MARKETING MANAGEMENT PRINCIPLES

(Qualification code: 71242)

SAIM Programme in Business Management

Only learning guide for

PPBM06W
PROF A BRINK Centre for Business Management University of South Africa, Pretoria

 2010 University of South Africa All rights reserved Printed and published by the University of South Africa Muckleneuk, Pretoria PPBM06W/1/2010-2012

CONTENTS
PREFACE TOPIC 1 TOPIC 2 TOPIC 3 INTRODUCTION TO MARKETING THE MARKETING ENVIRONMENT MARKET SEGMENTATION, TARGETING AND PRODUCT POSITIONING TOPIC 4 TOPIC 5 TOPIC 6 INFORMATION FOR MARKETING MANAGEMENT PRODUCT DECISIONS DISTRIBUTION DECISIONS 35 53 66 84 1 14

TOPIC 7 TOPIC 8

MARKETING COMMUNICATION DECISIONS PRICING DECISIONS

94 107

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PREFACE
A LETTER FROM YOUR LECTURERS 1 WELCOME

Dear Learner It is a great pleasure to welcome you to this module in Marketing Management Principles. To make sure that you share our enthusiasm about this field of study, we urge you to read this preface thoroughly. Refer back to it as often as you need to since it will certainly make studying this module a lot easier. In this module, we aim to make marketing more accessible to the growing number of people involved in marketing activities. Included in this market are first-time marketing students, the people in the street who need marketing in the day-to-day running of their lives, people who aspire to a career in marketing as well as those business managers who need a basic understanding of the underlying principles of marketing in the execution of their management duties. It is generally recognised that marketing is central to a business because it defines what customers want and need and because it directs the resources of the business to meet these needs. The rapid change in the marketing environment over the past decade has increased an awareness of the importance of marketing. Businesses have had to face increasing competition, economic fluctuations, political changes and the need to become more ecologically aware. Successful marketers will be those who can best define and satisfy consumer requirements in the context of the ever-changing marketing environment. In this learning guide, we first focus on the fundamentals of marketing. This includes the nature of marketing, the marketing environment, consumer buying behaviour, market segmentation, targeting and product positioning, and information for marketing management. Secondly, we look at the four marketing instruments, namely product, distribution, marketing communication and price. The field of marketing is extremely dynamic and challenging. The learning content and activities contained in this learning guide will therefore provide you with opportunities to explore the latest developments in this field and help you to discover the field of marketing as it is practised today. We hope that you will enjoy the module.

AIM OF THIS MODULE

The aim of this module is to enable learners to gain a better understanding of the basic principles of marketing. The module intends to explain marketing concepts and terms to learners at first-year level, to people who are involved with and need marketing in their daily activities, and to people aspiring to a career in marketing.

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LEARNING OUTCOMES

After studying this module, you should be able to Demonstrate an understanding of the nature and basic principles of marketing Explain and illustrate all the variables of the components of the marketing environment. This includes: investigating the micro-, market and macro-marketing environments developing a marketing information system conducting marketing research performing market segmentation, targeting and positioning analysing the behaviour of consumers Explain and illustrate the elements of the marketing mix, namely product, marketing communication, distribution and price

4 THE APPROACH TO TEACHING AND LEARNING IN THIS MODULE

This learning guide has been specially designed to facilitate your learning process and to guide you through the relevant chapters of your prescribed book. An outcomes-based approach is followed, which means that after having worked through the various study units, you should have achieved very specific outcomes. Keep the learning outcomes in mind as you work through the study units and the chapters of the prescribed book and check whether you have achieved them all. In each study unit there are activities you need to complete as you work through the learning guide and prescribed book. These activities will help you apply the skills you acquire, and therefore also help you achieve the learning outcomes. Solutions to the activities are provided throughout the text. It is important that you do the activities on your own and only then refer to the solutions, as this will help you monitor your own progress. Please do not perceive the learning guide as the sole source of what you need to know for this course. It is important that you refer to your prescribed book for detail on aspects highlighted in this learning guide. The study material for this course consists of this learning guide (remember, you have to study all the material in this learning guide as well), a prescribed book and several tutorial letters which will be sent to you during the course of the year. The prescribed book is of vital importance because you will not be able to complete this course successfully without it. We expect you to master the contents of this learning guide and the prescribed book on your own, according to the guidelines provided in this guide as well as in the tutorial letters. Please consult your Tutorial Letter 101 for the details of the prescribed book. Prescribed books are often replaced by more recent editions or different books to keep you up to date

iv with the latest developments in the field. When we do change books, we supply a page reference guide which indicates the sections in the new prescribed book(s) to be studied.

FRAMEWORK OF THE MODULE

This module consists of eight major topics (as shown in the following table). Each topic is divided into sections called study units. Each topic has several outcomes that provide the overall focus for the topic, and each study unit has assessment questions specific to that study unit. Topic 1 Study unit Description

INTRODUCTION TO MARKETING 1 2 The nature of marketing The evolution of marketing and the marketing process

THE MARKETING ENVIRONMENT 3 4 The variables of the marketing environment Consumer buying behaviour

MARKET SEGMENTATION, TARGETING AND PRODUCT POSITIONING 5 6 Market segmentation and targeting Product positioning

INFORMATION FOR MARKETING MANAGEMENT 7 8 The marketing information system Marketing research

PRODUCT DECISIONS 9 10 11 The nature of products New product development The product life cycle

DISTRIBUTION DECISIONS 12 13 14 Introduction to distribution Distribution channel decisions Physical distribution

v 7 MARKETING COMMUNICATION DECISIONS 15 16 17 8 Marketing communication through advertising Personal selling and sales promotion Public relations, direct marketing and online marketing

PRICING DECISIONS 18 19 20 Pricing constraints and objectives Determining the basic price Price adjustments

ASSIGNMENTS

The completion of assignments is crucial for helping you to achieve the learning outcomes. By completing the assignments you will develop a feel for the type of question you can expect in the examination. The assignment questions also provide you with the opportunity to apply the theory to a case study or a practical situation related to the workplace. We encourage you to complete the assignments set for this module. Always apply the theoretical principles (in the case of essay questions) to a practical situation. To do well in essay questions, you need to structure your answers logically. Also use appropriate headings and subheadings and include a bibliography at the end.

EXAMINATIONS

All of the study material is relevant for the examinations, and we do not provide any demarcation of the study material. In addition to understanding the theoretical principles provided, we expect you to be able to apply these principles to a practical situation. The duration of the examination is three hours and the paper will count 100 marks. You may be given a short case study upon which the essay questions are based. The time limitation means that you need to structure your time carefully. Do not waste time with long introductions and summaries; do not include a bibliography; leave spaces between paragraphs; and start each question on a new page (but write on both sides of the page). This will make your answers more readable and ensure that the lecturer does not overlook anything. Remember, what we cannot read, we cannot mark properly!

KEY CONCEPTS IN ASSIGNMENTS AND EXAMINATIONS

In assignment and examination questions you will notice certain key concepts (ie words/verbs) explaining what is expected of you. For example, you may be asked in a question to list, describe, illustrate, demonstrate, compare, construct, relate, criticise, recommend or design particular information/aspects/factors/situations. The following

vi taxonomy by Bloom explains these key concepts and the level of cognitive thinking to which they refer so that you will know exactly what is expected of you. Knowledge. This is essentially memorisation and the recall of information. At its simplest, it involves the recall of specific facts or terminology, such as names, dates and definitions. It can also involve the recall of principles and generalisations, or the recall of ways of doing things. Outcomes/instructions written at this level will typically use verbs (these are the instructions in the questions; what you have to do) such as name, list, define, label, select, state, write, describe, identify and recall. Comprehension. This involves making sense of things, rather than just remembering them. Comprehension usually requires learners to translate information into their own words. Outcomes/instructions written at this level will typically use verbs (ie what you have to do) such as convert, illustrate, distinguish, interpret, rewrite, discuss, give examples, and summarise. Application. This is the ability to use information and ideas in new situations, such as solving problems that have a single or best answer. Outcomes/instructions written at this level will typically use verbs (what you have to do) such as calculate, demonstrate, construct, compute, solve, relate, show, use, and apply Analysis. This is the ability to systematically examine information to identify the important ideas, the relative hierarchy of those ideas, and the relations between the ideas. Outcomes written at this level will typically use verbs (what you have to do) such as analyse, differentiate, categorise, classify, relate, illustrate, outline, compare, contrast, discriminate, explain, and hypothesise. Synthesis. This is the ability to construct something new by combining several pieces of information to make a coherent whole (such as a plan). Outcomes written at this level will typically use verbs (what you have to do) such as plan, adapt, combine, create, compile, compose, construct, model, revise, design, develop, formulate, and organise. Evaluation. This is the ability to make judgements about the quality or value of things (either with reference to internal evidence or external criteria). Outcomes written at this level will typically use verbs such as assess, judge, choose, criticise, rate, argue, justify, evaluate, decide, recommend, and conclude. As this module is offered on the first level, you will be examined on the first three levels of Blooms taxonomy.

