a
firm wishing to target a certain market niche must take this into account.
In the short run, price has a direct and immediate influence on the firm’s
profitability through its effect on sales volume, which in turn affects sales
revenue as well the unit cost of production and marketing (Baker, 2007).
According to Baker, in the medium to long term, there is an indirect
connection between price and the firm’s objectives. This is due to the fact
that prices have an impact on a firm’s cash flow, inventory, brand image,
market competitiveness as well as customer awareness and concerns for the
price being charged (Baker, 2007). In fact, he lists out a number of possible
objectives while setting prices. These include:
• target return on investment
• target market share
• maximum long-run profits
• maximum short-run profits
• growth
• stabilise market
• desensitise customers to price
• maintain price-leadership arrangements
• discourage entrants
• speed exit of marginal firms
• maintain loyalty of middlemen and get their sales support
• enhance image of firm and its offerings
• be regarded as fair by customers
• create interest and excitement about the item
• help in the sale of weak or other items in the line
• discourage others from cutting prices
• build traffic.
159
The price firms charge for a product are dynamic and change over a period
of time as demonstrated in the figure below. Here, Amazon has gradually
reduced the price of a Kindle (see Figure 11.1) and this could be a function
of greater market penetration as well as increased competitive activity.
This change in price over the life cycle of a product brings into focus two
generic new product pricing approaches discussed in detail in Chapter 11
of Kotler and Armstrong: skimming pricing and penetration pricing.
According to the skimming approach, products are sold at comparably
high prices during the launch phase. Here, the company’s aim is to take
advantage of some consumers’ greater willingness to pay and a perceived
quality/image leadership that may exist for the firm’s product/s. This is
the case with Apple’s products, which normally launch at a higher price
point when compared to its competitors. As the product diffuses into the
market, competition intensifies and over the course of its life cycle, the
price is progressively reduced. On the other hand, a penetration strategy
aims to establish relatively low prices initially in order to stimulate rapid
diffusion into the market and gain market share quickly. Antivirus software
manufacturers are good examples of a penetration pricing approach where
they offer free download and usage of their products and raise prices
afterwards.
Nov 07:
Kindle 1
launched at
Retail $399
price May 08:
(USS) $359
July 09: Kindle
350
2 launched at
$299
300
October 09:
$259 June 10:
250 August 10:
$199
Kindle 3
200 launches at
$189 (3G
150 version /
$139 (WIFI
100 version)
April 10: iPad
Oct 09: launched
Nook launched
Figure 11.1: Kindle price history since launch in the USA (figure initially created
by LSE students for a group marketing project).
External factors affecting a firm’s pricing decisions

There are four main external criteria according to which a firm sets a price:
• cost structure of the industry
• market structure
• consumer demand (or the desired level of price discrimination)
• macroeconomic environment, principally inflation (deflation).
We will begin with cost considerations and deal with each of the other
three items in turn.
Cost structure considerations. Although cost is a factor that firms
deal with internally, the type of industry a firm is located in often
determines the prevailing cost structure present and hence the typical 2
Costs that do not vary
costs of production for firms in that industry. For example, in many
with output or sales
industries with large start-up and fixed or sunk costs2 of production, such level.
160
Chapter 11: Pricing
as steel and aviation, the costs per unit decline as the scale of operation
increases (see Figure 11.2). Figure 11.2 depicts the case of a firm in
which the long-run average cost curve (LRAC) falls as output increases
from 1,000 to 3,000 units. This is because the large scale of the
production process favours larger-scale output. However, this is only true
up to a point. After producing 4,000 units, the production plant’s cost per
unit begins to increase as the firm encounters what is known as
diseconomies of scale – too many workers and machines slowing things
down and putting upward pressure on costs.
Costs per
unit
1,000 2,000 3,000 4,000

Quantity produced per day
Figure 11.2: Cost per unit at different levels of production.
In other words, industries with high fixed costs favour large consolidated
companies and often only have a few competitors. The case of commercial
‘aircraft production’ is illustrative of this as there are now only two major
players in the industry – Boeing and Airbus. Firms in these industries are
said to have large economies of scale3 and low marginal costs of 3
Declines in costs per
production, which would make pricing according to the traditional rule (of unit as scale or output
increases.
price equal to marginal cost), not profitable. On the other hand, when
economies of scale are small, this favours many small firms and much more
competition. In this situation we revert back to our simple cost-pricing rule,
where prices approach marginal cost.
A firm’s costs might also be affected by accumulated production; that is, the
accumulation of daily experience in producing a good or offering a service
will cause costs to fall as the firm and its employees learn how to produce
more efficiently. This drop in the average per unit cost of production with
accumulated production or service delivery experience, is sometimes
referred to as the experience or learning curve as depicted in Figure 11.3.
The figure shows that the average cost of production for the first 1,000
units is £10, but falls to £9 when the firm has produced 2,000 units.
Costs
per unit
£10
£9
1,000 2,000 3,000

Accumulated production
Figure 11.3: The experience curve.

A final type of cost consideration that affects prices are industries with
high fixed or sunk costs and economies of scale at relatively low output
levels. This means that if price were to equal cost, it would be equivalent to
pricing close to zero. One prominent example of this phenomenon is found
161
with information goods: the incremental cost of stamping out another

CD or printing another book is approximately a pound. The incremental
cost of downloading a purely digital good, such as a song or a film, is
approximately a few pence at the most. In these cases, efficient pricing of
such goods would require that users with a very low value for such goods
pay a very low price.
One might think that it is rare to observe information goods selling
for virtually nothing, but on reflection, this is not so uncommon. As
highlighted by the economist Hal Varian (1996) in his paper on differential
pricing (see also Box 11.1, which is taken from Varian (1996)):
many information goods are supported by advertising and sell
for prices close to their marginal cost of production and delivery:
newspapers and magazines are obvious examples. Books sell for
a high price as hardbacks, and much lower prices when reissued
as paperbacks. Remaindered books sell for very little. And all
sorts of printed material – books, magazines, newspapers, etc. –
are available in libraries at effectively zero cost to the users. In
addition, there are thousands of shareware computer programs
that sell for extremely low prices – in the order of a few dollars.
The implication of this is that in industries where there are large fixed
costs but low average and marginal costs, there will be lots of price
differentiation for the same goods and services.
Box 11.1: Evidence of price differentiation for firms in industries with high
sunk costs.
The evidence shows that differential pricing is common in industries that exhibit large
fixed or shared costs. This is true both for industries that are highly concentrated or
industries that are highly competitive.
Airlines: The airline industry is highly competitive in many ways, yet it is common to
see differential pricing practised in a variety of forms. As we have seen, airlines offer
different types of consumers different fares (senior citizen discounts, major corporations,
conference delegates, etc.); they offer different classes of service (first class, business
class, tourist class); they offer different sorts of restricted fares (advanced purchase,
weekend stays, etc.)
Telecommunications: The long-distance telecommunications market in the US involves
many different forms of differential pricing. Firms give quantity discounts to both large
and small customers; charge businesses and individuals different rates; and offer calling
plans that offer discounted rates based on individual characteristics and usage patterns.
Mobile phone service providers are especially adept at price differentiation. They seem to
have a price plan (to paraphrase Alfred Sloan) ’for every purse, purpose and/or person’.
This is because once a network is installed, the marginal costs of running and maintaining
the network are dramatically reduced making a MC = MR = P pricing rule non-profitable.
Publishing: A book that sells for $40 can be produced at a marginal cost of $2. This gap
between price and marginal cost has led to a variety of forms of differential pricing. Book
clubs, hardback and paperback editions, and remaindered books are all examples of the
ways that the product characteristics are adjusted to support differential pricing.
Lighthouses: Yes lighthouses! This example is rather interesting from a historical
perspective. Economists have often used lighthouses as an example of a good that
would be best provided as a public utility due to the difficulty of recovering costs. For
our purposes, their interesting feature is that the cost of servicing incremental users is
negligible. As Samuelson (1964) once put it, ‘...it costs society zero extra costs to let one
extra ship use the service; hence any ships discouraged from those waters…will represent
a social economic loss’. Ronald Coase (1974) examined the historical record and found
that privately financed lighthouses were provided in England for hundreds of years. Even
162
Chapter 11: Pricing
more remarkably, the pricing arrangement they used was quite efficient: they charged
on a sliding scale based on the number of voyages a ship took per year. After six to 10
trips per year, the incremental price for the services of the lighthouse was zero, just as
efficiency requires.
(Adapted from Hal R. Varian ‘Differential pricing and efficiency’, First Monday 1(2) 1996 –
permission granted by the author; www.firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/
fm/article/view/473)
Market structure. Economists generally define two major types of

market structures – perfect competition and imperfect competition. Perfect
competition: the market consists of many sellers trading in a homogeneous
product with no single buyer or seller having much of an effect on the
going market price. Price equals marginal cost and this equals marginal
revenue, ensuring normal profits for all firms in the market. Within
imperfect competition there are usually three main market structures –
oligopoly, duopoly and monopoly. However, under each of the imperfectly
competitive market structures there is much more variety in terms of what
the resulting pricing policies may be dependent upon:
• Monopoly: Here, the market consists of one seller and the monopoly
may be static or dynamic. Static monopolies usually occur because
of high barriers to entry and the impracticality of two or more firms
competing in the same market (namely, two public transportation
operators in one city). Dynamic monopolies are shaped not by high
fixed costs or the impracticality of having one supplier, but because
the firm is acting in ways that thwart new firms from entering. These
actions may be related to pricing low to keep competitors out or to
new and better innovations, which make the firm a market leader.
Combinations of strategies depicted above can also ensure dynamic
monopolies.
• Duopoly: Here, the market consists of two sellers who can interact
with each other in terms of pricing in ways that can involve a varying
degree of price competition. For example, in the case of Pepsi and
Coca-Cola, the companies might operate a cooperative price duopoly
and engage in non-price competition through other marketing-mix
policies (namely, advertising and placement).
• Oligopoly: This is a special case of a duopoly where the market
consists of a few sellers who interact with each other in terms of
pricing in ways that can involve a varying degree of price competition.
For example, in the oil industry, petrol stations owned by several
different major branded oil companies rarely vary their price
significantly within a given geographic region.
With regard to pricing in a monopoly, in each of the static and
dynamic cases, the monopolist has options for uniform or differential
pricing. If we take the case of public transportation systems, in some
cities like Madrid the prices are uniform for a standard ride. In other
cities, most notably London with its six zones, prices vary by the
distance travelled. In both cases, the city has one public transport
body, but there is scope for differential or uniform pricing.
Activity 11.2
The case of Microsoft Windows, which has nearly 95 per cent of the global operating
system software, is often alleged by Bill Gates (the founder and ex-CEO of the company)
to be an example of a dynamic monopoly. Do you agree? If not, what other factors may
have contributed to Microsoft’s success?
163
Within the term market structure we can also define more generally a
description of the firms’ behaviour in a given industry or market. The factors
that determine firms’ pricing behaviour include precise specifications of:
• the number of firms in the industry, along with the extent of barriers to
the entry of new firms
• the actions available to each firm
• firms’ expectations about the actions/reactions available to competing
firms
• firms’ expectations about the number of firms in a given industry or
market and the potential entry of new firms.
Consumer demand. More than 20 years ago (in 1991) and much
before Intel Pentium chips became popular, Intel Corporation announced
the introduction of its 486 processor. Intel began with a fully functioning
486DX processor, and then proceeded to disable the maths co-processor, to
produce a chip (the 486SX) that was strictly inferior to the 486DX, but more
expensive to produce.
So which processor was priced more expensively to consumers? In 1991, the
486DX sold for $588 while the 486SX sold for $333. This was almost half the
price of the chip that was actually less expensive to produce.
So the question is, why would a firm consciously sell and announce to the
world that it is selling an inferior good that cost more to produce and then
proceed to sell it at a lower price? The quick answer is that it depends on
consumer demand, specifically demand that differs considerably between
well-defined consumer segments.
Suppose in a hypothetical representation of the Intel chip price decision
above, that consumers are not homogeneous and have a different willingness
to pay for a specific product such as a computer chip (that is, some desire the
product more and are willing to pay more to get it). Now suppose that the
Intel Corporation has identified or thinks that there are two types of buyers
of equal numbers for its DX and SX chips. No consumer wants to own both
varieties simultaneously. Production costs for the DX are $5 and the SX $10.
The two groups of consumers are:
Consumer type 1 (‘techno geeks’): they value the high-quality DX processor
at $130 and the low-quality version at $60.
Consumer type 2 (‘techno grannies’): they value the high quality at $65 and
low quality at $50.
The intuition here is that if the DX chip was sold for $130 or less, Consumer
1 will buy it over an SX that is $60 or less. If the SX chip is sold for $50 or
less, Consumer 2 will buy it over a DX chip priced at $65 or less. What is the
profit-maximising strategy?
Where profits = total revenue – total costs.
Intel chip Willingness to pay for Consumer 1 Willingness to pay for Consumer 2
DX $130 $65
SX $60 $50
Table 11.1: Consumers’ willingness to pay for Intel chips.
What is the optimal price strategy if there were two consumers? The answer
is to price the SX at $50 and the DX at $130. This will generate profits of
$180 – $15 = $165. No other pricing strategy maximises profit.
What this case demonstrates is that firms may be able to differentiate on
price and product attributes when consumers are sufficiently different from
164
Chapter 11: Pricing
each other in their willingness to pay for a product. This is sometimes

referred to as consumer heterogeneity.
Consumer heterogeneity, often in combination with low marginal costs,
opens up the door to marginal benefit pricing. This is where firms charge
different prices to consumers for the same good based on the benefit
that each consumer derives from consuming the product. Often, as in the
case above, the product is slightly altered or the choice set is changed.
For example, in the airline industry a ticket for the same destination is
often priced differently depending on when the ticket is purchased. This
is often an indirect tool designed to discriminate between different types
of travellers with different willingness to pay schedules. For example, the
retired tourist is price-sensitive and books early, and hence prices are lower
for tickets booked ahead of time, whereas tickets booked at the last minute
are often bought by business travellers who have to make an important last-
minute business call, so these tickets are the most expensive.
Closely related to this concept of willingness to pay is price elasticity, which
is a measure of how responsive consumer demand is to a change in price.
The price elasticity of demand is given by the following formula:
Price elasticity of demand = % Change on quantity demanded