USE OF ICONS

The icons that will be used in this learning guide are listed below, together with a description of what each means.

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Icon

Description

Key concepts. The key concepts icon draws your attention to certain keywords or concepts that you will come across in the topic or study unit.

Learning outcomes. The learning outcomes indicate what aspects of the particular topic or study units you have to master and demonstrate that you have mastered them.

Study. The study icon indicates which sections of the prescribed book or the learning guide you need to study and internalise.

Read. The read icon will direct you to read certain sections of the prescribed book for background information.

Activity. The activity icon refers to activities that you must do in order to develop a deeper understanding of the learning material.

Assessment. When you see the assessment icon you will be required to test your knowledge, understanding and application of the material you have just studied.

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Feedback. The feedback icon indicates that you will receive feedback on your answers to the self-assessment activities.

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WHAT YOU CAN EXPECT FROM UNISA

You can expect us to do the following: We will provide you with up-to-date and relevant learning material which is regularly compared and benchmarked against similar local and international programmes. We will keep the learning material in line with the needs of industry and commerce by consulting regularly with the profession, and with industry leaders and government officials. We will assist you as students by giving you the opportunity to develop competencies and skills at a certain level. The outcomes correspond to the National Qualifications Framework (NQF) level. You will be assessed taking the level descriptors of the NQF into account. We will support you whenever you require assistance. You may contact your lecturers by making personal appointments; contact them by phone or via e-mail. We understand that studying through distance education is more challenging than attending a residential university. We will provide you with clear indications of what we expect from you in terms of your assessment.

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CONCLUDING REMARKS

We hope you will enjoy your studies! We are certainly looking forward to being your partners in this endeavour. Best wishes Your Lecturers for Marketing Management Principles

REMEMBER:

You have to study all the material in this learning guide, and all the sections in the prescribed book as indicated in this guide.

1 TOPIC 1 AIM The aim of this topic is to enable you to become acquainted with the nature and evolution of marketing. LEARNING OUTCOMES INTRODUCTION TO MARKETING

After studying this topic, you should be able to explain the nature and basic principles of marketing explain the evolution of marketing identify the place of marketing in an organisation explain the activities in the marketing process

TOPIC CONTENT Study unit 1 Study unit 2 The nature of marketing The evolution of marketing and the marketing process

2 STUDY UNIT 1 Key concepts Getting an overview 1.1 1.2 The nature of marketing Gaps between production and consumption THE NATURE OF MARKETING

Assessment Summary

Key concepts Space gap Time gap Information gap Ownership gap Value gap Middlemen Primary activities Exchange marketing activities Risk taking Standardisation and grading Storage Financing GETTING AN OVERVIEW From Coca-Cola to Castle Lager, from Pick n Pay to, to Dion and Foschini, companies have to do certain things to inform the market of their products. Think how often Coca-Cola or Castle Lager advertise, and how many of their trucks you see on the road. Do you realise how many activities go into bringing this product to the nearest caf, bottle store or spaza shop? Marketing is an important activity in any organisation. For marketing to be successful, it is important that all the departments and all the personnel of a company work together in satisfying customer needs. For you to understand marketing, it is also necessary to have a bit of background knowledge on its role in an organisation and the evolution of marketing itself. Remember, also, that the marketing concept is central to any business - it is the basis of a managerial philosophy.

3 In this study unit we will look at the nature of marketing. 1.1 THE NATURE OF MARKETING

(Study secs 1.1.1 & 1.1.2 in the prescribed book.) When you pay R5,80 to the caf owner for a loaf of bread, the ownership of the bread is transferred to you - this means an exchange has taken place. This is what we call marketing in its simplest form. Note that at least two parties were part of the transaction, each party had something the other wanted, each was in a position to deliver something of value, both chose to accept the offer of the other, and both were eager to negotiate. It is also important that you realise that prior to the exchange of ownership there are various activities that take place from the time the wheat is grown until it ends up in the form of a loaf of bread, and that these activities also constitute part of the marketing process. 1.2 GAPS BETWEEN PRODUCTION AND CONSUMPTION

(Study secs 1.1.3 & 1.2 in the prescribed book.) Marketing is the link between a business and its customers. The link is necessary because there are gaps which must be bridged between a business and its customers. A proper market offering and successful marketing are possible only if these gaps have been bridged effectively. The five gaps are as follows: Space gap. The manufacturers and the consumers are separated geographically. Using a fish market to illustrate our point, we can say that fish is caught in the sea but is consumed all over the country. Time gap. Consumers may not want to consume products at the time that they are produced. Fish is caught throughout the year as it is consumed throughout the year. For this reason you get fresh fish, frozen fish and canned fish. Information gap. Producers do not know who needs what, where, when and at what price, while the consumers do not know what is available from producers or at what term. If consumers are not told about the new calamari steaks they will not buy them. Ownership gap. When the customer has paid the cashier, the fish becomes the customer's property. A value gap. The consumer will pay the price charged for the fish only if he/she feels it is

4 worth it - that is, if it offers value for money. When you study the prescribed book, you will notice that it deals with only five gaps. There are two additional gaps, namely the assortment gap and quantity gap. The assortment gap is the discrepancy that occurs when producers produce and sell a limited line of identical or nearly identical products, while consumers want to choose from a wide range of products. The limited assortment offered by producers stems from the need to realise the economies of scale associated with the mass production process. Retailers help bridge the assortment gap by buying the limited product line offerings of several different producers/wholesalers, creating product selection by combining these lines, and offering the combined product lines for sale to customers. A quantity gap develops from economies of scale in production that require producers to produce and sell in large and often bulky quantities. On the other hand, consumers need to buy in small, individual units because of low rates of consumption, limited storage space and transport capabilities, and restricted funds available for making purchases at a given time. To overcome this discrepancy in selling and buying quantities, retailers buy large quantities from producers/wholesalers, perform the break-in-bulk function, and sell smaller quantities to the intermediaries (ie case lots) and consumers (ie individual units). The gaps between users and producers has become wider and wider with time. To bridge this gap, certain marketing activities have evolved. These marketing activities include primary, auxiliary and exchange activities. Primary activities. Transport or the movement of goods is a primary activity. This includes air, sea and land transport. Auxiliary activities. When you study this section in your prescribed book, you will note that these activities are mainly aimed at bridging some of the gaps already identified, such as providing the finance to buy a product. The auxiliary activities of obtaining and supplying information, for example, are performed by conducting marketing research and then incorporating the information obtained from the research into marketing messages in the media. The fact that a shop (such as Pick 'n Pay) advertises low prices implies that it knows (through research) that price is important to its customers and it uses advertisements on TV and in the newspapers to inform them of this. Have a look at the other auxiliary activities of standardisation and grading, storage, financing and risk taking in your prescribed book as well. Exchange marketing activities. These activities refer to buying and selling. Pep Stores, for instance, buys clothing from a manufacturer and then sells it to its customers.

Activity 1.1 Every Friday, Ms Phaswana, who lives in Garsfontein, goes to the local supermarket, Pick n Pay, to buy some fish. Sometimes she buys fresh fish and other times frozen fish. She buys I&J, believing that their fish is fresher as it is frozen on the ship when caught. Identify the types of gaps that exist between a fishing company (such as I&J) and the users or buyers of their fish.

Feedback The following gaps could have been identified: A space gap. Fish is caught in the sea but it is consumed all over the country. A time gap. Fish is caught throughout the year as it is consumed throughout the year. For this reason you get fresh fish, frozen fish and canned fish. An information gap. If consumers are not told about the new calamari steaks they will not buy them. An ownership gap. When the customer has paid the cashier, the fish becomes his/her property. A value gap. The consumer will pay the price charged for the fish only if he/she feels it is worth it that is, if it offers value for money. An assortment gap (see if you can identify this gap). Quantity gap (see if you can identify this gap).

Assessment 1 2 3 Describe the terms marketing and exchange in your own words. Explain the gaps between production and consumption in marketing. Explain the marketing activities needed to bridge the gaps between production and consumption.

6 SUMMARY In this unit we looked at the nature of marketing, as well as the various gaps that have to be bridged by marketing. The next study unit deals with the evolution of marketing and the marketing process.

7 STUDY UNIT 2 Key concepts Getting an overview 2.1 2.2 2.3 2.4 2.5 Evolution of marketing Relationship marketing Defining marketing Marketing process The marketing function in the organisation THE EVOLUTION OF MARKETING AND THE MARKETING PROCESS

Assessment Summary

Key concepts Production orientation Sales orientation Marketing orientations Marketing concept Consumer orientation Profit orientation The societal marketing orientation Relationship marketing Marketing process GETTING AN OVERVIEW After the Industrial Revolution in the 1800s, when workers were replaced by machines, organisations focused on mass production. They soon realised, however, that they could not mass produce just any product as, in order to make profit, they had to be sure that consumers would actually buy their products. This lead to organisations realising that product sales, and not just the manufacturing of the products, are essential for the success of the organisation. In later years, organisations realised that they could not force consumers to buy whatever they produced, but to supply them with the products that they wanted. This led to organisations not just selling what they could produce, but rather producing what they could sell. As you see from the illustration, there was a gradual evolution in marketing thought. The various orientations or approaches that an organisation may follow when marketing its

8 products and services will be discussed in this study unit. The concept of relationship marketing will also be explained. 2.1 EVOLUTION OF MARKETING

(Study sec 1.3 in the prescribed book.) When you study this section in your prescribed book, please replace the heading in section 1.3, Marketing orientations by Evolution of marketing. In organisations, management's approach to the marketing function has changed over the years. Initially, it did not realise the importance of marketing the organisation's products or services, but preferred to focus on producing them. Different approaches to marketing developed, and each new approach in turn resulted in a reorientation of management concepts. We will now look at each orientation. 2.1.1 Production orientation

An orientation to production is shaped by the belief that consumers will select the products that are available, and therefore an organisation should focus on improving its production efficiency. A retailer who is production-oriented focuses on the internal capabilities of the organisation rather than on the needs of the consumer. The disadvantage of this orientation is that the organisation does not take into consideration the fact that the products or services it produces may not be the ones consumers desire or need. 2.1.2 Sales orientation

Here the organisation focuses on improving its sales volumes, not just to end-consumers but also to intermediaries in order to encourage them to promote the manufacturer's product more actively. The emphasis of a sales-oriented retailer is on selling at any cost. Mail order retailers often apply the principle that if they use aggressive sales techniques then the organisation will make large profits. A disadvantage of this approach is that consumers may not be persuaded to purchase products or services that they do not need or want. 2.1.3 Marketing orientation (pure marketing concept)

If an organisation has a marketing orientation it means that the organisation's emphasis is no longer on selling its products at any cost. Production will only start after information has been obtained on what products consumers want and need. A marketing-oriented retailer regards the following aspects as important: sales message, product price, product quality, product packaging and distribution and the marketing information consumers receive by means of

9 advertising. This orientation to marketing led to the development of the pure marketing concept, which is an ethical code according to which all marketing tasks are performed. If an organisation follows a marketing orientation it means that it makes a profit by satisfying consumers' needs and wants. The marketing concept consists of four essential elements: Customer orientation, where all the organisation's actions are aimed at satisfying consumers' wants and needs. Profit orientation, whereby the organisation achieves its own profitability objectives by providing market offerings that satisfy consumers' wants and needs. Organisational integration, which means that all functions or departments in an organisation should work together in order to be successful in achieving the organisation's objectives. Societal marketing orientation. The concept of societal marketing orientation or social responsibility maintains that the organisation is a part of the larger society in which it operates and is accountable to society for its actions. A retailer that has a societal marketing orientation determines the needs of the target market and then delivers superior value to consumers in a way that maintains and improves consumers' and society's wellbeing. Marketers should aim to achieve a balance between their customers' needs and wants, society's interests and the long-term financial goals of the organisation. Organisations demonstrate their social responsibility or societal marketing orientation by contributing to community projects and charities, and even sponsoring sporting events, instead of just focusing on their financial objectives.

All of the above four principles of the marketing concept must be applied in a balanced manner. If these principles are ignored, success can be achieved only in the short term. A business that ignores the principles of the marketing concept is not customer focused and market driven. The application of the marketing concept will have an advantageous influence on the business as a whole.

Activity 2.1 Can you think of an example of an organisation that demonstrates its social responsibility by contributing to a community project or charity, or by sponsoring a sporting event? Do you think that its social responsibility campaigns or programmes help to improve consumers overall impression of the organisation?

Feedback There are so many examples of organisations that contribute to the overall wellbeing of society. You could have mentioned Vodacom, which sponsors the Vodacom Challenge as

10 well as the Blue Bulls. These sponsorship programmes definitely help to improve our overall impression of organisations, which are then seen by consumers as giving back to the community.

Activity 2.2 Study section 1.3 in the prescribed book, and then answer the following question: As the manager of a restaurant, explain what the marketing concept means to you. Think in terms of how you would like your customers to be treated, what your customers expect from the food, the prices to be charged for the food, and so on.

Feedback When answering this question, can you see that there is a need for everybody in the restaurant to work together to satisfy the customers? Here follows more information on the principles of the marketing concept, with particular reference to the above question: Consumer orientation. Here the importance of looking after the needs of the customer should be highlighted, as well as the fact that everybody in the restaurant should attend to the customers' needs. It is not only the responsibility of the waiters to see that everything goes according to schedule, but also that of the owner, the managers and the other workers. The fact that a variety of dishes are offered, that there is a smoking and non-smoking section and that credit cards are accepted, are all indications that customer needs are taken into account. Profit orientation. Remember that in order for the enterprise to be successful, a profit must be made. This can only be done if the needs of both the customer and the business are met. If a bottle of wine costs R20, it cannot be sold for R20 or R25 as profit must be generated for the restaurant. This is normally why there is a hundred percent mark-up on wine. Organisational integration. A crucial aspect of the marketing concept is that everybody must work together for the common good of the restaurant. If the waiter is slow, it may upset the client, or if the food is well-done instead of being rare, it may lead to customer dissatisfaction. Can you see how important it is for all concerned to be aware of customers' needs? The societal marketing orientation. It is becoming more and more important for businesses to become more involved with their staff and the community as a whole. The restaurant owner may decide to sponsor the Black Tie Ensemble, a group of

11 previously disadvantaged singers. In this way he is showing that his restaurant wants to be part of the community and wants to support it. The next section of this study unit will discuss relationship marketing, which is a further development in the evolution of marketing. 2.2 RELATIONSHIP MARKETING

(Study sec 1.4 in the prescribed book.) In relationship marketing, the focus of the organisation has shifted from once-off sales transactions to ongoing relationships. The sale is not the end of the marketing process but the beginning of an ongoing relationship between the organisation, the government, the public, the suppliers of raw materials, the employees, and current and potential customers of the organisation. According to the principles of relationship marketing, the four traditional marketing instruments (or 4 Ps), namely place, price, product and promotion, are expanded to include people and processes. It is important to note that synergy (where the whole is more than just the sum of its parts) between various departments or functions become very important, and the focus on Total Quality Management (TQM) in an entire organisation is emphasised. The bigger market includes, for example, current customers, potential customers, suppliers, potential employees, current employees and reference groups. Even though the marketing process which evolved over time was made to look very simple in the above discussion, it is indeed a very complex process. It involves a number of issues all of which have to be addressed to ensure the success of the product. We will now see what the marketing process involves. 2.3 DEFINING MARKETING

(Study sec 1.5 in the prescribed book.) Marketing is defined as a combination of management tasks and decisions aimed at meeting opportunities and threats in a dynamic environment in such a way that the market offerings lead to the satisfaction of consumers' needs and wants, so that the objective of the enterprise, the consumer and society are achieved. See table 1.1 in the prescribed book for the key words in the definition of marketing.

12 2.4 THE MARKETING PROCESS

(Study sec 1.6 in the prescribed book.) The organisation's product or service does not automatically end up in the hands of the endconsumer in the target market. The process by which an organisation's product or service offering ends up in the possession of the end-consumer is known as the marketing process, and this process needs to be managed effectively by the marketing manager and his/her team. As mentioned earlier, both marketing management and consumers participate in the exchange transaction in pursuit of particular objectives. Marketing management aims at the long-term maximisation of profitability and consumers aim at the complete satisfaction of their needs. Both these objectives are hard to realise in practice, but the continuous pursuit of objectives is nevertheless characteristic of the marketing process, as depicted in figure 1.3 in the prescribed book. The market offering (or product) which the consumer receives consists of a product at a price which the consumer is prepared to pay, which is available at a certain place or distribution point (store) and about which the consumer has been informed by means of promotion or marketing communication messages (advertisements). 2.5 THE MARKETING FUNCTION IN THE ORGANISATION

(Study sec 1.7 in the prescribed book.) It is also important to place the marketing function as performed in a modern business in the correct perspective. See in this regard the organisational structure in figure 1.4 in the prescribed book. The management tasks in marketing are summarised in section 1.7.2 in the prescribed book.