% Change in price
To understand what this means, suppose that a seller raises its price by
2 per cent and demand falls by 10 per cent. The price elasticity of demand
is therefore –5 (the inverse relation of price and demand is captured by
the negative sign) and the demand in this case is elastic and total revenues
fall since a 2 per cent increase in price caused prices to fall by more than 2
per cent. If demand had fallen by 2 per cent, the seller’s total revenue stays
the same and hence the elasticity is said to be unitary elastic. If, however,
demand had fallen by only 1 per cent when price was increased by 2 per
cent, then elasticity was –1/2, less than 1, and hence known as inelastic.
The less elastic the demand, the higher the willingness to pay, and hence
the more it pays the seller to raise the price to that consumer segment.
At a general level, Nagle and Holden (1994) identify nine factors that affect
a customer’s price sensitivity:
• Unique-value effect: buyers are less price sensitive when the
uniqueness of the product is high.
• Substitute awareness effect: buyers are less price sensitive when
they are less aware of substitutes.
• Difficult comparison effect: buyers are less price sensitive when
they cannot easily compare the quality of substitutes.
• Total expenditure effect: buyers are less price sensitive when a
particular expenditure is low when compared to their income.
• End benefit effect: buyers are less price sensitive when a particular
expenditure is low when compared with the total cost of the end
product.
• Sunk investment effect: buyers are less price sensitive when the
product is used in conjunction with assets that were bought previously.
• Price-quality effect: buyers are less price sensitive when the product
is perceived to be more exclusive or prestigious.
• Shared cost effect: buyers are less price sensitive when part of the
cost is borne by another party.
165
• Inventory effect: buyers are less price sensitive when they cannot
store the product.
Apart from the above nine factors, willingness to pay is strongly affected
by an emotional perception of fairness (fairness effect) and how gains and
losses related to a purchase are perceived by consumers (framing effect)
(Nagle and Holden, 2006). Perceived fairness is linked to assumptions
about the seller’s profit margin and their motives (Cram, 2008). A feeling
that a very large company is increasing prices to vulnerable individuals
might be seen as unfair.
Activity 11.3
Visit online sites of the same clothing retailers (such as Zara or H&M) in two different
countries and compare the prices of identical clothes. How different are the prices and to
what do you attribute the price differences?
Macroeconomic environment. There are a whole host of

macroeconomic factors that firms need to consider when making their
pricing decisions, the most important of which is the inflation rate – the
rate of increase in the overall price level of an economy. The existence
of high inflation often provides firms with a cover for inefficient (costly)
production practices and pricing decision errors. In other words, firms
find it much easier to pass along price increases when inflation is
high. However, in the last few years many countries have witnessed
the phenomenon of low inflation (and in the case of a country such as
Japan, disinflation) caused by production overcapacity, intensified global
competition and better central bank policies. In this context, firms need
to carefully rethink their pricing policies and be aware of the affect
on consumer demand caused by much more noticeable price changes.
Examples of marketing mix responses necessitated by low inflation are the
following:
• reduce discounts and promote everyday low prices
• accelerate new product development
• redesign products for ease and speed of manufacture
• strip away costly features customers do not want
• forge closer links with customers (namely, relationship marketing)
• invest in information technology.
11.3 Pricing policies and strategy

There are four main types of pricing policies. These will be discussed as
well as their implications for profitability.
11.3.1 Uniform pricing

With this approach the firm charges the same price for every unit of
product. This relies on aggregate measures, such as the aggregate demand
curve, and for this reason it has low market information requirements.
On the other hand, the main shortcoming of uniform pricing is that the
‘inframarginal’ buyers – those who would have been willing to pay more
for the product – enjoy a considerable consumer surplus, and this results
in an economically inefficient quantity of sales.
11.3.2 Perfect price discrimination (dynamic pricing)

Here the firm sets prices to earn different incremental margins on various
units of the same or a similar product. In this way the two shortcomings
166
Chapter 11: Pricing
of uniform pricing are resolved. First, by pricing each unit at the buyer’s
benefit, it extracts the entire consumer surplus. Second, it establishes
opportunities for additional profit from increased sales, since it provides
the economically sufficient quantity. This is the most profitable pricing
strategy for firms if every consumer’s willingness to pay is known ahead
of time and resale can be prevented.
11.3.3 Direct segment discrimination

With this pricing policy a firm sets different incremental margins to each
identifiable segment. For this policy, the firm must be able to directly
identify the various segments. In this way, it applies the rules of the
uniform pricing in the context of each market segment. For instance,
identifiable market segments could be men and women, or children
and adults. The necessary conditions for the direct market segment are
that there has to be a fixed and identifiable consumer characteristic
that segments the market, and that there are no arbitrage (namely,
resale) opportunities among the segmented markets. In fact, an amusing
example of direct segment discrimination was reported in June 2012
by CNET that Orbitz (a travel and hotel reservation site) was charging
$20–30 a night more to Mac users than PC4 users. The direct market 4
Please see http://news.
segmentation in terms of profitability falls between complete price cnet.com/8301-1023_3-
57460254-93/mac-
discrimination and uniform pricing, since it applies the rules of uniform
users-pay-more-than-pc-
pricing but in each segment’s context, thus reducing uniform pricing’s users-says-orbitz/
shortfalls. Moreover, since the buyers within a segment are usually non-
identical, this form of price discrimination does not extract consumer
surplus and does not provide economically sufficient quantities, as does
the complete price discrimination.
11.3.4 Indirect price discrimination

The firm structures a choice for consumers so as to earn different
incremental margins within each segment. The main reason for a firm
to apply this type of pricing policy is because it cannot directly identify
customers. In this case, there are two necessary conditions. First, the
firm must have some control over a variable to which buyers in the
various segments are differentially sensitive, in order to structure a set of
possible choices that will discriminate among the segments. Second, the
consumers must not be able to circumvent the discriminating variable.
One of the most widespread methods of indirect segment discrimination
is the so-called bundling method, where the firm offers a combination
of two or more products in one package at a single price. In terms of
profitability, this type of price discrimination falls between direct market
segmentation and uniform pricing; it provides an enhanced alternative
to uniform pricing through effective market segmentation based on
consumers’ own preferences. However, when compared with direct price
discrimination it is of lower profitability because it involves higher costs,
relies on the self-identification of the market segments through structured
choice, and it uses product attributes as discrimination criteria, thus
marginally exploiting the consumer’s surplus.
11.4 Summarising pricing policy in theory

Summarising, uniform pricing is the simplest way to set price, mainly
because of the low information requirement. For this reason, uniform
pricing is the least costly but also potentially the least profitable pricing
policy. If the costs of gathering information were zero, the most profitable
pricing policy would be complete price discrimination, where each unit is
167
priced at the benefit that the unit provides to its unique individual buyer.
However, in order for this policy to be implemented, the firm must be
able to do so legally (many industries have laws that govern the pricing
of goods such as prescription medication). If legal, the firm must also
have complete information on each potential buyer’s individual demand
curve and be able to set different prices for every unit of product. In the
presence of information costs, a profitable pricing policy is direct segment
discrimination. Finally, another profitable pricing policy when personal
information is costly to obtain is that of indirect segment discrimination,
according to which the firm structures a set of choices around some
variable to which the various segments are differentially sensitive. Figure
11.4 shows the informational requirements for the four types of pricing
policies highlighted.
Indirect price Direct price Perfect price

Uniform pricing
discrimination discrimination discrimination
Low Informational requirements High
Figure 11.4: Informational requirements for the different types of price

discrimination.
11.4.1 Pricing policy in the real world

Determining pricing policies in the real world of marketing is a less
theoretical and a far more intuitive process. The major difference between
the theoretically (economic) and the on-the-ground marketing approach
is that the profit-maximisation objective of pricing policy adopted in
the economics textbooks is considered to be vague and incomplete.
Alternatively, there are other, less tangible, types of pricing objectives,
which have to be in line with the general organisational strategic
objectives, such as:
• price to achieve profit, but with the sense of satisfactory, rather than
optimal, profit
• price to gain market share, when the firm’s target is to increase or
maintain market share
• price to obtain cash flow: to recover cash as fast as possible, especially
with products with short product life cycles (see Chapter 9 of the
subject guide)
• pricing for survival: accept short-term losses necessary for long-run
survival
• price to maintain the status quo: applicable primarily in cases where
non-price competition is more important (namely, the soft drink
industry where Pepsi and Coca Cola do not compete on price), when
firms need to establish certain labels
• pricing to forestall new entry and limit competition.
Given the aforementioned goals there are many specific types of pricing
policies that can achieve them. For example, some of the most commonly
used specific pricing policies are the following:
Prestige pricing: a disproportionate price is used as a measure of
quality. A firm charges the highest price possible that buyers who most
168
Chapter 11: Pricing
desire the product will pay. The target group are consumers having
inelastic demand since they are more interested in quality, status and the
unique features of the product.
Price skimming: this is similar to the prestige pricing policy but is used
in new products (for example, innovative electronic devices). In this way, a
firm can rapidly generate initial cash flow and cover high R&D costs.
Odd–even pricing: end prices with a certain odd number in order to
give a false impression of accuracy (for example, £99.95 sounds better
value than £100). Unlikely as it may seem, people perceive a big difference
between a .99 price and a rounded price. Also, pricing with .05 at the
end induces a feeling in the consumer that the firm has calculated the
exact cost of the good and is not ‘exploiting’ or extracting more consumer
surplus.
Price bundling: aggregation of product, options and customer services
in one price. It is prevalent in the PC market, where there is one price for
the whole set of hardware, software, accessories, installation and support.

This chapter started with highlighting the importance of price from a
marketing perspective and then moved onto the internal and external
factors that affect a firm’s pricing decisions. We then discussed the
different types of pricing policies, namely uniform pricing, perfect
price discrimination, direct segment discrimination and indirect price
discrimination. There was some reflection on the varying informational
requirements for the four policies highlighted as well as an overview of
other aspects such as price skimming and price penetration strategy. You
may be tempted after having read this chapter, given the examples of how
Apple lost market share in the 1990s with its premium pricing strategy
and how Wal-Mart’s success is due to its low price strategy, to assume that
price strategy today is synonymous with low price. This is not true, as
good pricing really is about differentiating and giving value to customers,
some of whom are willing to pay more or less for any given product or
service.

• explain the importance of pricing
• state what factors, both internal and external to the firm, determine
the pricing decisions of firms
• describe what is meant by terms such as ‘economies of scale’, ‘learning
curve’ and ‘price sensitivity’
• explain how consumer heterogeneity can influence the pricing
decisions of firms.

1. a. Citing relevant examples, discuss the differences between cost-
based and value-based pricing. (15 marks)
b. Briefly explain the different types of pricing policies and critically
evaluate their usefulness for price setting within the airline
industry. (10 marks)
169
2. Coca Cola and Pepsi closely compete against each other in most soft
drink markets all over the world. Due to the sluggish nature of sales,
marketing managers at Pepsi in your local country context have
decided to review their pricing strategy in a bid to compete more
effectively against Coca Cola.
a. Elaborate on the external factors that Pepsi will have to consider
while reviewing their pricing strategy. (15 marks)
b. After reviewing their pricing strategy, marketing managers at Pepsi
have decided to initiate a price cut to stimulate demand. Critically
analyse the various strategies Coca Cola could adopt to neutralise
Pepsi’s price cut. In your opinion which will be the most effective
counter strategy for Coca Cola? (10 marks)
170
Chapter 12: Distribution
12.1 Introduction
Most marketers do not sell their product or service directly to the end
user. In order to reach their target customers, they sell or distribute
via intermediaries. Such intermediaries are referred to as ‘marketing
channels’. The choice of channel is important since it affects such variables
as the pricing of the product and the level of service that the producer can
offer. Furthermore, the choice of a channel can affect a firm’s long-term
relationship with other firms. In this chapter we look at the functions
of distribution channels and we also consider the fundamental role that
power plays in the relationships between channel members.
Marketing channels are sets of interdependent organisations involved
in the process of making a product or service available for use or
consumption. Producers use the marketing channels of other firms’
members in order to reach the final consumer. Such firms can be
wholesalers, retailers or distributors.

The aims of this chapter are to introduce you to the:
• functions of distribution channels
• factors that marketers need to take into account when establishing
distribution channels
• role of power in determining channel member relationships.

• identify the functions of distribution channels and how the marketer’s
need for these will vary depending on the types of products and
services that they are selling
• describe and critically assess the key issues in the design and
management of marketing channels
• explain the factors that can influence the power relationships between
channel members.

Pearson Prentice Hall, 2012) Chapter 12. Note: You do not need to read
the section on ‘Major logistic functions’ or the following section, ‘Integrated
logistics management’. You do not need to read the sections dealing with
public policy and distribution decisions.
Gaski, J.F. ‘The theory of power and conflict in channels of distribution’, Journal
of Marketing 48(3) 1984, pp.9–29.

El-Ansary, A.I. and L.W. Stern ‘Power measurement in the distribution channel’,
Emerson, R.M. ‘Power dependence relations’, American Sociological Review
27(1) 1962, pp.31–40.
171

transaction-specific assets in conventional channels’, Journal of Marketing
52(1) 1988, pp.20–35.
Joshi, A.W. and S.J. Arnold ‘The impact of buyer dependence on buyer
opportunism in buyer-supplier relationships: the moderating role of
relational norms’, Psychology and Marketing 14(8) 1997, pp.823–45.
Kang, M-P., J.T. Mahoney and D. Tan ‘Why firms make unilateral investments
specific to other firms: the case of OEM suppliers’, Strategic Management
Journal 30 2009, pp.117–35. http://business.illinois.edu/josephm/
Publications/Paper%2041_Kang_Mahoney_Tan.smj_2006.pdf
Tae-Hoon, P. ‘Hierarchical structures and competitive strategies in car
development’, Asian Business and Management, 6 2007, pp.179–98.
Spekman, R.E. and D. Strauss ‘An exploratory investigation of a buyer’s concern
for factors affecting more cooperative buyer-seller relationships’, Industrial
Marketing and Purchasing 1(3) 1986, pp.26–43.

Bourantas, D. ‘Avoiding dependence on suppliers and distributors’, Long Range
Planning 22(3) 1989, pp.140–49.
Dahl, R.A. ‘The concept of power’, Behavioral Science 2(3) 1957, pp.201–15.
Frazier, G.L., J.D. Gill and S.H. Kale ‘Dealer dependence and reciprocal actions
in a channel of distribution in a developing country’, Journal of Marketing
53(1) 1989, pp.50–69.
Frazier, G.L., E. Maltz, K.D. Antia and A. Rindfleisch ‘Distributor sharing of
strategic information with suppliers’, Journal of Marketing 73(4) 2009,
pp.31–43.
Geyskens, I. and J.E.B.M. Steenkamp ‘Economic and social satisfaction:
measurement and relevance to marketing channel relationships’, Journal of
Retailing 76(1) 2000, pp.11–32.
Puttnam, D. Movies and money. (New York: Knopf, 1998).
Spinelli, S. and S. Birley ‘An empirical evaluation of conflict in the franchise
system’, British Journal of Management 9 1998, pp.301–25.
Twede, D., R. Clarke and J.A. Tait ‘Packaging postponement: a global packaging
strategy’, Packaging Technology and Science 13(4) 2000, pp.105–15.
Van de Ven, A. ‘On the nature, formation, and maintenance of relations among
organisations’, Administrative Science Quarterly 1(4) 1976, pp.598–621.