You only have to read section 1.8 in the prescribed book.

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Assessment 1 2 4 6 7 8 Explain a production and sales orientation to markets. Explain the four principles of the marketing concept and illustrate with the aid of practical examples. Explain, with the aid of practical examples, how an organisation should consider the new concepts contained in relationship marketing if it wishes to implement this concept. Briefly explain the marketing process in a large organisation. Explain the place of the marketing function in an organisation. Briefly explain the management task in marketing.

SUMMARY In this study unit we discussed the evolution of marketing and what is meant by the term relationship marketing. We concluded the study unit by explaining the marketing process, the marketing function in the organisation and the management tasks in marketing. The next topic deals with the environment in which all businesses operate.

14 TOPIC 2 AIM The aim of this topic is to enable you to understand how the variables in the marketing environment influence any organisation. LEARNING OUTCOMES THE MARKETING ENVIRONMENT

After studying this topic, you should be able to explain the role of marketing management in the interaction between the business and its environment identify and explain the influence of the variables of the microenvironment, market environment and the macroenvironment, on a business describe the importance of identifying opportunities and threats in the marketing environment and performing a SWOT analysis explain and illustrate the meaning and elements of consumer buying behaviour

TOPIC CONTENT Study unit 3 Study unit 4 The variables of the marketing environment Consumer buying behaviour

15 STUDY UNIT 3 Key concepts Getting an overview 3.1 3.2 3.3 3.4 3.5 Marketing management and the marketing environment The microenvironment The market environment The macroenvironment Swot analysis THE VARIABLES OF THE MARKETING ENVIRONMENT

Assessment Summary

Key concepts Microenvironment Market environment Consumer market Government market Resale market International market Macroenvironment SWOT analysis Strengths Weaknesses Opportunities Threats GETTING AN OVERVIEW In your own experience as a South African consumer you should know that the price of petrol is influenced by various factors. Most of you have read in the newspapers that the petrol price is adjusted on a monthly basis. Various reasons are given for the increase or decrease in the petrol price. Some of the reasons given in the past for these price increases/decreases have been: a decline of the rand against the American dollar an increase in the consumption of petrol products in the USA owing to a prolonged winter season and resulting in a worldwide shortage of petroleum products an increase in the wholesale price of petrol supplied by the oil companies to the retail sector (ie filling stations)

16 an increase in the price of crude oil owing to an oversupply by the OPEC countries

As you can see, these reasons can all be related to the changing marketing environment. This environment includes everything inside and outside the business. 3.1 MARKETING MANAGEMENT AND THE MARKETING ENVIRONMENT

(Study sec 2.1 in the prescribed book.) All businesses operate or function in the marketing environment. It is the task of the business to manage changes in the environment proactively. The marketing environment can be defined as all the variables or factors which directly or indirectly influence marketing activities. This environment is dynamic, which means that the business has to constantly monitor these variables to determine their impact on the business, its customers and its competitors. Figure 2.1 in the prescribed book shows the composition of the marketing environment. The total marketing environment comprises three components: the microenvironment, market environment and macroenvironment. Each of these will now be examined. 3.2 THE MICROENVIRONMENT

(Study sec 2.2.1 in the prescribed book.) The microenvironment, as reflected in figure 2.1 in the prescribed book, consists of the mission and objectives of the business, and the management of the business and its resources. Let us look at these components. Let us first consider the mission, one of the variables in the microenvironment. The mission of an organisation defines the business's fundamental, unique purpose and identifies its products or services and customers. Each and every business requires a mission statement as a guiding principle to define its reason for being a business. Questions that need to be answered when formulating the mission are as follows: Who is the customer? What does the customer buy? Where is the customer located? How does the customer buy? How can the customer be reached? What does the customer regard as value for money?

17 A retailer's mission, for example, is an important aspect of the microenvironment on which retail management needs to concentrate. The retailer's mission statement is an expression of his/her future direction. The following are the requirements for a good mission statement: It should describe the business and the customer domains of the business. The business domain should answer the question: "What is the business and what should it be"? The customer domain should provide answers to the question "Who is your customer?" It should describe the retailer's responsibilities to the people with whom he/she interacts. These include the customer, the community, the shareholders and the employees. The mission statement should provide details of how the retailer's objectives will be realised, for example, by stocking high-quality products with superior merchandising and enthusiastic staff. The mission statement should also show how the business should compete in the marketplace, and how it should interact with its suppliers, its marketing channels and its competitors. It should also be realistic and acknowledge how it will acquire, maintain and use resources, which include financial assets and liabilities, the organisational structure, the human resource component and the store facilities, fixtures and equipment. The mission statement should also refer to the retailer's sustainable competitive advantages, which may be visual merchandising, exclusive supplier arrangements, inventory planning or the control system.

A company's mission statement should clearly be more concerned with its customers than with other processes or problems. Pick 'n Pay's mission statement To distribute manufactured goods and agricultural products efficiently and interpret and satisfy consumer demand. This means that in our business "the customer is always queen". Everyone on earth has certain objectives - one of yours may be to obtain a distinction in marketing at the end of the semester! A retailer, for example, could have the following objectives: Marketing objectives are formulated to obtain customer patronage and achieve a competitive position in the market. Customer patronage refers to sales objectives (eg 10% growth in sales of the Centurion Edgars store during 2006), an increase in customer traffic or an increase in customer loyalty. The competitive position refers to the retailer's market share, his/her image in the eyes of customers and vendor relations (eg maintaining a good balance between established and newly emerging vendors). Financial objectives are set to ensure that the retailer operates profitably and productively. Profitability refers to objectives such as return on assets (ROA), earning per shareholder and stockholder dividends. Productivity refers to the objectives of labour productivity (eg labour productivity can be calculated by dividing net sales by the total number of employees), space productivity (calculated by dividing net sales

18 by the surface of the sales area) or merchandise productivity (ie the stock turnover of the retailer). Societal objectives refer to a retailer's social responsibilities (eg supporting Red Nose Day and the Street Children Fund) and corporate values (eg sound ethical values).

The marketing manager has direct control over the activities of the marketing department. In table 2.1 the variables in the microenvironment controlled by top management are given, while table 2.2 shows those variables in the microenvironment controlled by marketing management. 3.3 THE MARKET ENVIRONMENT

(Study sec 2.2.2 in the prescribed book.) An organisation functions within a certain market environment, that is, the second subenvironment which lies just outside the business. The variables in the market environment will influence the enterprise to some extent. It is the task of management to evaluate these variables and their influence on the business, and to recommend strategies to utilise the opportunities in the market environment and to counteract threats from, among others, competitors to ensure the long-term prosperity of the business. The key variables in the market environment are: consumers competitors intermediaries suppliers

These variables will affect the business, which makes it imperative for management to react to opportunities and threats in the market environment. 3.3.1 Consumers

Consumers are the people who buy a business's products and services. Identifying the target market for your product or service is therefore one of the most important activities undertaken by management. Marketing management has to analyse the consumer to reveal the composition of the market. Changes in market composition or changes in consumer needs may create certain opportunities which, if used, can influence the business's long-term growth and survival. In study unit 4 the buying behaviour of consumers will be discussed. The enterprise can operate in five types of consumer markets. These markets consist of final consumers or customers, namely:

19 Consumer markets. We, as consumers, buy our products and services from these markets. We are consumers of products as diverse as Ciro Coffee and Black Cat Peanut Butter, for example. Services such as those supplied by dentists also fall into this category. Industrial markets (please insert the heading Industrial markets on p 41 of the prescribed book, third paragraph) are markets in which manufacturing organisations buy products and services for their own consumption and/or use in the production of further products or services (eg Ciro Coffee for the staff canteen in the Ford motorcar factory). Government markets. These are the markets that are generated when the government, as the consumer, buys products and makes use of service. Resale markets. These are the markets created by intermediaries, such as wholesalers and retailers, who are the consumers in this case, and who purchase products and services to resell them at a profit. Shoprite/Checkers and Game are examples of businesses that operate in the resale market. International markets. These are markets created by foreign buyers of products who are the consumers in this case. For example, there is an international market for gold, which is exported from South Africa. Gold is sold in South Africa and in other markets creating an international market for the South African gold producers. Competitors

3.3.2

Competitors are a natural part of a capitalistic society. We are accustomed to the fact that various competitors compete for our money in the case of most products and services. Retailers face two basic types of competition, namely intratype competition and intertype competition. Intratype competition refers to the competition between two or more marketers who use the same type of business format. For example, Checkers/Shoprite supermarkets compete with Pick 'n Pay supermarkets using the same type of store, layout, stock carried and information systems. Intertype competition refers to the situation where two or more marketers compete with different retail formats in the market. An example is the Edgars fashion retailing group, which also competes with Pick 'n Pay Hypermarkets in selling clothing to customers. Also study figure 2.2 (ie competitive forces in an industry) in your prescribed book which illustrates the five forces responsible for competition in a particular industry, namely: potential new entrants, suppliers, industry competitors, buyers and substitutes. 3.3.3 Intermediaries

The question of the gaps that exists between the manufacturer and the end-consumer was addressed in topic 1. Intermediaries, such as wholesalers and retailers, evolved to bridge the gap between the manufacturer and the supplier. New developments in this field constitute opportunities for, or threats to, certain businesses operating in this particular industry. One such example is the development of convenience shops at filling stations and the resultant threats to the traditional convenience stores, such as cafs, in South Africa.

20 3.3.4 Suppliers

A business is dependent on suppliers for running its business. An example of such a supplier is the supplier of capital to a business. Traditionally, the commercial banks are the suppliers of capital to small and medium businesses. Listed companies such as Pep Stores have an additional supply of capital provided by their shareholders. When you study this section, take special note of figure 2.3 in the prescribed book about the value chain for a breakfast cereal. 3.3.4 Opportunities and threats

The market environment also contains opportunities that the organisation may use to its own benefit, as well as threats that need to be countered. For example, in the seventies, CocaCola's growth dropped from 13 percent annually to 2 percent when Pepsi launched the "Pepsi Generation" campaign that delivered a good-feeling differential benefit with its message of idealism and youth. This was followed by the launch of the "Pepsi Challenge", which stated that people preferred the taste of Pepsi in blind taste tests. By 1984 Coke's market share lead had slipped by 2,9 percent. Best customers of Coke, those who drank Coke exclusively, dropped from 18 percent to 11 percent. All of this happened while Coke was outspending Pepsi on advertising by $100 million! Pepsi's efforts forced Coke to look for new ways to regain its control of the market and this proved a big factor in developing its overseas markets.

Activity 3.1 Briefly explain the different groups of consumers or markets to which a business could market its products.

Feedback There are five different groups of consumer or markets (also give a brief explanation of each groups): Consumer markets Industrial markets Government markets Resale markets International markets

The variables of the macroenvironment will be discussed next.

21 3.4 THE MACROENVIRONMENT

(Study sec 2.2.3 on p 47 of the prescribed book. Please insert 2.2.3 before the heading The macroenvironment.) The macroenvironment refers to those factors in the environment over which the individual business has no control and on which it has little effect. These factors influence the business and need to be constantly monitored as they continually change. Look at the following examples of changes in South Africa: Changes in the macroenvironment in South Africa One component of the silent revolution is urbanisation. The level of urbanisation in South Africa now matches that of England in 1860, when the number of urban dwellers exceeded the number of rural dwellers for the first time. Another component of the silent revolution is education. Between 1955 and 2000, the number of black matriculants increased by 40%. By the end of the 20th century, seven in every ten matriculants were black. In 1967, only 7% of university students in South Africa were black; now more than 40% of university students are black. Home ownership is also a manifestation of the silent revolution in South Africa. For every house built for black people in 1983, 88 houses were built for white people. Only four years later, in 1987, the ration had shrunk to 2,4:1. The implications of the silent revolution on the South African market are huge. Of all music sales, 60% are to black consumers. The Sowetan has the highest distribution of all morning newspapers. The share of black people in tourism to Durban has grown from 4% in 1985 to the present 20%.

The following six variables in the macroenvironment may either individually, or collectively, affect the business at any time: The technological environment The economic environment The social environment The physical environment The politico-government environment The international environment The dynamic environment (note that you need not study the dynamic environment)

22

Activity 3.2 After having studied pages 47 to 58 in the prescribed book, answer the following question: As a manager and owner of Eezee Enterprises, which sells trendy, imported womens clothing, Mr Sambora wants you to explain to him how the variables in the macroenvironment may influence his business. Explain all the macrovariables that will influence his business.

Feedback You should have identified six variables which may affect Eezee Enterprises in different ways. These variables are listed below: The technological environment. This environment is affected by innovation and change. For example, new manufacturing processes and new technologies may influence the type and quality of clothing being sold by Eezee. One needs only to think of the new types of material available, such as those combining natural and synthetic fibres to create crease-resistant material. The economic environment. This variable is well known to everyone. An increase in the inflation rate, changes in the exchange rate and a higher rate of personal tax are examples of how the economic environment may influence Eezee clothing and Mr Sambora in his personal capacity. Escalating food prices since 2007 have angered many consumers. The social environment. Social changes are prevalent throughout the world and also in South Africa. A decline in the population growth rate may eventually have a negative impact on sales of trendy imported clothing to a declining target market. The changing role of women in society (eg more women in full-time positions and more career women) may be a positive variable in the case of Eezee Enterprises, and may result in a higher turnover. The physical environment. This variable is of great concern to people all over the world. Scarce resources are utilised in the packaging of clothing, and wastage of packaging material must be of concern to Eezee enterprises. The political-governmental, also called institutional environment. This variable in the macroenvironment would be of particular concern to Eezee Enterprises. One example

23 of the effect of this variable would be the surcharges on imported clothing. This would have a direct influence on the selling price of the clothing sold by Eezee Enterprises in South Africa. The international environment. South Africa is part of the global village. As such, our economy and its businesses are directly influenced by the economic troubles of the Far Eastern countries, for example. In the case of Eezee enterprises, it may benefit from a better exchange rate, enabling Mr Sambora to import his clothing at a cheaper price.

By now you should have realised that the macroenvironment is an active force which influences each and every enterprise operating in South Africa, and which no business, whether big or small, can ignore. In order to identify internal strengths and weaknesses of a business and external opportunities and threats in the marketing environment, a SWOT analysis is conducted. This will be discussed next. 3.6 SWOT ANALYSIS

(Study the sections that follow.) A SWOT analysis is a useful instrument for helping managers to identify internal strengths and weaknesses of a business and external opportunities and threats facing it. SWOT is an acronym: S = Strengths, W = Weaknesses, O = Opportunities, T = Threats. A SWOT analysis is based on the assumption that an effective strategy maximises a business's strengths and opportunities and minimises its weaknesses and threats. Strengths should be matched to opportunities and threats should be seen as challenges. A SWOT analysis thus aims to shed light on those environmental variables that in some way either have a positive or negative impact on the success of the business. The importance of environmental scanning or analysis may be summed up as follows: It helps the business to capitalise on early opportunities, rather than lose to competitors. In other words, it helps the business to obtain a first-mover advantage by taking action before the competition. It provides an early signal of impending problems or threats, which can be defused if recognised well in advance. It sensitises a business to the changing needs and wants of its customers. It provides a base of objective information about the business's internal strengths and weaknesses that determine its ability to counter threats or utilise opportunities. It improves the image of the business by showing that it is sensitive and responsive to its environment.

24 Let us now briefly look at strengths, weaknesses, opportunities and threats. Strengths are areas in which a business does particularly well, that set it apart from competitors. It is a distinctive competence that gives the business a competitive advantage in the marketplace. It is what a business can do particularly well. In many industries the service, efficiency and personal attention offered to customers make a crucial difference in gaining leverage in the marketplace. Businesses that deliver superior service over their competitors have a real competitive strength. Weaknesses are areas in which a business needs to improve, should it not want its competitors to gain the competitive advantage. A weakness is thus a limitation or deficiency in resources, skills and capabilities that seriously impedes a business's effective performance. For example, a business short of cash cannot afford to undertake a large-scale marketing communication campaign. Opportunities are those things that can benefit the business. The identification of promising opportunities is an absolute prerequisite for a business's profitability, survival and growth. Some organisations have focused on gas heaters, lamps and generators as a result of the recent Eskom energy crisis. Threats are those things that can harm the business. Threats can take different forms, for example, changes in the consumer market, an unexpected increase in competition, a recession or an unfavourable rate of exchange. These threats should not be accepted as a matter of course, but should rather be seen as challenges or possibly even as opportunities.