In this chapter we look at the functions that distribution channels can
perform and this sets the scene for considering how marketers may need
to alter the design of distribution channels based on the functions that they
would like the channel to perform. We also consider how postponement
and speculation can be used to add value in distribution channels, plus the
link between these concepts and the notion of risk. The management of
distribution relationships also requires reference to the broad concepts of
power and control in determining channel relationships and this provides a
backdrop to the coverage of channel design issues in Kotler and Armstrong
(2012). We also look at other important aspects of relationships: the impact
of investments specific to channel relationships and fairness.
12.2 Why firms use distribution channels

Producers benefit from intermediaries’ use of their own capital to buy
retail outlets and showrooms; indeed, even the largest manufacturers
would find it difficult to purchase an entire dealer network. Furthermore,
most manufacturers would not find it economic to have retail outlets
selling only their own products; in addition, they may not have the
necessary skills and may not be able to meet consumer preferences if they
172
tried to do this. However, the use of intermediaries does involve giving

control of some marketing activities to other companies. To a large extent
the ways in which a product is promoted within a store will depend on the
store owner. Manufacturers, therefore, trade control for gaining a wider
distribution of their goods.
Members of a marketing channel perform a number of functions. These
include the collection and dissemination of marketing information, the
promotion of products and accepting some of the risks in distributing the
product.
Each person within a channel who brings the product closer to the final
consumer constitutes a channel level. Direct marketing is an example of a
‘zero-level’ channel; the marketer contacts the final user directly by email,
for example, and the customer places an order directly with the producer.
The challenge facing firms is their choice of channel design. Which types
of intermediaries should they have, how many and what should their
terms and responsibilities be?
The channel alternatives can be evaluated on the grounds of economic
criteria, control criteria and adaptive criteria. Economic criteria deals
with the costs and revenues associated with different channels. Control
criteria refers to the extent to which a firm can influence the actions of
other firms in the marketing channel. Such influence may be limited where
such firms are independent businesses, which can decide how they want
to promote the manufacturer’s goods. Adaptive criteria are important since
they deal with the ability of the marketing channel to adapt to a changing
marketplace. This is affected by contracts between channel members.
Once the decisions have been made regarding the design, individual
channel members (that is, actual firms) need to be chosen to distribute
and retail the products. Firms need to pay attention to the factors that
can cause conflict between channel members. Conflict can arise when
their goals are incompatible. For example, the manufacturer may want
a high market share through low prices, whereas the distributor may
want to maintain a high profit margin. There may also be differences
in perception. For example, the distributor may feel that the economic
outlook is buoyant and merits a more aggressive marketing stance, while
the producer may be more pessimistic.
In this chapter we will pay specific attention to the functions performed
by channel members and we will also consider the role of power in
determining the relationships between channel members.
12.3 The functions performed by marketing channel

members
Before we look at specific decisions relating to the design and
management of marketing channels, we will consider in more detail the
functions that marketing channels can fulfil (see Figure 12.1). Between
the manufacturer and the end user lies the distribution channel or channel
intermediaries. These people are in business in much the same way as the
manufacturer and they are also motivated by making profits. Just like the
manufacturer, they try to provide customers with benefits the customers
want and are willing to pay for. The benefits that channel intermediaries
provide are, for example, the convenience of a local neighbourhood shop
or the cost savings of a supermarket or the selection of quality products in
a delicatessen.
173
Marketing channels can vary from direct to indirect. The functions in

a channel cannot be replaced, though individual institutions can be.
Someone will have to undertake the following functions: stock carrying,
selling, providing after-sales service and extending credit to customers.
Manufacturer Information: gathering and distributing MR
Promotion: marketing communications
Contact: finding/communicating + buyers

Wholesaler
Matching: grading, assembling
Negotiation: reaching agreement on price
Retailer Physical distribution
Financing
Risk taking
Consumer
Figure 12.1: Functions of a distribution channel.

According to channel-structure theory, consumers prefer to deal with
marketing channels that provide higher levels of service outputs. These
outputs can be considered in terms of:
• spatial convenience (going to a shop nearer to you rather than further
away)
• lot size (people preferring to buy 250 g of coffee, rather than a 5 kg
bag)
• waiting time
• product variety.
The greater the level of these service inputs required by the consumer, the
more intermediaries there will be.
The organisation of marketing channels is geared towards providing
benefits or utility for consumers (end users). The greater the level of utility
the marketer provides to the customer, the greater the level of profits
channel intermediaries can generate; channel intermediaries are people
such as wholesalers and retailers. However, providing additional benefits
to customers can also involve handling risk. Channel intermediaries can
try to reduce the level of risk in their activities, and/or they can pass it on
to other channel intermediaries or even take on more risk themselves. The
reason they may want to take on more risk themselves is because they may
usually make more profits as a result. The functions performed by channel
members are as listed below.
12.3.1 Efficiency
Efficiency within a marketing channel is improved if exchange is
centralised rather than decentralised. You find it more efficient to visit a
supermarket to buy products from a range of manufacturers than to visit
each one of them individually. Similarly, channel members find it more
efficient to reach you via a supermarket rather than visit you.
The extent to which exchange is centralised is limited due to costs of
communications, the effectiveness/efficiency of institutions and the quality
of contact. If there are too many layers in the distribution channel, the
174
level of noise will increase. In this instance ‘noise’ refers to the idea that
information received by retailers (for example, about consumer tastes)
will not be understood by manufacturers because it has to pass through a
number of layers of intermediaries who may distort the message.
12.3.2 Adjusting discrepancy of assortments

Among the functions performed by intermediaries such as wholesalers and
retailers is the sorting of goods in order to bridge the discrepancy between
goods made by producers and those that consumers demand.
The discrepancy arises because each manufacturer (for example, Nestlé)
produces a large quantity of a limited variety of goods and each consumer
demands a small quantity of a wide variety of goods. Intermediaries also
undertake sorting. This refers to the grading of the products retailers
receive from manufacturers (especially important in the sale of fresh
produce). They also bring together similar stocks from a number of
sources; this is referred to as ‘accumulation’. The ‘allocation’ function
performed by channel members refers to goods being bought in truck
loads then being sold in case lots – again this is an important source of
utility for consumers. This is also an activity that distinguishes convenience
stores from hypermarkets. The latter may charge lower prices, in return
for consumers taking on the inconvenience of buying in large quantities
– which the consumers will have to store at home. ‘Assorting’ refers to
retailers building assortments of goods for consumers. For example,
retailers will bring together a variety of different fruit from different
countries.
Each of the above is more commonly found in some markets rather than
others. Because of the above issues there is a limit to the degree of vertical
integration that can take place. Vertical integration refers to firms within
a distribution channel; for example, the manufacturer, the wholesaler and
the retailer being owned by the same company.
12.3.3 Routinisation of transactions

Costs can be reduced by increasing the extent to which transactions are
‘routinised’ (namely, the same transaction takes place week after week).
In contrast, the greater the extent to which bargaining takes place, the
greater the costs – because every time the transaction takes place you
have to work out the price to be charged. Routinisation is an important
aspect of exchange; it leads to standardisation of goods and services; for
example, automatic reordering. A consumer example is the sale of certain
insurance policies that can be set to auto-renew. This gives the customer
the benefit of knowing that cover will not lapse if they forget to renew, but
the customer will lose potential cost-savings from finding a cheaper policy.
12.3.4 Postponement–speculation and channel structure

According to Twede et al. (2000), the concepts of postponement and
speculation help marketers to decide where and when to add value in
distribution channels. Speculation involves making changes to the product
as early as possible in the distribution channel, in order to benefit from
economies of scale. Postponement is the polar opposite of speculation – it
assumes that there are changes in the marketing environment in the future
thus it is too risky to make changes early on and so any changes should be
delayed. The trade-off between speculation and postponement is therefore
one of minimising costs versus minimising risks.
Efficiency in channel structure is achieved by postponing (delaying)
changes in the form and identity of a product to the latest possible
175
point in the marketing process, and inventory location to the latest

possible point in time. This reduces risk and the costs associated with
uncertainty. The more differentiated the product (the greater the number
of models of a range of cars or flavours for crisps), the greater the risk.
The cost of physical distribution is reduced by sorting products in large
lots in undifferentiated states. So it is cheaper to hold parts and only
manufacture when there are confirmed orders for particular specifications.
By postponing, channel members can also shift risks to other channel
members. So retailers only buy from wholesalers who offer fast delivery
– this means they can delay placing an order to the last possible moment.
The wholesaler will need to carry enough stock to supply the product at
the last possible time. The opposite of postponement is speculation. The
earlier that changes and movement takes place, the greater the reduction
in costs of the marketing system. Speculation involves reducing costs by
achieving economies of scale; reducing large numbers of small orders; and
reducing the occasions when the firm runs out of stock.
It is possible to consider various combinations of postponement and
speculation. Full speculation involves manufacturing large quantities of
products and then warehousing them at relatively high inventory costs.
However, production and distribution costs are relatively low.1 1
See the article by
Twede et al. (2000) for a
Speculation detailed consideration of
these issues.
Marketer Marketer
Make changes as early as
possible to gain from
economies of scale
Risks raised - what if Reduction of Lower risks

people do not want to
buy these products?
costs Make changes to the
product as close as
possible to when
someone is buying
Risks reduced - you
reduce the probability
of making something
the customer does
not want
Customer Customer
Postponement
Figure 12.2 Postponement, speculation and risks.
An alternative approach, logistics postponement, is to keep finished
inventory at a central location – products are only shipped when there
is demand for them. Distribution costs rise, but inventory levels in the
channel are reduced. This is also referred to as just-in-time shipping.
The use of catalogues and e-commerce is also a characteristic of logistics
postponement.
Manufacturing postponement involves shipping semi-finished products
to a point near the market. Final differentiation takes place close to the
market. An example of this is the packaging of fresh coffee in the retail
store. Packaging postponement is also used in some newer technology
products as well. This approach reduces inventory risk, but it does mean
that there are additional costs in having finishing services in locations near
the customer.
Full postponement means that all manufacturing is delayed until the
customer actually places the order, products are stocked and customised in
a central location.
176
The situations where full postponement is effective is where customisation

has a high value to customers and customers are willing to wait for the
product.
The decision to postpone packaging can depend on whether or not
the marketer wants to have a global standard product, for example,
customised for local markets. This approach also means that marketers
can move products more easily between regions. There is also a benefit to
postponement when demand is uncertain and products could end up being
in obsolete packages.
Activity 12.1
Think about different fast food outlets (for example, Burger King, KFC and McDonalds)
that you may have visited.
•• Which of these seem to work on the basis of speculation and which of them on the
basis of postponement?
•• How do these approaches allow the restaurants to offer value to the customer?
How can the postponement approach be made more effective?
Case study: Postponement and speculation in the Japanese car industry.

Park (2007) gives the example of the Japanese car industry to illustrate how
postponement and speculation can be used in the product development process.
Postponement allows the firm to delay making final decisions about their products in the
production process, until they have more certainty about precise customer requirements.
Speculative strategies are used to reduce development time by finalising the design
before product development starts. According to Park (2007, p.180) car manufacturers,
for example, use postponement for parts that are, ‘crucial to the integral product
architecture’ and which may be important for product differentiation and speculative
strategies are used for parts that have ‘modular architecture and can be developed
beforehand’. The two objectives are differentiation and decreased development time.
More modular development means that the component only has limited links to other
components and there is less need for communications between organisations and this
reduces development time. On the other hand ‘integral product architecture’ refers to
components that have a high degree of mutual dependence and for this reason firms
need to have a high level of coordination in their development.
Because postponement decisions are taken late in the development process, this enables
differentiation, and the product can better reflect customers’ latest requirements.
Speculative strategies require working on the basis of forecasts.
Source: Tae-Hoon, P. ‘Hierarchical structures and competitive strategies in car
development’, Asian Business and Management 6 2007, pp.179–98.
12.4 The importance of power in channel member

relationships
The following definition of power is given by Dahl (1957), pp.202–03:
A has power over B to the extent that he can get B to do
something that B would otherwise not do.
The key feature of power then is the ability to cause someone to do
something he/she would not have done otherwise (Gaski, 1984). In
marketing, the notion of power is an important one when considering
distribution channels because channel relationships can involve the
exercise of power by one party over another. When we consider vertical
177
marketing systems below, we will see how power can be applied in a

practical context. In this section, however, we will consider the factors that
contribute to power; this will clarify in conceptual terms how power can
be exercised and managed by different members of a marketing channel.
The reason why an organisation has power over another is because of
the existence of the related concept of ‘dependence’. Emerson (1962)
argued that the relative dependence between two actors in an exchange
relationship determines their relative power. Not being dependent, a
state of independence refers to the concept of autonomy. Dependence
poses constraints in the freedom of choice of actions. A company becomes
vulnerable when it loses control over resources to its exchange partners
and finds itself dependent on its partner (Spekman and Strauss, 1986).
With increased dependence also comes strategic vulnerability (Van de Ven,
1976). Frazier et al. (1989) define dependence as the degree to which
a party needs to maintain its relationship with another party in order to
achieve the desired goals. Dependence on an exchange partner is often
connected to the costs associated with terminating the relationship and
switching to an alternative exchange partner (Joshi and Arnold, 1997).
The behavioural approach to power deals with the relationship between
power, dependency and conflict and the different bases of power that
stakeholders may have and these include:
• reward – ability to reward desirable behaviour
• coercive – the opposite of reward power and refers to the ability to
punish
• legitimate – derived from authority
• referent – where power is derived because others admire and wish to
emulate
• expert – comes from knowledge that is valued by others
• informational power – where power is derived from having access to
more information than others.
Dependency increases the organisation’s vulnerability by creating problems
of uncertainty or unpredictability; it reduces the organisation’s autonomy
and the degree of strategic freedom, and allows the direct transfer of
benefits and profits from the dependent on the dominant organisation
(Bourantas, 1989).
El-Ansary and Stern (1972) view dependency as a function of:
• the percentage of a channel member’s business which they contract
with another member and the size of the contribution which that
business makes to their profits
• the commitment of a channel member to another member in terms of
the relative importance of the latter’s marketing policies
• the difficulty in effort and cost faced by a channel member in
attempting to replace another member as a source of supply or as a
customer.
Frazier et al. (2009) say that suppliers who are highly dependent on their
distributors are more likely to want the relationship to develop over time.
These distributors will therefore expect their suppliers to use strategic
information in order to benefit the distributor. The authors identify two
types of strategic information; external (ESI) and internal (ISI). The
former relates to information about customers and competitors, whereas
ISI relates to information about the organisation’s future plans and is
178
likely to be both sensitive and proprietary; this makes it more likely to

be misused by suppliers. Distributors and suppliers value both types of
information, because they can be a source of competitive advantage. A
high degree of supplier dependence on a distributor will mean that the
supplier will be less likely to commit opportunistic acts that damage the
distributor; this means that distributors who are more powerful than the
suppliers they deal with are likely to perceive lower risks of sharing ESI
and ISI.
12.5 Coordination in channel relationships