Assessment 1 2 3 4 5 6 Why should an organisation manage changes in the environment proactively? Explain the variables in the microenvironment controlled by top management and those variables controlled by marketing management. Explain the different groups of consumers or markets. Explain the importance of intermediaries, suppliers and competitors. Explain the macroenviromental variables that could affect a business. Explain the meaning and benefits of a SWOT analysis.

SUMMARY In this study unit we discussed the variables of the market environment, the micro environment and the macroenvironment. The importance of a SWOT analysis was also discussed. In the next study unit we will look at consumers and their buying behaviour, an important component of the market environment.

25 STUDY UNIT 4 Key concepts Getting an overview 4.1 4.2 4.3 Purchase decision-making process Individual factors influencing consumer behaviour Group factors influencing consumer behaviour CONSUMER BUYING BEHAVIOUR

Assessment Summary

Key concepts Complex buying behaviour Dissonance-reducing behaviour Habitual buying behaviour Variety-seeking behaviour Routine decision making Impulse decision making Decision-making process Motivation Perception Learning ability Personality Lifestyle Attitude Cultural groups Family Reference group Opinion leaders GETTING AN OVERVIEW People satisfy their needs by buying products in a competitive market. Marketers need information about consumers. They need to know what consumers' needs and preferences are and why they have those preferences. When this information is known, marketers can try to satisfy these needs with their particular products. They must, however, first inform the consumers about the products and persuade them to buy their particular products (market offering). Such information will also assist them with other things such as segmenting the market, making product changes, launching new products, deciding on the location of their stores, what advertising message to use, and so on.

26 4.1 PURCHASE DECISION-MAKING PROCESS

(Study sec 3.1.1 in the prescribed book.) 4.1.1 Types of purchase decisions

Consumer decision making varies with the type of purchase decision being made. The type of purchase decision is largely influenced by the degree of buyer involvement and the number of differences between the brands. Six types of decision making are identified: Complex purchase behaviour: The consumer is highly involved in the purchase and there are significant differences between the brands. An example would be when a consumer is considering purchasing a new motor car. Dissonance-reducing behaviour: Consumers are highly involved in the purchase, but perceive few differences between the brands. The purchase of a new carpet would involve dissonance-reducing behaviour because consumers are highly involved but perceive few differences in the available brands. Habitual purchasing behaviour: Buyers are not highly involved and do not perceive significant differences in the brands. The items are bought habitually. Consumers who purchase milk are normally not concerned whether it is manufactured by Clover or by Douglasdale. Variety-seeking behaviour: Products are purchased for the sake of variety or "trying something different". There is usually a perceived difference between the brands. Routine decision making: Similar to habitual decision making, routine decision making is also characterised by low buyer involvement and few differences between the brands. However, routine decision making involves the continual re-purchase of the same brand. Families might, for example, continually repurchase the same brand of toothpaste. The difference between habitual and routine buying is that in the case of habitual buying any brand will be bought while in the case of routine buying the same brand is always bought. Impulsive decision making: Impulsive decision making normally occurs at the point of purchase allowing the buyer to progress quickly through the decision-making process and to take action immediately. The last-minute purchase of a magazine while standing in the queue to pay is an example of impulsive decision making.

Activity 4.1 After you have studied section 3.1.1 in the prescribed book on the types of purchasing decisions, visit your local spaza store, caf, supermarket or large hypermarket and observe the customers. Identify which customers are engaged in real decision making, impulse buying and routine decision making.

27

Feedback Did you perhaps notice a housewife buying groceries? Did she almost automatically add certain tinned food items to her shopping basket? That is routine decision making since she always buys the same brand without taking time to think about it. Did you see a customer buying a bar of chocolate while waiting in the queue at the check-out point? That is known as impulse buying. Did you see a couple looking at different types of kettles, discussing the different brands and prices? That is complex decision making, known as real decision making. Consumer buying behaviour consists of those actions of individuals and families directly involved in obtaining and using need-satisfying products and services. 4.1.2 Purchase decision-making process

The stages in the purchase decision-making process, as shown in figure 3.1 of the prescribed book are as follows:. Need recognition Information search Evaluation of alternatives Purchase decision Post-purchase behaviour

Activity 4.2 When you have studied the phases in the decision-making process, read the following excerpt and answer the question that follows: Mercedes Morule is a married college graduate who works as a brand manager for a leading liquor company. She wants to find a new leisure-time activity that will provide some contrast to her working day. This need has led her to consider buying a camera and taking up photography. Explain how Mercedes progressed through the stages of the buying decision-making process.

28

Feedback You should have followed the decision-making process as follows, and made your own practical assumptions where necessary: Need recognition

Need recognition or problem recognition occurs when buyers become aware of a difference between a desired state and an actual condition. At the beginning, Mercedes Morule recognised the need for a new hobby when her busy season at work slowed down, and thought of cameras after talking to a friend about photography. By gathering such information, a marketer can make consumers aware of unsatisfied needs. Information search

After recognising the problem or need, buyers search for information about products to help resolve the problem or satisfy the need. In the internal search, buyers search for information about products. If they cannot retrieve from memory enough information for a decision, they seek additional information through an external search. A successful search yields a group of brands, called an evoked set, which a buyer views as possible alternatives. At this point, Mercedes Morule becomes more receptive to information about cameras. She pays attention to several sources of information including looking at camera advertisements (marketing sources), listening to friends' conversations about cameras (group sources), looking for reading material (public sources), and handling and examining cameras (experiential sources). Note that the extent of external search conducted by a buyer depends on perceived risk, the knowledge level of the buyer, prior experience and the level of interest in the product. From the information gathered from different sources, Mercedes would then narrow down her options to an evoked set or consideration set for further evaluation. Evaluation of alternatives

To evaluate the products in the evoked set, a buyer establishes certain criteria by which to compare, rate and rank different products. Marketers can influence consumers' evaluation by framing alternatives. Assuming that Mercedes Morule has narrowed down her choice to four cameras, and is primarily interested in four attributes - picture quality, ease of use, camera size and price (see table 3.3 in the prescribed book for the evaluation criteria). She has also formed beliefs about how each brand rates on each attribute. If one brand, say Nikon, rates best on three out of four attributes, it can be predicted that she would choose it over the rest. Unfortunately, however, this evaluation happens in a consumer's mind and can therefore not be seen. Note that perceived risk associated with buying a product also impacts on the evaluation process (see table 3.4 in the prescribed book).

29 Purchase decision

In the purchase stage, consumers select products or brands on the basis of results from the evaluation stage and on other dimensions. Buyers also choose the seller from whom they will buy the product. Should Mercedes Morule decide to buy, she would also have to decide on the brand (such as Nikon), vendor (Game Stores), quantity (only one camera), time (just before the Christmas break) and payment method (cash). Post-purchase behaviour

After the purchase, buyers evaluate the product to determine if its actual performance meets expected levels. Shortly after the purchase of an expensive product, for example, the postpurchase evaluation may result in complete satisfaction, dissatisfaction or cognitive dissonance. Is Mercedes satisfied, dissatisfied, or does she suffer from cognitive dissonance? If she is satisfied, this would lead to brand loyalty since she might be inclined to the same brand in future. In the case of dissatisfaction, she may never buy the same brand in future or may return the camera to the store. If she suffers from cognitive dissonance it means that she is beginning to wonder whether she has made the right choice although there may be nothing wrong with the camera, in which case she will have to reassure herself that it was a wise decision. 4.1.3 Model of consumer behaviour

(Study sec 3.1.2 in the prescribed book.) Figure 3.4 on page 74 in the prescribed book summarises all the factors influencing consumer decision making, namely: Individual factors Group factors Economic and situational factors (eg shortage of time, available funds, and number of brands considered) Experience (eg what the person has learned about the products as a result of previous experience with the products) Marketing activities (eg advertising)

In the next two study units we focus on the individual and group factors influencing consumer decision making.

30 4.2 INDIVIDUAL FACTORS INFLUENCING CONSUMER BEHAVIOUR

(Study secs 3.1.3 & 3.1.4 in the prescribed book.) Let us consider the following scenario as an illustration of how individual factors influence consumer behaviour. If you like a certain product, for example Coca-Cola, you will probably buy it when you are thirsty (motivation). You will probably buy Coca-Cola in a store which you regard as not being too expensive (perception). Previous experience has taught you that Coca-Cola is better than Tab (learning). Therefore you will not buy Tab because you do not like it (attitude). You like being with your friends when you watch soccer (lifestyle and personality) and then you all drink Coca-Cola. The individual factors influencing consumer behaviour are the internal factors inherent to a particular customer and are identified as follows: Motivation

When you study section 3.1.3 in the prescribed book, you will notice that motivational factors are discussed separately. However, these are usually seen as part of the individual factors influencing consumer buying behaviour. A motive is the driving force within individuals that compels them to satisfy their needs. Consider the following situation: Simon, a 15 year-old boy, wants to go to watch Bafana Bafana when they play against Nigeria at the stadium near Johannesburg. However, he does not have enough money to pay for the ticket. He decides to do some odd jobs at home (gardening and washing floors) to earn extra cash. After school he helps the teacher with little tasks like coaching the younger boys in soccer (for which he earns some more money). He also delivers the newspaper early every morning to all the neighbours. After three months he has saved enough money to buy a ticket for the Bafana Bafana/Nigeria soccer match. We can say that Simon was motivated to earn extra money and his motivation was rewarded when he satisfied his need to watch the soccer match that he had been dreaming of for months. Motivation can therefore be defined as the encouragement of behaviour (earning extra money) directed at a particular goal (watching Bafana Bafana). Perception

Perception involves seeing, hearing, feeling, tasting and smelling. We are all exposed to countless stimuli (sensations or objects) every minute and every hour of the day. In order to cope with all these stimuli we usually "switch off" to protect ourselves from becoming confused.

31 For example, we are exposed to many products in the stores we visit and too many advertisements in magazines and on television. We normally pay attention only to those products and advertisements in which we are interested. Thus, if one were interested in buying a new television set one would be inclined to notice advertisements for television sets as well as stores selling television sets. Learning ability

We start learning about the world from the moment of birth. We learn what food to eat, what clothes to wear and ultimately what products to buy. We also learn (by using them) that certain products are of a better quality than others and that some products satisfy our needs better than others. Every facet of our behaviour depends on what we learn and what we remember about objects and situations. The entire decision-making process is dependent on previous learning situations. It is thus of the utmost importance for marketers to know how people learn, since they want consumers to learn about their products and services. Attitude

Every time you are asked whether you like or dislike a product or an advertisement, you are being asked to express your opinion. For example, if you say that you like Royco soup, it means that you have a positive attitude towards it. If you say you do not like smoking, you are in fact saying that you have a negative attitude towards it. The marketer therefore has to try to influence the attitudes of the consumer, for example, by means of advertisements. Marketers have to attempt to influence attitudes by creating new attitudes, by changing neutral attitudes into positive attitudes and by reinforcing existing favourable attitudes. The longer a person has a particular attitude, the stronger and more fixed it becomes. Personality

You might say that one of your friends is "fairly aggressive, very opinionated, competitive, outgoing and witty". What you have described is your friend's personality. We all have personalities - and our personalities are all different. The marketer has to be aware of the dynamics of personality because people tend to buy products that reflect, enhance or even justify their personalities. In this way, a certain symbolic meaning is attached to a particular product, and this is referred to as the product image. A particular sports car, for instance, may symbolise youth, and may therefore be very attractive to certain older men because they wish to appear youthful. Lifestyle

Peter goes to work in the mornings and when he gets home in the evenings he works again late into the night. Samuel also works during the day but in the evenings he watches television and visits his friends - he loves going to parties. Paul works very hard during the week but over weekends he plays soccer, works in the garden and never misses church on Sunday. These three people have different interests and social activities - they have what we call

32 different lifestyles. People with different lifestyles have different needs. Since large consumer groups usually share the same lifestyle, marketers use lifestyle as a basis for market segmentation. They can then offer each particular market segment products in a way that will correspond with their lifestyle.

Activity 4.3 Provide practical examples of how each of the individual factors influences consumer behaviour.

Feedback You could have considered the following practical examples: 4.3 Motivation: A young girl needs to feel that she is part of her group of friends. She therefore has a motive and buys Rimmel cosmetics. Perception: A young man sees an advertisement for Camel cigarettes. His interpretation (ie his perception) is that smoking demonstrates masculinity. He buys a packet of Camel cigarettes. Learning ability: A woman learns through experience that Cobra floor polish will put a shine on her floors. She remembers to purchase Cobra on her next shopping trip. Attitude: A teetotaller has a negative attitude towards liquor. He does not even read advertisements for brandy and never considers buying it. Personality: A man is ambitious. He buys books, travels overseas frequently and lives in an expensive home. Lifestyle: A woman likes to be outdoors, plays golf and tennis, and reads the Getaway magazine when she relaxes. GROUP FACTORS INFLUENCING CONSUMER BEHAVIOUR

(Study sec 3.1.5 in the prescribed book.) John Brown, an English-speaking South African, has a wife and three children and they live in a rented house in a working-class suburb of Johannesburg. He was educated at a technikon and works as a technician for a telecommunications company. He earns a modest salary of R3 000 per month and in his free time he plays tennis at the local tennis club of which he is a member.

33 We can say that John belongs to various groups. He forms part of the English-speaking cultural group; he is part of a family; he belongs to the lower-middle class; and his reference group is the tennis club. John (like all other consumers) therefore does not live in isolation. Cultural and social influences, as well as the family and reference groups, affect his behaviour. These groups also influence the types of products that he buys. The groups which influence all consumers are: Cultural groups

We are all born into a specific cultural group and every cultural group has certain "rules". For example, culture provides standards and "rules" regarding when to eat, how to eat, where to eat, and what is appropriate to eat for breakfast, lunch, dinner or at a picnic or wedding. The different cultural groups in South Africa, also known as subcultures (eg Zulus, Tswanas, Afrikaners, Xhosas) all have different habits and customs as regards common and acceptable ways of behaving. Cultural groups also determine to a large extent what products their members should buy - hence marketers need to understand cultural differences in order to anticipate consumer acceptance of their particular products. South Africa's heterogeneous population makes it vitally important for marketers to be familiar with the different cultural values of each subculture, especially when it comes to advertising. For some cultures, for instance, a model lying down is a sign of laziness; others do not regard flowers as gifts since they are associated with funerals. Examples of how culture affects buying behaviour include the strong pride in the community (ubuntu) for black consumers, as well as the specific brand and retail choices learned by children from their parents and peers. This would include traditional foods (mealie-meal and boerewors) and the type of food eaten (Kosher and Halaal foods for Jewish and Muslim customers respectively). Family

Someone who lives in the same house with his or her parents, brothers and sisters, grandmother and aunt, for example, is part of a family. The extended family was the norm in African life; however, such families are diminishing and becoming more of an exception, particularly in the urban areas. Extended family relationships are now confined to events such as marriages, deaths and funerals. The youth in particular dislike the extended family living under one roof because of parental authority and perceived unfair treatment of daughters-inlaw. Reference groups

Reference groups consist of formal and informal groups that influence the decision making of consumers. Individuals may be members of one or more of the following reference groups: membership groups automatic groups negative groups associative groups

34 Young people in particular feel the need for a group identity and many conform to the norms of their group rather than being "individualistic". Marketers should use role models to build sales, and so many retailers identify with national sports teams (eg through Springbok or Bafana Bafana endorsements) to give customers a guide to purchasing. The image of the store as it relates to one particular reference group could be important in deciding which store to patronise. Many teenagers, for example, do not like shopping at the same store as their parents. Opinion leaders

Opinion leadership is the process by which one person (the opinion leader) informally influences the actions or attitudes of others. An opinion leader is not necessarily an important person, but is someone whom the group looks up to, especially during the purchase of new, high-risk products. Celebrities are often opinion leaders because of their public status. Opinion leaders are especially important in channelling information to members of the target market. Many marketers and retailers use opinion leaders to help guide the choice of other members of the target market. This is done by channelling their marketing communication efforts through opinion leaders so that it is reinforced by the opinion leader. An example would be a retailer who retails sporting goods, targeting national team members of Bafana Bafana to use his/her brand, as well as advertising to the sports product customer. The retailer is trying to use the opinion leader role of the sports stars to influence the general market. This is especially useful if the product is new or if it is a high-risk product in terms of social or financial risk.

Assessment 1 2 3 4 Explain the different types of purchase decision making. You recently purchased a new motorcar. Explain how you progressed through the phases of the consumer decision-making process. Explain, with the aid of practical example, the individual factors that influence consumer behaviour Explain, with the aid of practical examples, the group factors that influence consumer behaviour

SUMMARY In this study unit we discussed the different types of purchase decisions, the consumer decision-making process and the factors that influence the decision, namely the individual and group factors. You must be able to apply the stages of the decision-making process to practical situations, as was illustrated in this study unit.