There has been a shift towards the increasing usage of coordination,
rather than control. Coordination is defined as the degree to which the
manufacturer and dealer activities are well organised and synchronised;
it involves channel members aligning their activities to achieve their
objectives. Coordination is achieved when the members of a channel
are able to maximise retailer and manufacturer profits (if there are two
members in the channel). There are two types of efforts that suppliers can
use in order to achieve coordination: outcome-based coordination efforts
and behaviour-based coordination efforts.
The focus of outcome-based coordination efforts is on short-term
‘bottom-line’ results like sales growth, market share, target achievement,
etc. in the personal communication with the distributor personnel. In
contrast, behaviour-based coordination efforts focus on process issues
such as customer education, sales person training, selling techniques,
etc. Behaviour-based efforts also involve greater information exchange
and sharing expertise. Behaviour-based coordination is inherently more
relationship oriented since issues related to the task of accomplishing
results are focused on the relationship rather than on the results
themselves. Behaviour-based control systems are considered to be
‘nurturant’ providing guidance and feedback, focusing much less on
short-term results and more on long-term results. If the channel principal
chooses to adopt outcome-oriented coordination, the channel partner will
be encouraged to be more keen on short-term, result-oriented activities
rather than on long-term, relationship-building activities. This would lead
to an erosion of commitment in the relationship since the channel partner
will be reluctant to invest fewer resource for the long-term benefit of the
relationship and instead would concentrate on immediate outcomes.
12.5.1 Channel behaviour and organisation

This topic is covered in detail in Kotler and Armstrong (2012). In the
Essential reading, you should pay attention to the coverage of vertical and
horizontal marketing systems. You should also consider multi-channel
systems. In Figure 12.3 below you will see a summary of the three
different types of vertical marketing systems. The figure shows how, in an
administered VMS, a single retailer (for example) can exert control over
a number of different organisations in its supply chain due to the power
that it has. In contrast, in the corporate VMS, power is derived from single
ownership and in a contractual VMS the franchisor can exert control over
franchisees via contracts.
Activity 12.2
What are the advantages of vertical marketing systems (VMS)? Explain the reasons for
the increase in the use of systems of this type.
179
Administered Corporate Contractual

Contracts allow firms to
Size and power Single ownership
gain economies and sales
M M M M Manufacturer Manufacturer
W W W W Wholesaler
Retailer Retailer R R R R
Consumer Consumer Consumer
Figure 12.3: Different types of vertical marketing system.
12.6 Channel design and management decisions

Kotler and Armstrong (2012) deal with channel design issues in terms
of a sequence of stages that organisations may need to follow in order to
design their marketing channels. The textbook highlights the different
options that marketers face and the advantages and disadvantages
associated with each. Once the company has established the channel
design, it will need to consider how the channel ought to be managed
and this is also covered in terms of the selection of channel members,
managing, motivating and evaluating them.
In Figure 12.4 below you will see that it is possible to consider certain
channel design options based on the types of products being marketed
(covered in Chapter 8 of Kotler and Armstrong). For example, the
same type of convenience products may be better suited to an intensive
distribution strategy.
Distribution Type
Stocking in as More than 1

Limited number of
many outlets as but less than
dealers – exclusive
possible all intermediaries
rights to distribute
Intensive Selective Exclusive
Speciality
Unique characteristics or brand

identification: enough buyers
Type of product
will make a special purchase effort
Shopping
Comparisons made; suitability,
quality, price and style
Convenience
Frequently: immediately;
minimum comparison and
buying effort
Figure 12.4: Distribution type and product type.
180
Case study 2.1: Disintermediation in the movie industry

Major film studios dominate the distribution channels for films around the world. They
have achieved this by owning film, video and television distribution companies. The
importance of video and television is underlined by the fact that 80 per cent of movie
revenues come from the video and television markets.
A recent development has been video-on-demand (VOD). This would involve movies
being delivered to the audience, for example, via the internet. Consumers would be
able to download movies on their computer hard drive (for a fee). However, this would
only be for a limited period of time and the movie could not be copied or transferred to
another device.
One of the factors driving this move to VOD has been the success of Napster (a music
file-sharing service) that has been accused by the music industry of facilitating the
illegal distribution of songs by individuals. Film industry executives have been fearful
that a similar unlicensed service could be established and would thereby have an
impact on the sale of movie DVDs and perhaps cinema tickets.
Another factor encouraging the development of VOD has been the fact that the
internet is a distribution channel which allows firms to establish relationships directly
with the final consumer – this is unlike traditional distribution channels where there
has usually been an intermediary between the movie studio and the film watcher.
Moreover, this new distribution channel allows the movie studio unprecedented ability
to gain information about their consumers and engage in a dialogue with them. Such
information could be particularly useful for undertaking direct marketing campaigns
and developing offers specifically suited to particular market segments.
Of course there are also clear economic benefits to using a distribution channel which
offers such low costs to the movie studios. Studios will effectively be in the movie rental
business, except that when the consumer pays their $2.50 to rent the movie, instead of
some of it going to the rental store, the studio will be able to keep all of the proceeds.
Activity 12.3
What are the factors that are encouraging disintermediation in the movie industry?
12.7 Relationship specific investments in distribution

In this section we look at the notion of relationship specific investments
and how the concept can be applied to distribution channels. We have seen
in Chapter 7 of the subject guide, which deals with customer relationship
management, the notion of asset specific investments and their role in
marketing relationships.
In order to examine the application of these concepts to distribution, we will
now focus on a journal article and then consider some questions about it.
Activity 12.4
Read the following article, Kang, M-P., J.T. Mahoney and D. Tan ‘Why firms make unilateral
investments specific to other firms: the case of OEM suppliers’, Strategic Management
Journal 30 2009, pp.117–35 (available at: http://business.illinois.edu/josephm/
Publications/Paper%2041_Kang_Mahoney_Tan.smj_2006.pdf).
You should read from the Introduction on p.117 to the end of the Introduction on p.118.
You should then answer the following questions.
1. Under which circumstances would firms lose part of their relationship specific
investments?
2. According to transaction cost economics, how can firms mitigate the risks of the
above happening?
See Appendix 2 for feedback. 181
12.8 Fairness in distribution channels

Channel member conflict deals with disagreement between sellers and
their channel members and it arises because both parties may have
different interests and goals. The goal of the marketer who is selling their
own products would be to maximise the sales of their brand. The goal of
a retailer will usually be to maximise sales from the store, regardless of
brand. Opportunistic behaviour can take place in these situations where
firms can undertake ‘passive’ or ‘active’ attempts to break written contracts
or social contracts, which underpin the exchanges between them. For
example, a retailer may promise a marketer to display goods prominently
if they are on promotion (for example, on a discount). But they may not
keep this promise if they receive a better offer from another marketer.
This is a variation on the usual form of opportunism, which is generally
considered to involve the violation of explicit contracts. Opportunism can
be linked with the notion of fairness (a comparison of perceived outcomes
by one party of an exchange with the perceived outcomes to another
party). Where the ratios are not equal the party with less feels that the
exchange has not been fair. This notion can be applied to the distribution
context. If unfairness is perceived to exist on the part of an exchange
partner they may feel that any opportunism or conflict that they have
encountered has been intentional and as a result they may be more likely
to take action against it.
Channel satisfaction and its consequent impact on channel relationships
has been an important concern for both practitioners as well as researchers
during the last three decades. This follows the global move towards
building closer and more integrated relationships between manufacturers
and their channel intermediaries. Channel member satisfaction is defined
as an overall positive effective state resulting from the appraisal of all
aspects of a firm’s working relationship with another firm. 
Geyskens and Steenkamp (2000) proposed a two-way classification of
channel satisfaction based on economic and social antecedents. Economic
satisfaction is described as ‘a channel member’s evaluation of the economic
outcome that flows from the relationship  with its partners such as sales
volume, margins and discounts.’
Social satisfaction depends on a channel member’s evaluation of the
psychological  aspects of its relationship, in that interactions with the
exchange partner are fulfilling and gratifying. Social satisfaction looks
at issues like the type of influence strategies used, conflict resolution
approaches followed, etc. Social satisfaction does not take into
consideration the financial performance or the goals of the channel
partner. It is in fact quite possible that a channel member is economically
satisfied but not socially satisfied.
In their study of conflict in franchise systems, Spinelli and Birley (1998)
asked franchisees about their satisfaction with the services that they
received from franchisors. In terms of importance a sample of these
services were ranked as follows:
• resolving disagreements quickly
• effective national advertising
• programmes for training employees
• support for new store development
• advice on inventory control.
182
The first and last items in this list illustrate social satisfaction, while the
middle three are examples of economic satisfaction.
Channel commitment is considered as an important outcome variable
in channel relationships. A committed party to an exchange believes the
relationship is worth working on to ensure that it endures indefinitely.
Commitment is considered to be very important since it motivates channel
members to ignore short-term inadequacies of the relationship and look
at the long-term possibilities. Commitment is also important to induce
channel members to make long-term investments in relationship-related
assets.
Economic satisfaction depends on the economic or financial well-being
of the channel partner and satisfied channel members consider the
relationship to be a success with respect to goal attainment.
While it is to be expected that a channel member who is satisfied with
the economics of a relationship will be committed to it, this may not
necessarily be the case. Environmental and behavioural factors can
influence the extent to which economic satisfaction results in relationship
commitment. Although a firm may have a high level of economic
satisfaction there may nevertheless be a lack of commitment because of a
high level of environmental uncertainty; for example, due to an increase
in, often cheaper, competition. This has been the case with some brand
owners in western countries who have broken long-term manufacturing
relationships with firms in the west in favour of manufacturers in eastern
countries who may be cheaper.

In this chapter we have looked at the functions that distribution channels
can perform and this has set the scene for considering how marketers may
need to alter the design of distribution channels based on the functions
that they would like the channel to perform. We also considered how
postponement and speculation can be used to add value in distribution
channels, plus the link between these concepts and the notion of risk. We
have also considered the role of power and control in determining channel
relationships and this has provided a backdrop to the coverage of channel
design issues in Kotler and Armstrong (2012). This chapter also looked
at the impact of investments specific to channel relationships and their
impact on such relationships and we concluded by looking at fairness.

• identify the functions of distribution channels and how the marketer’s
need for these will vary depending on the types of products and
services that they are selling
• describe and critically assess the key issues in the design and
management of marketing channels
• explain the factors that can influence the power relationships between
channel members.
183

1. a. Identify and describe the different bases of power. (10 marks)
b. ‘Reducing the level of dependence that an organisation has
on other channel intermediaries is an important goal for an
organisation.’ Critically discuss this statement. (15 marks)
2. a. In distribution, what is the difference between outcome-based and
behaviour-based control systems? (10 marks)
b. Discuss the different ways in which vertical marketing systems can
enable an organisation to manage the power relationships between
itself and channel intermediaries. (15 marks)
3. Explain the difference between direct and indirect distribution. Assess
the advantages and disadvantages of each and explain why direct
distribution has become popular in recent years. (25 marks)
184
Chapter 13: Corporate social responsibility (CSR)
Chapter 13: Corporate social

responsibility (CSR)
13.1 Introduction
Although often relegated to the final chapter of most marketing textbooks,
(including this one), the topic of social responsibility and ethical behaviour
is of paramount importance in marketing. Indeed one of the deliberate
features of this chapter is to draw your attention to previous topics of the
subject guide and how they relate to corporate social responsibility.
The importance of this topic can be gauged by considering how firms
that were once considered invincible, such as Siemens (bribing scandal
in Greece), Danone’s (fined for fraudulent claims about its yoghurts) and
Lehman Brothers (collapsed in 2008), have all suffered from activities that
could have been avoided if greater attention had been paid to the social
and ethical side of their market operations.
The term corporate social responsibility (CSR) is a rather new one applied
to all aspects of ethical corporate behaviour, from the environmental
practices of a firm to the way in which the management treats its
employees. Before we explore this approach to marketing and deal with
the question of why it may have arisen, it may be helpful to outline why
marketing may generate ethical and social problems to begin with. We
shall then move on to discuss the responses of consumers and civil society1 1
Broadly defined as
to the marketing behaviour of firms and see how firms respond. We will the space between
the state and private
also examine the question of which firms are more likely than others to
organisations on the
adopt corporate socially responsible behaviour and what factors may be one hand, and the
responsible for the switch to corporate socially responsible ways of individual on the other.
behaving. Normally we think of
civil society as being
Finally, this chapter also provides a platform for reviewing corporate synonymous with the
responsibility issues that relate to a number of previous chapters. voluntary sector, but also
included are religious
13.1.1 Aims of the chapter groups, informal
associations and labour
The aims of the chapter are to:
organisations.
• make clear the growing importance of ethical marketing and explain
the reasons why it is more important today than ever before
• emphasise how the rise in the global telecommunications industry
makes inappropriate corporate behaviour much less localised
• demonstrate that firms engage in socially responsible behaviour for
both normative reasons (namely, because it is good) and for profit-
oriented reasons (that is, acting ethically can also be good for the
bottom line)
• illustrate how corporate social responsibility and ethical issues relate
to topics covered in previous chapters.

• identify some of the common and more radical criticisms of marketing
• explain what is meant by the term ‘corporate social responsibility’ and
its origins in the early industrial revolution
185
• describe the history of ethical marketing practices and the impact

of environmental and other social movements on fostering modern
ethical behaviour on the part of firms.

Pearson Prentice Hall, 2012) Chapter 20. Note: Please read the entire
chapter.

O’Shaughnessy, J. and N.J. O’Shaughnessy ‘Reply to criticisms of marketing,
the consumer society and hedonism’, European Journal of Marketing, 41(1)
2007, pp.7–16.
Peloza, J. and J. Shang ‘How can corporate social responsibility activities create
value for stakeholders? A systematic review’, Journal of the Academy of
Marketing Science 39 2011, pp.117–35.
Smith, N.C., M.E. Drumwright and M.C. Gentile ‘The new marketing myopia’,

Badot, O. and B. Cova ‘The myopia of new marketing panaceas: the case for
rebuilding our discipline’, Journal of Marketing Management 24(1–2) 2008,
pp.205–19.
Belk, R.W. ‘Materialism: trait aspects of living in the material world’, Journal of
Consumer Research 12 1985, pp.265–72.
Brik, A.B., B. Rettab and K. Mellahi, ‘Market orientation, corporate social
responsibility and business performance’, Journal of Business Ethics 99
2011, pp.307–24.
Freeman, R.E. Strategic management: a stakeholder approach. (Boston: Pitman,
1984).
Frooman, J. ‘Stakeholder influence strategies’, Academy of Management Review
24(2) 1999, pp.191–205.
Galbraith, K. The affluent society. (London: Penguin, 1999).
Hirschman, A.O. Exit, voice and loyalty. (Harvard: 1970).
Jocz, K.E. and J.A. Quelch, ‘An exploration of marketing’s impacts on society:
a perspective linked to democracy’, Journal of Public Policy and Marketing
27(2) 2008, pp.202–06.
Kang, G-D. and J. James ‘Revisiting the concept of a societal orientation:
conceptualisation and delineation’, Journal of Business Ethics 73 2007,
pp.301–18.
Kelley, E.J. and W. Lazer Managerial marketing: perspectives and viewpoints; a
source book. (Homewood, IL: Irwin, 1967).
Kilbourne, W.E. and M.C. LaForge, ‘Materialism and its relationship to
individual values’, Psychology and Marketing 27(8) 2010, pp.780–98.
Klein, N. No logo: no space, no choice, no jobs: taking aim at the brand bullies.
(Toronto: A.A. Knopf Canada, 2000).
Levitt, T. Marketing for business growth. (New York; Montreal, McGraw-Hill,
1974) second edition.
Natale, S.M. and C. Doran ‘Marketisation of education: an ethical dilemma’,
O’Shaugnessy, N. and J. O’Shaugnessy ‘Marketing, the consumer society and
hedonism: a reply to Abela’, European Journal of Marketing 41 2007,
pp.7–16.
Peloza, J. and J. Shang ‘What business leaders should know: investing in
CSR to enhance customer value’, Director Notes Series, The Conference
Board Governance Centre 3(3). Available at: SSRN: http://ssrn.com/
abstract=1843308
186
Rose, P. and S.P. DeJesus ‘A model of motivated cognition to account for the link
between self-monitoring and materialism’, Psychology and Marketing 24(2)
2007, pp.93–115.
Smith, N.C., M.E. Drumuright and M.C. Gentile ‘The new marketing myopia’,
Journal of Public Policy & Marketing 29(1) 2010.
Springer R.A. ‘Pharmaceutical industry discursives and the marketization of
nursing work: a case example’, Nursing Philosophy 12 2011, pp.214–28.
Tadajewski., M. ‘Towards a history of critical marketing studies’, Journal of
The Economist ‘Corporate social responsibility: two-faced capitalism’,
22 January 2004.
The Economist ‘Survey: corporate social responsibility’, 20 January 2005.
Vallaster, C., A. Lindgreen and F. Maon ‘Strategically leveraging corporate social
responsibility: a corporate branding perspective’, California Management
Review 54(3) 2012, pp.34–60.
Vargo, S. and R. Lusch ‘Evolving to a new dominant logic for marketing’,
Wible, A. ‘It’s all on sale: marketing ethics and the perpetually fooled’, Journal
of Business Ethics 99 2011, pp.17–21.

http://baierle.wordpress.com/2008/11/behind-mask.pdf
The Bairle and Company website contains a detailed report entitled: ‘Behind
the mask: the real face of corporate social responsibility’.
www.bsr.org
Business for Social Responsibility (BSR) offers a large collection of online tools
and guidelines on responsible business practices.
www.csr.gov.uk
The United Kingdom government’s website on corporate social responsibility.
www.pbs.org/frontline
The Frontline website contains a free download of a documentary entitled
‘Bigger than Enron’ which details accounting scandals and how firms with
no ethical oversight or CSR policies proliferated over the last decades.

This chapter starts by identifying some of the ethical and social problems
that marketing is accused of causing. We then assess some of those
criticisms that relate to marketers’ impact on consumers and a possible co-
creation solution to these (co-creation was introduced in Chapter 8 of the
subject guide, Section 8.3). The chapter then examines more fundamental
criticisms of marketing in terms of its role in a materialistic society. We
continue with this theme when we look at the criticisms of ‘marketisation’.
The next section of this chapter examines the obvious relationship
between societal marketing and CSR and why some firms may be more
inclined to adopt the CSR philosophy. The CSR concept is then assessed in
more detail; in particular, the role of stakeholders. The chapter ends with a
look at ways in which marketers can influence stakeholders.
13.2 What ethical and social problems is marketing

accused of causing?
There is a long list of social and environmental ills which marketing is
often accused of causing. Many of these negative effects are outlined in
great detail by Kotler and Armstrong (2012, pp.610–15) and include:
• high prices
• deceiving consumers
187
• high-pressure selling
• shoddy or unsafe products
• waste/environmental damage
• planned obsolescence
• customer privacy and data protection.
13.2.1 Impacts on consumers

The list above affects individual consumers directly and although the list
looks negative, there are in fact reasons or rationales that vindicate the
marketing framework in each of the points. Indeed in previous chapters
of the subject guide we have looked at concepts that can help explain why
firms use particular strategies.
Activity 13.1: Why marketers engage in activities that have been criticised
1. What reasons could be used to explain the use of high prices by marketers (rather
than just profiteering)?
2. For what reasons, linked to consumers’ buyer behaviour, may firms engage in heavy
advertising expenditure?
3. In what ways may firms branding strategies be a response to consumer behaviour?
What the above discussion suggests is that at the very least marketers
cannot be held wholly responsible for all of the negative impacts of their
activities. Wible (2011) says marketers commonly argue that their actions
are simply a response to consumer wants and needs. Theodore Levitt
has been quoted as saying that advertising is similar to art. Art fulfils the
human desire for beauty, enrichment, imagination, and entertainment
(Levitt, 1974, pp.84–92). The counter argument is that ads create desires
rather than satisfy them. People did not want the $275 dollar breadmaker
until the $400 one was presented, at which point the $275 offering
became very popular indeed. The latter was a decoy, which encouraged
people to think that the $275 offering was good value, even though when
it was the only one available people did not buy it, because they felt they
had no need for it. People are manipulated into developing wants that they
would otherwise not have. Moreover, the economic system encourages
people to spend their money on private goods (such as expensive
breadmakers) and then ignore public goods such as art, parks and clean
air that people would desire without any advertising.
There are some other arguments to defend the position of marketing. For
example, high prices are often alleged to be the result of the marketing
system, with its emphasis on high promotional costs and complicated
distribution channels. A more centrally planned system, with fewer
intermediaries and less scope for promotion, could, in theory, reduce costs
for consumers.
But is such a system ‘better’ than the one we currently have? The
disastrous examples of centrally planned economies notwithstanding,
there may be a reason why consumers willingly pay more for a certain
product than they would otherwise if they lacked the sophisticated
distribution and promotional techniques that the marketing system
provides. This is because price mark-ups often reflect product or service
attributes that consumers want, such as convenience and choice. Having
a less costly distribution system with only one location where goods and
services can be bought may lower the direct cost of the product, but these
188
savings will be offset by greater indirect costs associated with the purchase
such as increases in transportation costs and search time.
On balance it is difficult to make a claim that marketing harms or helps
consumers since there are equally compelling reasons for each view. As
is often the case, the question of whether marketing activity is good or
bad for consumers is an empirical or a practical one. That is, we have to
ask whether, in the real world, the benefits of such market activities as
advertising (for example, information) outweigh the costs (for example,
higher prices).
13.2.2 A co-creation solution?

The new co-creation paradigm may provide a solution to some of the
criticisms levelled against marketing. Co-creation can involve, for example,
new consumers being able to use their exchanges with other consumers to
develop knowledge about a product or brand. Moreover, using such content
can be an interactive experience and, as such, gives consumers the feeling
of having greater control over their decision-making and consumption.
According to Badot and Cova (2008) marketing has traditionally been
based on an exchange model grounded in economics, whose basis was
the exchange of manufactured goods and which distinguished services
as a special type of good that was intangible. In contrast, in the service
dominant logic as espoused by Vargo and Lusch (2006) customers are
considered to co-create the functionality of products and also the meanings
of the experiences that they derive from the consumption of those products.
For example, visiting a theme park provides various experiences; however,
the meanings of those experiences are co-created by consumers in terms
of the conversations with friends and relatives that they have about their
experiences and the significance they hold for the consumer. In the S-D
philosophy, marketers no longer market to their customers; rather, they
market with them and customers are seen as collaborators in the value
creation process.
This new approach changes marketing from being a process where
marketers seek to know about their target customers in order to address
their needs and generate repeat business towards a model where marketers
try and learn from their customers’ expertise and experiences of using their
products and services.
Co-creation means that companies cannot control their consumers or their
stakeholders just as consumers or stakeholders cannot control companies.
An example of the new approach is Mozilla Firefox. In the context of OSS
(Open Source Software), collective effort, social interaction and group
influence are the components that lead to the development of software
such as Linux. In the case of Mozilla Firefox consumers played the role of
marketing agents. They generated word-of-mouth by putting up links to
the main download site (including in their email signature file), discussing
Firefox in blogs, posting its icon to their personal websites, collecting
testimonials and visiting technical sites where they vote for their favourite
browser. In this example it was not just the marketer doing marketing, but
rather the customers themselves.
Developments such as this one demonstrate a shift in the power relationship
between marketer and customer. This stands in marked contrast to the
orthodox view of marketing where managers are expected to manage the
elements of the marketing mix in order to deliver satisfaction for customers.
Having examined the most immediate criticisms and answers to these, we
will now look at broader criticisms of the type of society in which marketing
takes place and the associated responses.
189
13.2.3 Materialism
One of the concepts associated with a consumer culture is materialism,
which has been defined by Belk (1985) as ‘the importance a consumer
attaches to worldly possessions’ (p.265), and characterises it as
a set of traits. The traits associated with materialism in this view
are possessiveness, non-generosity and envy. O’Shaughnessy and
O’Shaughnessy (2007, p.8) draw the following distinction: ‘Generally we
define consumerism as both giving priority to the culture of consumption
and promoting it, and materialism (outside philosophy) as a preoccupation
with the pursuit of material goods at the expense of other more interesting
things – human relationships, love, etc.’ Although a defence of marketing
is that consumers engage with it if they want access to goods and
services, and highly involved consumers tend to spread information and
constitute a check on marketers’ power. The associated criticism is that
they may do so for emotional and psychological benefits. This criticism of
a consumer society is explained in the following way: ‘The accumulation
and display of material possessions; satisfying transitory appetites and
created wants; seeking positional goods for social status and social
bonding’ (O’Shaughnessy and O’Shaughnessy, 2007, p.8). The feature of
these criticisms is that in such a society consumption is taking place for
its own sake, it is essentially unnecessary and consumers are effectively
consuming goods in order to either compete with each other and/or to
build relationships with each other, something which ought not to be
necessary. However, they concede that: ‘Given this, operational meaning
[of materialism] will continue to be elusive because the concept itself lacks
a definition in which to operate, one with the tightness and rigor necessary
for scientific verification’ (2007, p.9).
Kilbourne and Laforge (2010) identify the following positive social
consequences arising from materialism. Economic growth in such societies
becomes defined in terms of material progress (for example, in terms of
the material possessions that people own today that their parents did not
have). Materialism is then seen as both an outcome of the system and the
motivation that encourages people to work for further growth. Though as
Rose and Dejesus (2007) point out, purchasing motivated by materialism
may involve consumers who are more prone to complaining (because
they are dissatisfied with their material standard of living. This process
is defended on the grounds of Pareto optimality – as long as the absolute
gains of one individual are not at the expense of another, then growth
benefits all members of society who compete for the material output of the
system. In this context, materialism would be characterised as a positive
attribute that benefits society in the long term by promoting even more
growth. Though Rose and Dejesus (2007, pp.94–95) report that, for most
people, materialistic values are negatively correlated with life satisfaction.
They also cite studies showing that compared to non-materialistic people,
more materialistic people ‘show less interest in their communities’… ‘are
dissatisfied with their families’… and ‘likely to spend less time with them’
and ‘take more than their share of limited natural resources by amassing
products of questionable necessity’.
However, there are negative social consequences as well and these include
the environmental impact of materialism if large numbers of people were
to pursue it. For example, the impact of car pollution would become
unsustainable if everyone were to be able to drive. In many cities it is only
because large numbers of people are willing to travel on public transport
that car travel is possible for those who choose that mode of transport. In
addition there are argued to be social and physical limits to growth. For
190
example, positional goods only provide people with value if other people
do not have them; an example of this is education, but it can be applied to
various other goods as well.
As well as social positives and negatives Kilbourne and Laforge
(2010) identify personal positives and negatives as well. Consumption
behaviour can be used to develop individual identity. It can also help
develop collective experiences (between groups of people) and even
communities centred around the consumption of particular brands
(brand communities). So consumption behaviour can provide people
with meaning and empowerment. On the other hand the negative social
consequences of materialism are that whereas people may believe that the
possession of material goods can yield happiness, higher order intrinsic
needs – for example, self-esteem – cannot be addressed via material goods.
Materialism has also been linked to behaviours such as compulsive buying
and the increase in levels of personal debt in order to finance purchasing.
Jocz and Quelch (2008) highlight some of the benefits of marketing,
which is said to enable consumption and help people sustain healthy and
productive lives. Marketing activities also ensure that goods and services
are available where and when they are wanted, at prices that people
are willing to pay. The various activities associated with the distribution
function – for example, sorting – are designed to increase efficiency in the
marketing system. Although marketing may be criticised for encouraging
overconsumption, historically what has been more of a problem has been
the under consumption of goods and services.
‘Marketing in its broadest sense is the medium through which the material
goods and culture of a society are transmitted to its members.’ (Kelley and
Lazer, 1967, p.42). Marketing can be defended in terms of its inclusivity.
Marketers aim to serve the vast majority of the population, and the rich
pay a price premium if they want unique, specialised, or luxury items. (In
some situations, rich consumers subsidise others – for example, airline
pricing in which yield management technology enables high fares paid
by business travellers to subsidise low fares paid by tourist passengers
on the same flight.) Marketers also link people across countries and
address the needs of the disadvantaged and minority groups. That is not
to say that all consumers have equal access to goods or that retailers and
other marketers do not discriminate against various ethnic, religious or
racial groups. There remain populations that have little, if any, access to
marketing systems that could raise living standards by linking consumers
with multiple producers and by consistently delivering high-quality
products and services. However, seeing potential opportunities, marketers
are displaying increasing interest in participating in underserved markets
and emerging economies, sometimes in partnership with local or global
not-for-profit organisations.
Case study 13.1: Has South Korea become consumption and credit crazy?
Has marketing and the attention placed on the alleged economic benefits of a
consumer-oriented society turned a nation of savers into out-of-control ‘spendaholics’?
That’s the question many commentators are asking of South Korea, one of the most
successful countries, economically, in South-East Asia.
For many years South Koreans were known for their thriftiness and high savings rates.
The country’s huge reservoir of personal savings kept interest rates low, fuelled real
investments by governments and businesses, held inflation at bay and kept economic
growth rates high from the 1960s all the way through to the late 1990s.
Then something began to change.
191
Partly induced by the speculative bubble of the late 1990s and the Asian currency crisis
of 1998, South Korea has now emerged as one of the highest per capita spenders in
the world.
Much of the blame has been laid on new consumer society inventions like non-secured
credit and the aggressive promotional campaigns designed to get consumers to spend
following the last economic downturn. Growth was maintained during the last Asia
crisis because the government boosted private consumption by aggressively promoting
credit card use. It did this by, among other things, introducing tax deductions for
purchases made by credit card. The result was a credit card debt explosion. The total
amount of credit card spending rose from $53 billion in 1998 to $519 billion in 2002;
household debt soared from 18 per cent of GDP in 1999 to 62 per cent in 2001. Not
surprisingly, delinquency rates began rising sharply in 2002. As reported by the Korea
Economic Institute, ‘credit card excesses…created spiralling social problems [including]
increasing numbers of suicides, violent crime, kidnappings, and prostitution.’
Frightened by the possibility that personal bankruptcies could undermine the country’s
financial system, the government finally took steps to limit credit card use in early
2003. Its success produced a sharp contraction in private consumption, which triggered
a decline in business investment, and a recession in 2004.
So where does South Korea’s future lie?
Having chosen consumption-led growth as the path to get out of the economic malaise
of the late 1990s, South Korea is now faced with the prospect of the hollowing out
of its own industry and an increased dependence on exports. Exports accounted for
98.2 per cent of the country’s growth in 2003, while investment in new equipment
for production inside of South Korea, which regularly exceeded 20 per cent during the
economic expansion days prior to 1998, has been zero or negative since 1999.
Activity 13.2
Can you find examples of exchange behaviour (whether undertaken by marketers or
consumers) in your own country that can be criticised?
Tadajewski (2010) says that a neo-Marxian perspective inspired by

critical theory assumes that social reality is structured by socio-economic,
cultural and biological influences, together with power relations. The
critique focuses on highlighting inequalities in exchange relationships and
questioning the value of owning and the emphasis it has acquired over
‘being’. The ‘having’ orientation is criticised since it focuses on possessions
at the expense of individual and interpersonal relationship development
and the natural environment. In the promotion of having, marketing
and advertising are criticised, since the emphasis on possession represses
individuality.
Like Marxism, critical theory deals with emancipation and the freeing of
individuals from the control of the economic realm and the reconciliation
of ‘man and man, and man and nature’. Positive social transformation
would help the individual understand how one-dimensional modern
society is, in its promotion of ‘false’ needs that serve the interests of
industry, instead of promoting the self-development of the individual.
We will now look at another criticism that addresses one of the fundamental
trends in modern society. This is to do with a progressive increase in the
extent to which market-based exchanges take place. The more the market
becomes the basis for exchange activity, the greater the role for marketing
and the attendant activities that have been criticised above.
192
Activity 13.3
So far we have looked at the impact of marketers’ behaviour with consumers. In Chapter
20 of Kotler and Armstrong the section titled, ‘Marketing’s impact on other businesses’,
deals with the negative impacts firms can have on other business organisations.
In your study of this subject guide so far, what examples of such negative impact can you
identify?
13.3 Marketisation
The mechanics of the marketplace allow people the opportunity to
exercise their preferences. The ability that the market offers customers
for choice-making also enables people to construct a shared identity and
social belonging. The historical development of marketing, through the
different business orientations, shows that marketers have responded to
the changing marketing environment.
Notwithstanding these supposed benefits, there are people who criticise the
increasing use of markets (marketisation). Those people who challenge the
marketisation (associated with privatisation, deregulation and competitive
tendering) that has become a phenomenon of many economies in recent
years provide another fundamental critique not just of marketing per se but
the very market system on which it is based. Springer (2011) provides an
example of marketisation in the healthcare sector. She sees marketisation
as bringing market-based thinking into situations where it ought to have no
role at all. She identifies three methods that the pharmaceutical industry
uses in order to do this. The first is the development of credibility the
industry achieves by building a specialised body of knowledge: in her
example about the treatment of multiple sclerosis (MS). Such knowledge
about the effectiveness of new products and the use of clinical trials
then becomes part of the language and discussion between medical
professionals and their patients (doctors and patients talk about different
commercial products when discussing the patient’s condition). Secondly,
the industry co-opts the involvement of healthcare professionals by
sponsoring conferences and professional meetings. Thirdly, the industry
offers healthcare professionals recognition, status and prestige. These three
methods enable the industry and the market to play a role in the care of
MS that would otherwise not be possible.
Natale (2012) provides another critique of marketisation in the field of
higher education. He says that the introduction of the market and its
processes into higher education has meant that students may be seen
as revenue streams and colleges and universities may be seen simply
as businesses. The argument is that while marketisation may benefit
universities there are questions about the benefits to students and faculty
since the focus of the market and market-based performance may detract
from teachers’ core responsibility as educators. Students themselves
may see higher education not so much as the acquisition of education,
but rather the acquisition of skills that are necessary for employment
and indeed the selection of subjects may be chosen in terms of their
attractiveness to employers. This may reduce the importance or value
attached to education that emphasises the process and the ability to think.
Having examined a variety of criticisms of marketing, we will now look
at the ways in which organisations have sought to respond. We shall start
with a re-examination of the societal marketing concept that we first
encountered in Chapter 2 of the subject guide.
193
13.4 Societal marketing (revisited)

Kang and James (2007) cite Carrigan and Attalla (2001) who make the
point that the reliance of marketing on the notion of exchange assumes
that both the parties that are involved are satisfied at the end of the
exchange process. However, an important factor is that others may also be
affected, who are not party to the exchange process and as a result it has
been argued that the marketing orientation should be extended to other
groups of people since marketing activities may be at the expense of other
groups (or society).
Moreover, products that customers may want in the short term and whose
provision satisfies their expectations may ultimately be the cause of
dissatisfaction in the long-run. This situation can be applied to a number
of different product categories. For example, cars can fulfil the need for
transport in the short-run, but in the long-run the pollution they cause could
affect the health of drivers. Food that is high in salt and fat may provide a
more pleasurable eating experience in the short term, but longer term it
could be the cause of chronic ailments such as diabetes and heart disease.
Marketers have traditionally evaluated success in terms of whether or not
something can be sold (that is, whether there is a demand for it). This is
considered to be a marketing-oriented perspective. In contrast, the societal
orientation asks whether a product should be sold. The shortcoming with
a societal orientation is that it may require substantial changes in the
operations of a business and may not yield immediate profits.
Reluctance to operate with a societal orientation (previously covered in
Chapter 2 of the subject guide) seems to be based on the point of view that
financial and social performances of an organisation are antagonistic. The
financial and social performances of an organisation should, however, be
viewed as interdependent. For example, consumers believe that companies
actively supporting ethical behaviour are more reliable. Social attributes
such as ‘environmentally friendly’ or a ‘caring company’ can serve as an
extrinsic cue for product quality and customers may be willing to pay
higher prices as a result.
A societal orientation highlights the importance to an organisation of
operating with an emphasis on the well-being of consumers (for example,
health and safety) and society (for example, environmental preservation).
It signifies that an organisation is concerned with the long-term interests
of consumers and society at large. Operating with a societal orientation
widens an organisation’s attention from gratifying individual short-term
desires to addressing the well-being of consumers and society over the
long term.
This consideration of the societal orientation immediately begs the
question as to what differentiates this concept from CSR. We’ll now look at
what CSR is and how it differs from the societal orientation.
13.5 Definitions and a brief history of corporate social

responsibility (CSR)
Should businesses have to consider the economic, social and
environmental impacts of their activities, wherever they operate in the
world? According to many social activists, policy-makers, marketers
and even economists, the answer is a resounding yes. Corporate social
responsibility (CSR) is about how business takes account of its economic,
social and environmental impacts in the way it operates – maximising
194
the benefits and minimising the disadvantages. CSR can be described as

the voluntary actions that business can take, over and above compliance
with minimum legal requirements, to address both its own competitive
interests and the interests of wider society. The British government is such
an advocate of CSR that it has even created a ministerial post devoted to
the fostering and study of CSR, and the World Bank has issued an official
definition and is helping governments encourage this behaviour among
their firms:
Corporate Social Responsibility is the commitment of business
to contribute to sustainable economic development – working
with employees, their families, the local community and society
at large to improve the quality of life, in ways that are both
good for business and good for development.
(World Bank, 2004)
But is all this effort worth it? The biggest detractors of CSR are those who
claim that it is yet another corporate fad or buzzword. The well-known
and influential Economist magazine in particular has been very critical.
Like the stakeholder society before it, which argued that corporations
are beholden to all those who have a stake in the company (employees,
consumers, residents) and not just shareholders, the critics claim that CSR
is an unwarranted intrusion on what should otherwise be the corporate
prerogatives to make profits and add value for the owners of an enterprise,
who are typically shareholders. But this view of CSR negates the long-term
concern that many industrialists and business leaders have had with social
welfare and the role firms could play in fostering it.
Activity 13.4: CSR and societal marketing

Having seen explanations of the two concepts above, what do you consider to be the
differences between the two concepts?
13.5.1 Which firms adopt CSR and why?

Corporate social responsibility has taken on more prominence in recent
years because it has been adopted by well-known globally branded
companies such as the Body Shop, Starbucks and even the most
ubiquitous brand in the world, McDonalds. Even oil companies, which
were once stigmatised by environmental and human rights groups such
as Greenpeace, are now some of the biggest proponents of CSR. To
understand why, there are several points to consider in the context of
companies that are branding internationally.
First, branding has a danger in that external ‘shocks’ or accidents (like
selling a defective product) have a stronger and more immediate effect
on sales for branded goods than no-name goods. Among branded goods,
the strength and transmission of these shocks are an increasing function
of how much brand equity a particular firm has. Therefore to protect
itself, a company often has to be prepared to defend its actions to the
public. CSR is one way to achieve such protection in the marketplace.
Moreover, it is the large globally branded company that often has the
means to adopt costly CSR provisions such as buying only environmentally
compliant products from suppliers. However, as Vallaster, Lindgreen and
Maon (2012, p.38) point out: ‘When companies proclaim their embrace of
values that relate to CSR, they immediately come under increased scrutiny
and often attract the attention of activists and interest groups that aim
explicitly to counter their marketing efforts.’
195
Second, large globally branded companies are also often companies that
sell shares to the public as well as to large institutional investors. These
investors often worry about the safety of their investment and do not want
to witness an Enron-style scandal2 that can ruin their investments. They 2
In 2000 Enron was
pressure firms to adopt codes of conduct that, in turn, encourage more the largest energy
CSR-type behaviour. company in the world,
until it went bankrupt
Finally, there is the growth of public pressure to improve corporate
as a result of unethical
behaviour via consumer actions, and pressure from non-governmental business practices,
organisations such as Greenpeace (or what Kotler and Armstrong refer financial impropriety and
to as consumerism and the impact of environmentalism). Consumers, phoney accounting.
moreover, are sometimes willing to pay more for goods and services if they
feel that the companies are operating in a socially responsible manner.
Consumers often have two very powerful mechanisms in the marketplace
by which they can affect the corporate behaviour of large firms. As
noted by Albert Hirschman (1970), they can either exercise voice or
exit if they disapprove of corporate actions. The exit option works when
there is sufficient competition in the marketplace so that consumers can
switch from one company to another if they disapprove of the actions
of one company. Voice is exercised when there is less likelihood of
switching behaviour because the company commands a large share of the
marketplace. This is often the case with large globally branded companies,
which explains why consumer boycott campaigns often target these large
companies and not smaller, less well-known (but perhaps more egregious)
violators of whatever standard consumers are hoping to improve. Both
the voice and exit options have been given more power recently via the
internet and the increasing spread of communications technology. For
example, a protest organised through Facebook targeted Nestlé and their
usage of palm oil: www.guardian.co.uk/sustainable-business/nestle-
facebook (available 12 June 2013).
13.5.2 Types of CSR

In a systematic review of CSR activities and how they can create value for
stakeholders, Peloza and Shang (2011) categorise CSR activities into three
broad categories:
• philanthropy
• business practices
• product-related.
They found philanthropy to be the most significant category of CSR
activities. This included cause-related marketing (where a charity donation
is tied to a commercial exchange); donations of cash (different from
cause-related marketing because donations are not tied to a sale); and
statements of support for charities without stating explicitly how that
support is given. Community involvement and employee volunteerism,
promotion of a social issue, donations of products, licensing event
sponsorship, customer donations and non-specific support for charities are
also included in philanthropy.
The value of the different ways in which philanthropy is undertaken
can be considered in terms of the intrinsic (prized for its own sake) and
extrinsic (seen as a means to an end) value that it provides.
After philanthropy the second most common form of CSR activities were
those related to the business practices of the firm. Such practices can
include environmental protection and employee relations’ policies.
196
The final most common group of CSR activities includes product-related

features, such as products that generate fewer pollutants. Other activities
are product quality, organic products and biodegradability.
13.5.3 Stakeholders
An important question regarding corporate social responsibility is the
identity of the audience towards whom it is directed. One possible
group is investors, another is customers and a third group could be
channel intermediaries. Indeed it could be one or more of any of the
elements of the micro-environment of the organisation, the organisation’s
stakeholders. A stakeholder is any group or individual who ‘can affect or
is affected by the achievement of the organisation’s objectives’ (Freeman,
1984, p.46).
Stakeholder management is not a new idea. It is well established within
the business and society field, though in general, this literature does
not address how marketing specifically can be informed by attention to
stakeholders.
Smith, Drumwright and Gentile (2010) say that another way of looking
at marketing is that in addition to customers, stakeholders also create
value for the firm and society (though of course any individual or group
can fall within more than one category of stakeholder). This perspective,
they argue, will be in contrast to a new variation on the marketing
myopia. Thedore Levitt described the marketing myopia as the (incorrect)
assumption held by some marketers that they were in business to make
and sell goods, rather than satisfy customer needs. The current variation
on this problem is where marketers simply think of their customers as
customers. This is not really the case Smith et al. (2010) argue. They say
that customers are also employees, citizens and community members.
Thus firms need to take a more holistic view of whose needs they should
address. There is a lack of attention in the marketing literature to multiple
stakeholders who serve, in practice, as constraints on marketing strategies,
as well as sources of opportunity for firm and societal value creation.
Attention has been given to topics such as social marketing, cause-related
marketing, and ethical consumerism, but even in these areas, there has
been little focus on the requirement that the firm consider multiple
stakeholders beyond the consumer.
Marketers can be thought of as boundary spanners (who work at the
interface between an organisation and its stakeholders), which can mean
that they span more than just the boundary between the organisation
and its customers. One way of considering CSR is that of a stakeholder
orientation, where decision-making is embedded into everyday decision-
making, rather than a response to individual crises.
Developments such as this one demonstrate a shift in the power
relationship between marketer and customer. This stands in marked
contrast to the orthodox view of marketing where managers are expected
to manage the elements of the marketing mix in order to deliver
satisfaction for customers. The challenge for marketers is balancing the
needs of different stakeholders, as the following example illustrates:
Consider IKEA. Its business vision, ‘[to] create a better everyday
life for many people,’ supports the company’s ambition of
integrating social and environmental considerations into its
daily operations and placing such considerations at the heart
of its corporate brand. Rooted in a Nordic business philosophy
that tends to think of ethical values, politics, and economics
197
as constituents of a virtuous circle, IKEA believes it can reduce

the conflict between CSR and profit functions. However, IKEA’s
emphasis on cost effectiveness and its engagement in emerging
and developing countries sometimes has conflicted with the
company’s ambition to be regarded as a responsible corporate
citizen.
(Vallaster, Lindgreen and Maon 2012, p.51).
Influencing stakeholders
Frooman (1999) identifies broad ways by which organisations can
influence their stakeholders. These approaches are:
• Withholding strategies: A stakeholder withholds a resource from a
firm in order to change their behaviour. This approach can apply, for
example, to consumer boycotts.
• Usage strategies: Here the stakeholder provides resources but only
if certain conditions are met. For example, firms can offer to buy a
suppliers goods, but only if the employees in the supplying firm are
well treated and have reasonable levels of pay.
The argument presented by Frooman is that while these two strategies
may look very similar, they are actually quite different from the
stakeholder’s point of view, for the following reasons.
A withholding strategy means that the stakeholder is willing to shut off a
flow of resources (this can be effective where dependence is unilateral). In
the case for a usage strategy there is likely to be reciprocal exposure and
firms are mutually dependent. The example above of a firm considering
the welfare of employees in a supplier firm is an example of this. The
supplier firm knows that both firms are likely to suffer if there is a
consumer backlash against their customer.
Mini-case 13.4: How global outrage changed corporate practices at Shell

(or did it?)
In the winter of 1995 the Royal Dutch Shell company (or Shell as the
popular brand has come to be known) was in the news for all the wrong
reasons. The company at the time had extensive holdings in Nigeria (e.g.
Shell is currently still responsible for 40 per cent of Nigeria’s total oil
output and 55 per cent of its onshore production). At the time there were
three human rights activists in Nigeria, most notably Ken Saro-Wiwa,
who were raising international awareness of the deplorable living and
working conditions of Nigerian citizens in and around the Brent Spar
oil platforms run by Shell. The government at the time, fearing that this
negative publicity could stir popular insurrection and hence cause foreign
investment to desert the country, pre-emptively imprisoned and sentenced
to death these three human rights activists. The outside world was
outraged and many critics of the regime blamed Shell for not intervening
and even secretly condoning the silencing of these three human-rights
activists.
The Nigerian government, despite popular and international scorn,
carried out their death sentences and this created a publicity nightmare
for Shell. Critics from all walks of life were alarmed that the company,
whose activities were the cause of the activists’ fight to begin with and the
eventual reason for their deaths, had remained silent and never threatened
to pull out its investments as a result of the Nigerian government’s actions
to restrain individual human rights.
198
Sensing that its corporate image could be irreparably damaged and noting the
fall in its stock price brought about by jittery investors who were uncertain
as to whether Shell could survive the publicity nightmare, the company
took a bold step. It decided in early 1996 to embark on a major consultative
exercise known as ‘Society’s changing expectations’. As a result of the public
reaction to the Brent Spar incident and allegations of complicit involvement
in other human rights abuses in Nigeria, human rights emerged as one of the
key concerns of the company’s goals. This led to a revision of the company’s
business principles, which now explicitly commit Shell to ‘respect the human
rights of its employees’ and ‘express support for fundamental human rights in
line with the legitimate role of business’. In 1998, the company produced a
management primer on business and human rights.
Shell also engaged with a range of stakeholders such as Amnesty
International and Human Rights Watch regarding the security aspects of
their Nigerian operations starting in 1996. This led to a revision of Shell’s
rules of engagement with the state security forces – the police and the
military – to accommodate the United Nations Basic Principles on the Use
of Force and Firearms and the UN Code of Conduct for Law Enforcement
Officials. The experience in Nigeria has prompted a more broadly-based
review of security provision, and the development and adoption in 1998 of
group-wide Use of Force Guidelines.
Despite all the visible commitment to change its practices, in 2003 Shell
was in the news once again (and again for all the wrong reasons) as the
company faced multi-million dollar class-action suits brought by enraged
investors, and five legal investigations including the US Justice Department
and Securities Exchange Commission, following the shock announcement
earlier in the year that the company had ‘lost’ one-fifth of its assets, leading
to dramatic revisions of its global oil reserves. The honesty of directors on
what assets the company actually had (there were four successive revisions
of its oil reserves) called into question Shell’s ability to deliver on its
corporate social responsibility commitments made after 1995 and even the
veracity of its own accounts were now in doubt.
Despite changes in the boardroom and a noticeable shift of tone towards
a more contrite approach to admitting its mistakes, the company seemed
to be engulfed in the same kind of identity crisis it faced in 1995. The new
Shell Chair Ron Oxburgh, whose appointment followed the departure of
three senior managers including the former Chair Sir Philip Watts, was not
even sure that Shell should be in the oil business anymore: ‘No one can
be comfortable at the prospect of continuing to pump out the amounts of
carbon dioxide that we are pumping out at present…with consequences
that we really can’t predict but are probably not good,’ Oxburgh told The
Guardian newspaper.
The case of Shell illustrates the extent to which social and ethical factors
in the external environment are inextricably linked to the fortunes of a
company, which if it wishes to establish a global brand reputation must be
prepared to defend it not only with the right commitments on paper, but
through actions at the highest and lowest levels of the company.
Activity 13.5
Consult the Shell website in your country (check their global website to find your own
country site via www.shell.com) and find its statements on human rights and the
environment. Then do a literature search from local newspapers, journals, human rights
and environmental agencies such as Amnesty International and Greenpeace to see if
Shell’s rhetoric matches its behaviour in your country. Is there a big difference between
the company’s rhetoric and its practice? If so (or not), can you explain why?
199

This chapter started by identifying some of the ethical and social problems
that marketing is accused of causing. We then assessed some of those
criticisms that relate to marketers’ impact on consumers and a possible co-
creation solution to these. The chapter then examined more fundamental
criticisms of marketing in terms of its role in a materialistic society and the
critique of marketisation. The next section of this chapter examined the
obvious relationship between societal marketing and CSR and why some
firms may be more inclined to adopt the CSR philosophy. The CSR concept
was then assessed in more detail; in particular, the role of stakeholders.
The chapter ended by looking at ways in which marketers can influence
stakeholders.

• Having completed this chapter, and the Essential readings and
• identify some of the common and more radical criticisms of marketing
• explain what is meant by the term ‘corporate social responsibility’ and
its origins in the early industrial revolution
• describe the history of ethical marketing practices and the impact
of environmental and other social movements on fostering modern
ethical behaviour on the part of firms.

1. Discuss the extent to which the growth of the internet and consumer
awareness campaigns have influenced the marketing policies and
functioning of large corporations.
2. Evaluate the extent to which CSR can provide a more effective
way of fixing social and environmental ills than direct government
intervention.
3. Is CSR here to stay? Or are the critics correct and this is only a passing
corporate public relations fad?
4. Identify the reasons why companies may feel pressurised to weaken
their CSR commitments during a global recession. Where would
this pressure to weaken standards come from and what part of the
marketing environment would most resist such change?
200
Appendix 1: Sample examination paper
Appendix 1: Sample examination paper
Important note: This Sample examination paper reflects the

examination and assessment arrangements for this course in the academic
year 2013–2014. The format and structure of the examination may have
changed since the publication of this subject guide. You can find the most
recent examination papers on the VLE where all changes to the format of
the examination are posted.
Candidates should answer FOUR of the following EIGHT

question. All questions carry equal marks.
Time allowed: three hours
1. a. Explain what the term stakeholder means and describe the range
of stakeholders for any organisation of your choice. (10 marks)
b. Identify and evaluate the factors that may affect the salience of
different stakeholders’ claims on that organisation. (15 marks)
2. a. Explain what is meant by the terms performance risk, social risk
and economic risk. (10 marks)
b. Critically assess three different ways in which organisational
buyers can manage the risk they face when making purchases.
(15 marks)
3. a. Explain what is meant by the term ‘hierarchy of effects’.
(10 marks)
b. Discuss the value to marketers of using the hierarchy of effects in
order to design promotion campaigns. (15 marks)
4. a. Explain what is meant by the term ‘co-creation’ and give examples
of situations where it takes place. (10 marks)
b. Explain what is meant by the term ‘quality’, and discuss the
possible impact of co-creation on the quality of the offering that
customers may receive. (15 marks)
5. a. Using appropriate examples, explain what is meant by the
following terms: intangibility, extrinsic cues, intrinsic cues and
adverse selection. (15 marks)
b. Why may firms that sell intangible offerings find adverse selection
to be a problem? (5 marks)
c. How can extrinsic cues be used to overcome the adverse selection
problem? (5 marks)
6. a. Explain what is meant by the terms ‘relationship specific
investment’, ‘fairness’ and ‘dependence’ in the context of marketing
distribution. (15 marks)
b. Discuss the advantages and disadvantages of unilateral relationship
specific investments. (10 marks)
7. a. In new product development, using appropriate examples, explain
what is meant by the term ‘embedded’. (10 marks)
b. Critically assess the value of embeddedness to marketers.
(15 marks)
201
8. a. Using appropriate examples, explain what is meant by the terms

segmentation, targeting and positioning. (15 marks)
b. Explain the difference between intended, actual and perceived
positioning and critically discuss the value of these concepts to
marketers. (10 marks).
202
Appendix 2: Activity feedback
Chapter 2
Activity 2.1
The following observations have been made about these definitions:
The 2004 AMA definition is fairly general and does not provide a sense of the essence of
the term, being narrow in scope and normative.
Since 1985, AMA definitions have become too managerial and assume that marketing is
in the best interests of consumers.
Between the 1985 and 2004 definitions of marketing, the AMA replaced the reference
to ‘exchange’ with mention of ‘value creation’. Sheth and Uslay (2007) welcomed this
change and made the following points.
•• The exchange paradigm emphasises the role of sellers as suppliers; however, they
have other roles as well, such as producers.
•• The exchange paradigm also emphasises value-in-exchange, and as a result ignores
the role of value in-use. Value-in-exchange refers to the costs and benefits customers
associate with a purchase at the time at which they make the purchase. Value in use
refers to the value they actually derive from a purchase over the period of time that
they consume the product or service. The difference between these two may arise
because of bounded rationality (we will look at this in a subsequent chapter); that is
to say, customers may not know what the actual level of value will be.
Activity 2.2
An example of a successful firm that has characteristics of the product orientation is
Apple. The reason why it may be said to be product oriented (at least to a degree) is that
at the time of launch of a number of its products, public and professional opinion held
that the products would not be successful. For example, the iPhone was considered to
be difficult to use in comparison to phones that had more tactile keypads. The iPad was
similarly considered to be inferior to the notebook computers that had become popular at
the time of its launch. The firm persevered nevertheless.
Chapter 3
Activity 3.1
The charity exists in order to serve the needs of its users. However, they will not typically
be paying for the help that they receive. So, in order to help them, the charity needs to
acquire resources from others. To attract these resources the charity will need to make
appeals to donors. This will involve telling them about the possible benefits that they may
receive if they do this. Such benefits can include the emotional value of knowing that
they are helping an important and worthwhile cause. The same process may be involved
in attracting volunteers. All these groups can therefore be considered to be customers in
different ways.
203
Chapter 4
Activity 4.1
Holidays can be seen to be some function of:
•• institutions (law, political parties, unions)
•• preferences (custom, ideology)
•• prices (taxes, incomes).
The simple answer would be that Europeans prefer leisure more than Americans do. In
the parlance of economics, we may say that they have a greater taste for holidays.
The answer preferred by economists would be that leisure is more ‘expensive’ in the
American world and therefore workers take fewer hours/days off. By ‘expensive’ we don’t
mean that the price of theme parks or resorts is higher. What we mean by price is really
the cost of taking time off work. In Europe, leisure is cheaper, because work is more
expensive. What do we mean when we say that work is more expensive? Well, income tax
rates are higher in continental Europe, making the time off work less expensive.
Voters in those countries may feel that pressing for more leisure time is easier than
pressing for more tax breaks. Conversely, in the USA, pressing for legislative changes to
statutory maximum hours per week is more difficult so they instead press governments
for more tax cuts. What economists would argue, using the tools of economic consumer
behaviour, is that taxes and leisure are two possible choices for voters, in the same way
that consumers face choices over goods and services. However, the economist does not
necessarily think voters in these countries are inherently different.
Activity 4.2
This principle may break down where the two goods are perfect substitutes, (namely,
where the individual is perfectly happy to carry on giving up more of one good in
exchange for the other or would prefer not to undertake any substitutions at all). The
principle may also break down where the two goods are perfect complements, in such
an instance the utility of consuming one good depends on having the other one as well,
having more of one than the other will not increase utility.
Activity 4.3
An advertising campaign aimed at older people will be trying to reach a group of people
this approach considers to be a relatively hard one to convince. A general sales promotion
campaign on the other hand will reduce the effective price of the food for all consumers,
including the easier to convince younger group. The use of relatively low prices may
have the same financial effect for purchasers – but it may be more difficult to guide
purchasers’ behaviour compared to sales promotions. For example, sales promotions
could be used to encourage diners to try a range of different dishes.
Activity 4.4
a. People generally share information mostly with the people around them – friends and
relatives. These are people with whom tie strength may be strongest.
b. The more highly connected someone is, the more likely it is that they will be receiving
information directly from members of their social network. People who are not highly
connected may need to get their information from people who are. However, this will
depend on what information is being acquired. You may be well connected in terms
of contacts in the banking industry, but may not be so well connected in terms of
people who can provide holiday advice.
c. People who are more socially similar may be more willing to share sensitive
information, because of higher levels of interpersonal trust.
204
Chapter 5
Activity 5.1
When the first poultry with bird flu were found in France, a number of countries stopped
imports of French chickens. Their perception of the risks of buying such chickens had gone
up, even though the level of actual risk may not necessarily have risen.
Activity 5.2
Consequent risk refers to the level of risk at the brand level. A firm can reduce this by,
for example, making its products more reliable. This reduces the probability of something
going wrong. However, firms can try to reduce what the customer has at stake. This can
be undertaken by, for example, offering warranties and guarantees. So, if something does
go wrong the customer stands to lose a lot less than they otherwise would.
Activity 5.3
In a survey of the literature, Greatorex et. al. (1992) find the following ways in which
organisational buyers can manage risk when they make purchases.
•• Obtaining additional information; for example, visiting the potential vendor to
observe his viability and questioning the potential vendor’s present customers are two
important sources of information.
•• Using lists of approved suppliers. The decision-maker could be seen to be protecting
himself from criticism by implicating others in the decision-making procedure.
•• Seeking advice from the trade association or copying the purchasing decisions of
other companies in the same industry.
•• Buying the equipment of a well-known manufacturer.
•• Managers avoid risk rather than accept it, partly by negotiating uncertainty avoiding
contracts.
•• Performance guarantees and multiple sourcing can reduce the risk involved in relying
on a single vendor.
•• Loyalty to existing suppliers can be a risk reducer.
•• Industrial buyers may be trained to use highly structured purchasing procedures,
perhaps involving quantitative aproaches, in the analysis and selection of suppliers.
While reducing performance type risks, such a procedure could be one way of
reducing the psychosocial risk perceived by industrial buyers.
•• The following of company rules and procedures lessens some of the consequences of
a failed purchase by making it almost impossible for anyone to blame the purchaser
for doing his job badly.
•• Leasing can be an approach where the life of equipment may be short owing to
technological improvements and projected second hand values may not be attained.
Leasing also allows users to try the equipment before they buy and so reduces the
amount of money at stake.
•• However, firms can try to reduce what the customer has at stake. This can be
undertaken by, for example, offering warranties and guarantees. So if something does
go wrong the customer stands to lose a lot less than they otherwise would.
205
Chapter 7
Activity 7.1
1. The Scotchgard fabric protector provided economic value to customers because even
though it cost a relatively small amount of money, it could help to protect far more
expensive clothing and furnishings from damage.
2. The withdrawal caused problems because other suppliers could not offer the same
mix of value. In contrast to consumers, industrial buyers were more highly dependent
on these products’ value; thus, the unexpected withdrawal had the potential to
increase their costs and decrease the value of their own products.
3. For these companies, both value and trust had been paramount in their relationship
with 3M. They were selling a well-known brand, Scotchgard, as an individual
product itself or as added value to their own product. For these intermediaries,
Scotchgard offered economic value by providing a proven benefit for a reasonable
cost along with brand trust and familiarity. Because consumers had trust in the
brand, commercial intermediaries’ use of Scotchgard products created spill-over trust
effects for the intermediaries’ own products and services. Spillover refers to the idea
that a store that sold Scotchgard was likely to be considered by its customers to be
trustworthy because it sold a trusted brand.
4. 3M’s withdrawal of Scotchgard resulted in clear and substantial value loss for its
commercial intermediaries and may have temporarily undermined their trust in 3M,
in large part because 3M did not clearly announce its intention to create replacement
products at the time of withdrawal.
Activity 7.2
Possible answers could include salespeople who have withheld important information
about a product or service, or who have overemphasised some elements. People who
have carried out repairs using cheap, non-genuine parts, knowing that this would be
discovered by the customer much later.
Activity 7.3
The sale of petrol at a motorway service station is an example of a market-based
transaction. The product to be sold is fairly homogeneous, the two parties to the
transaction are unlikely to see each other again, and the price is similar to that charged
by other retailers and transparent. Once the transaction is completed there is nothing
tying the two parties together.
Activity 7.4
Some of the ways in which firms have sought to overcome the homogeneity of petrol is
to use additives and market the offering as something superior to ordinary petrol and
thereby worthy of the premium charged for it. Thus they have made a homogeneous
product heterogeneous and as a result sought to make customers more loyal (namely,
make their custom ‘recurrent’). Another method used by retailers has been to introduce
loyalty cards; here customers have an incentive to keep coming back to the same retailer
because they are given points with each purchase. The more points they have, the more
they can spend on special gifts. Such activity has also encouraged ‘recurrent’ buyer
behaviour.
In this instance customers also have a certain level of ‘sunk investment’ in the
relationship, since a few points on the loyalty card may be useless and more have to be
collected in order to be redeemable.
206
Chapter 8
Activity 8.1
What we have asked you to do is, in effect, to develop a working definition of the word
‘quality’. It would be particularly interesting to compare these definitions. However, it is
more than likely that your definition falls into one of the categories based on Ghobadian
et al. (1994) that follow the activity.
Activity 8.2
The product-based approach would probably be associated with a product-oriented
organisation and the process-led approach with a production-led organisation. A
marketing-oriented company would probably follow the users-led approach to quality.
Activity 8.3
When a firm launches a new brand name in a new product category (one in which it
has not previously made sales), it has launched a ‘new brand’. This is a relatively risky
option because the category is new to the marketer, as is the brand name. The firm has
no previous experience in selling in this new category nor does it know whether the new
brand name will be popular with customers. The firm and its managers therefore have
two important areas which are totally new to them, and the chances of making a mistake
are correspondingly high; that is the reason why this option is considered to be relatively
risky compared with the other three options.
Activity 8.4
1. It can enable people to get access to novel information, because people may be more
willing to exchange confidential information as a result of mutual trust.
2. Partners can behave in an opportunistic manner and there can be increased
perceptions of knowledge redundancy. Customers can, for example, integrate
vertically backwards and do in-house tasks that were previously performed by the
supplier. Knowledge redundancy refers to partners having similar knowledge and
capabilities and this is likely to happen after embeddedness has increased.
3. Because the existence of the relationship enables the firm to take the risk in testing
‘under-developed’ ideas.
4. The two problems are partner opportunism and perceptions of knowledge
redundancy.
Chapter 10
Activity 10.1
1. ‘Source likeability’ refers to the communicator’s ability to create a positive emotional
experience; while ‘source credibility’ refers to the perceived trustworthiness and
expertise of the person communicating the message.
2. Likeable sources are more likely to influence attitude change than neutral sources.
However, according to social adaptation theory, source likeability will only influence
attitudes under low involvement situations because it does not affect the key
information that people need for social adaptation. Source credibility is important
because when consumers want to have an objective correct position they will rely on
a source that is credible.
207
Chapter 12
Activity 12.1
Burger King and Subway could be said to follow a postponement strategy, since
customers can request variations on the burger or sandwich that they would like to have.
The downside is that this approach may involve customers waiting a little longer for
their meal. In contrast McDonalds pursue a speculation strategy, where little, if any, of
the burgers can be customised. This enables McDonalds to have burgers ready relatively
quickly and offer customers fast service, but it does limit the choice available.
The potential problem that outlets like Burger King can have is that there can be a huge
number of different combinations that customers can request; for example, in terms
of patties (different meats), different types of buns, and whether they have lettuce,
tomato, onion or pickle, etc. Burger King limit customers’ ability to choose from too many
variations by offering a more limited set of fixed combinations and only then allowing
customers to make their burger to order.
Note: this answer is only illustrative, management practices do change and what is
written above may not necessarily reflect the current practice in these restaurants in your
region.
Activity 12.2
The advantages are in terms of common channel design criteria relating to economic,
control and adaptive needs. Hence VMS can be expected to offer, in particular, cost-
reduction advantages and superior management of conflict within the channel:
•• The growth of powerful retailers able to dominate the distribution process, itself
perhaps reflecting the growth of self-service retailing, shopping by car, etc.
•• Globalisation of brands and the growth of franchising based on brand power.
•• Developments in technologies of information, control and command by application
of IT.
•• Development of e-tailing1 and direct marketing reflecting technological and social 1
E-tailing refers to
changes. retailing over the internet.
Thus an e-tailer is a B2C
business that executes a
Activity 12.4
transaction with the final
1. When the commitment is unilateral and there have not been reciprocal commitments consumer. E-tailers can
made by the transaction partner and the transaction partner behaves in an be pure play businesses
opportunistic manner. like Amazon.com or
businesses that have
2. The risks of the above happening can be mitigated by the use of formal contracts and evolved from a legacy
ex ante governance mechanisms. business, e.g. Tesco.com.
E-tailing is a subset of
You should now read the section titled, ‘Unilateral relationship-specific investments and e-commerce. Source:
Taiwanese OEM suppliers’. This section gives a case-study example of OEMs (original www.capcomarketing.
equipment manufacturers) in Taiwan, who provide manufacturing services and in order com/mediakit/Marketing_
to do so, design their own manufacturing and business processes to meet the specific Glossary/
needs of their customers, yet they do not have any formal protection for their relationship
specific investments.
Chapter 13
Activity 13.1
1. High prices may reflect the ‘value’ delivered by marketers (see Chapter 8 of the
subject guide). Customers can also use prices as extrinsic cues for quality (see Chapter
8 of the subject guide) and marketers take this into account when setting prices.
208
2. Promotional and branding efforts may create distinctions among products that
otherwise do not exist (for example, how different is bottled Evian water from
Volvic?), but these may also be useful for consumers as symbols of quality (see
Chapter 8 of the subject guide) in an uncertain world filled with many choices.
3. Branding of luxury goods can take into account consumers’ use of the self-concept
(see Chapter 4 of the subject guide) when deciding what goods to buy and this may
increase the effectiveness of using brands. Marketers can launch large numbers of
brands because of variety-seeking behaviour on the part of consumers (see Chapter 4
of the subject guide).
Activity 13.2
Based on prevailing behaviour in the early part of the new 21st century in the UK, such
examples could include, for instance:
1. Consumers taking on debt and buying properties on the basis of speculating on their
future appreciation in value. Banks and other intermediaries fuelling the demand for
such activity by having relatively lax lending controls.
2. Consumers in various countries buying various goods on the basis of low price – with
the impact that this has on the wages paid to workers in developing countries.
Activity 13.3
Possible examples could include:
The use of opportunism (discussed in Chapter 7 of the subject guide), where it is used to
take advantage of other organisations. Firms may also be criticised for their exercise of
power in order to control the behaviour of ‘weaker’ organisations’ (see Chapter 12 of the
subject guide). There is also the issue of fairness in the same chapter on distribution.
Activity 13.4
The societal orientation starts with a commercial premise, the desire to make profits and
in doing so recognises the obligations that the organisation has towards the long-term
interests of customers, other stakeholders and the environment. CSR on the other hand
appears to start from a premise – that is more ambitious in scope. There is an explicit
objective to improve the welfare of stakeholders.
Clearly there is an overlap between the two concepts. And in practice, with concepts
such as these, it is possible to find terms being used in a variety of ways, not all of which
are consistent. However, the value of this discussion is the insight that it gives into the
spectrum of ways in which commercial organisations can try and ‘do good’.
The section following the activity examines this idea in more detail.
209
Notes
210
Notes
Notes
211
Notes
212

Marketing Subject Guide

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Marketing Subject Guide

Încărcat de

Drepturi de autor:

Formate disponibile

Principles of marketing

University of London International Programmes

Published by: University of London

Chapter 5: Organisational buyer behaviour.......................................................... 61

9.8 Reminder of your learning outcomes..................................................................... 142

Chapter 7................................................................................................................... 206

1.1 Route map to the guide

1.2 Introduction to the subject area

1.4 Aims of the course

1.5 Learning outcomes for the course

• discuss the function and effect of advertising/promotion from an

1.6 Overview of learning resources

1.6.2 Reading advice

Essential journal articles

Mitchell, V-W. ‘Buy-phase and buy-class effects on organisational risk perception

Williamson, O.E. Markets and hierachies: analysis and antitrust implications.

Clerides, S. ‘Price discrimination with differentiated products: definition and

Fishman, C. ‘The Wal-Mart you don’t know’, FastCompany Magazine 77,

Homer, P.M. ‘Relationships among ad-induced affect, beliefs and attitudes –

O’Shaughnessy, J. and N.J. O’Shaughnessy ‘Reply to criticisms of marketing,

1.6.3 Online study resources

Making use of the Online Library

1.7 Examination advice

• Create an inventory of questions that may be relevant to the course.

Chapter 2: An overview of marketing:

2.1.1 Aims of the chapter

2.1.2 Learning outcomes

2.1.3 Essential reading

2.1.4 Further reading

2.1.5 References cited

2.1.6 Useful websites

2.1.7 Synopsis of chapter content

2.2 Definitions and a brief introduction to the history of

2.3 A brief history of marketing theory

by Michael Porter and his five-forces model and the paradigm of

The usefulness of this example is that there is no direct exchange

2.5 History of business orientations: the triumph of

• Production: Here the focus is on producing more, selling high

Let us now look at the assumptions underlying the different orientations.

and wants. issues – in their own right.

Table 2.1: Assumptions made by firms following the different orientations.

2.5.1 Other academic disciplines and marketing

Academic discipline Area of marketing relevance

2.6 Marketing problems

2.7 Looking ahead: the marketing framework and the

2.8 Overview of chapter

2.9 Reminder of your learning outcomes

2.10 Test your knowledge and understanding

b. Give examples of each of these types of exchange. (5 marks)

Chapter 3: The marketing environment

3.1.1 Aims of the chapter

3.1.2 Learning outcomes

3.1.3 Essential reading

3.1.4 Further reading

3.1.5 References cited

3.1.6 Synopsis of chapter content

3.2 Types of environment

3.3 Customers, consumers or clients?

Marketers suffering from the new marketing myopia view the

This may involve organisations engaging with groups that managers

influence on marketers. For example, after campaigning by individuals on

3.4.1 Framework for prioritising stakeholders

construction projects for upgrading infrastructure in Vietnam

In co-ordination with medical staff from the Ministry of