35 TOPIC 3 AIM The aim of this topic is to enable you to understand the basic principles involved in market segmentation, targeting and product positioning. LEARNING OUTCOMES MARKET SEGMENTATION, POSITIONING TARGETING AND PRODUCT

After studying this topic, you should be able to ! ! ! ! explain the nature of mass marketing and market segmentation illustrate how the bases for segmenting consumer markets can be used to segment a market explain the principles involved in market targeting describe the nature and principles of product positioning

TOPIC CONTENT Study unit 5 Study unit 6 Market segmentation and targeting Product positioning

36 STUDY UNIT 5 Contents Getting an overview 5.1 5.2 5.3 Mass marketing Market segmentation Market targeting MARKET SEGMENTATION AND TARGETING

Assessment Summary

Key concepts Mass marketing Market segmentation Bases for market segmentation Geographic segmentation Demographic segmentation Psychographic segmentation Behavioural segmentation Market targeting Undifferentiated targeting Differentiated targeting Concentrated targeting Niche targeting Mass customisation GETTING AN OVERVIEW The market consists of people who have specific needs and the ability (usually money) to satisfy these needs by purchasing the products they need. The market, in an endeavour to make a profit, delivers products to satisfy some of these needs. As all consumers cannot be satisfied, marketers must determine who should be part of their markets. The most effective method the marketer can use to help him or her to make this decision is to divide the market into segments or target markets. The marketing concept is based on the premise that the marketer should first determine consumer needs and then develop products to satisfy these needs. In order to define consumer needs more precisely, marketers employ market segmentation. This assists them to create a basis for developing products to meet consumer needs, through discovering the attributes that are of value to consumers.

37

Protea Hof hotel targets business travellers The Protea Hof hotel in Pretoria, which is situated in the city centre, has decided to cater primarily for the business traveller, and has therefore developed its product offering around the needs of business travellers. We will first look at mass marketing, then the nature of market segmentation as well as the bases for segmentation will be dealt with. We then conclude this study unit with a discussion on target marketing. 5.1 MASS MARKETING

(Study sec 4.1 in the prescribed book.) Before 1950, most businesses did not segment the market. They followed a mass marketing (also called market aggregation) approach, believing that individual consumers in the market for a specific kind of product have similar needs and preferences. They felt that most consumers could be satisfied by a single product with little or no variation, one price, a promotional campaign aimed at everyone and one distribution method to reach all consumers in the total market. Products that can be successfully mass marketed today, include staple food items such as sugar and salt because a great variety of people need these products in similar standard packaging. Mass marketing can be effective under the following conditions: ! A large proportion of consumers in the total market must have similar needs for the product. If the consumers have a variety of needs, the market offering will satisfy very few people. The marketer must be able to identify a set of product needs that are common to most consumers in the total market. The marketer must also have the resources and managerial skills to reach a sizeable portion of that market. If the consumers needs are dissimilar or if the marketer is unable to develop and maintain a satisfying market offering, then mass marketing is likely to fail.

The advantages of mass marketing include the following: ! Production costs per unit are low on account of having one production run for a homogeneous product. There are no different sizes or packages. The production costs of the Model T Ford declined from $4 000 in 1909 to $1 000 in 1923. Advertising costs are relatively low because usually only one advertising campaign is launched.

38 ! Marketing research costs are lower because it is not necessary to research changing consumer needs.

However, the main disadvantage of mass marketing is its inability to meet different consumer needs. Mass marketing is unlikely to succeed in todays marketplace as consumers are unlikely to accept a lack of variation in most product offerings. Their needs have become too varied. When you study this section in your prescribed book, note in particular the following concepts: Counter-segmentation: grouping together various market segments and directing a single marketing effort at these segments to reduce costs Mass customisation: products are tailored to the unique needs of the customer (this is also discussed in sec 1.4 of the prescribed book as an important part of relationship marketing, as well as on p 136)

Market segmentation, which is the opposite of mass marketing, will be dealt with next. 5.2 MARKET SEGMENTATION

(Study sec 4.2 and secs 4.3 to 4.3.2 in the prescribed book.) 5.2.1 The nature of market segmentation

Market segmentation is a market-oriented approach of identifying and satisfying the diverse needs of consumers. The total market is divided into similar segments of people who have similar needs (see the definition in your prescribed book). Each market segment represents a group of consumers who share one or more similar characteristics that cause them to have relatively similar product needs. Look at the following example: Market segmentation A person who has opened a business selling portable computers could identify the following segments in the market: ! ! ! ! Computers for small businesses (invoicing or record keeping) Computers for home use (games or financial planning) Computers for portable use (laptops) Computers for specialised areas (desk-top publishing)

Here, four possible market segments have been identified. One or more of these can be selected as the target market(s) for the portable computers. In this way the products are more closely tied into specific customer needs for portable computers.

39 The age-old adage of "divide and conquer" holds true for marketing as well. Clearly, dividing a large market into smaller, more accessible segments makes good business sense - it makes the business manageable. Bear in mind that for very small businesses, such as a corner caf, market segmentation may have very little benefit as their physical location already represents a form of market segmentation. 5.2.2 Advantages of market segmentation

In addition to the above, market segmentation is advantageous to companies because it forces organisations to focus all their energy on satisfying the needs of one (or just a few) group(s) of customers, rather that many it may highlight an untapped market segment --- think of airlines where once uniform pricing now varies by city, route, time of day and by passenger; in other words, it allows a firm to specialise it sets the parameters for the development of a separate market offering and marketing mix for each segment it helps focus resources more profitably on acquiring and developing customers, and may enable a firm with limited resources to compete with larger organisations Disadvantages of market segmentation

5.2.3

The following limitations or drawbacks can be identified: Market segmentation is expensive, as the cost of providing differentiated products and services, as well as marketing communication is high and requires considerable effort in its own right; a standardised product and communication message is much cheaper. It limits the marketing efforts of the company to part of the market only (limited market coverage), resulting in the reduction of any economies of scale the organisation might have had (the company may miss out on other lucrative opportunities). There is also the danger that the company may create too many different market offerings in an attempt to meet the needs of the various market segments, with the added complexity of staff having to cope with different strategies for different customers; cannibalisation may also occur when one product takes away market share from another product being marketed by the same organisation.

Please note that you must study the advantages and disadvantages of market segmentation in conjunction with those mentioned in the prescribed book. Consider the following example:

40 Market segmentation promotes new product ideas Until the 1980s, Levi jeans were sold on a mass market basis with one advertising message that Levis are for everyone. With the realisation that jeans were no longer for everyone, various lines were introduced. Market segmentation enabled Levi to target separate demographic segments, and resulted in the introduction of the 501 line (button-fly jeans, targeted at 14 to 24 year old males), the 505 line (jeans with a culler cut, targeted at older males) and the 900 line (for the female figure) of jeans. In diverse markets, it makes sense for marketing and retailing managers to research their customers in terms of the factors or criteria that make them buy different products. The research findings are likely to identify separate groupings or segments of customers showing different general characteristics, with different requirements and expectations for the products being offered to them, and with different buying behaviours. Market segmentation is not an easy or clear-cut task, however, and should be regarded as the product of critical and innovative thinking rather than of some given set of procedures. There is unfortunately no underlying universal theory to the process of effective market segmentation and what is an appropriate variable to use for segmenting one market may not be appropriate to other markets. Look at the following examples. Pram manufacturer In the case of a pram manufacture, segmenting the market according to geographic location would probably not make good business sense as young families with newborn children in Durban and Cape Town would have similar needs in terms of prams. However, income may well be a telling factor, as those with more income may buy a new and more expensive pram, while those with limited income may buy a second-hand pram. Also families with more than one child may already have a pram. So the size of the family and income may be two very important variables that pram manufacturer could use for market segmentation. Surfboard manufacturer For the manufacturer of surfboards, however, geography may well play a role. Surfboards are likely to sell better near a beach rather than inland and it is not surprising to find most surfboard manufacturers located at the coast. Nevertheless, the primary assumption for market segmentation is that consumers must have heterogeneous (different) needs for a product or service. If this is not the case, then there is obviously no need for market segmentation. 5.2.2 Criteria (or prerequisites) for effective market segmentation

In the process of market segmentation there are other prerequisites that need to be met to ensure that the process has indeed been effective. These criteria for effective market

41 segmentation state that any segments identified must be measurable in the sense that the marketer should have clear criteria for describing segments within the market be large and profitable enough to warrant marketing effort on the part of the company (ie it must be substantial) be accessible; the marketer should be able to reach the market segment with a product or service and marketing communication be actionable; in other words the organisation should be able to do something about the segment (ie develop a specific market offering for the market segment) be differentiable - in other words each segment should be similar enough (homogeneous) within the segment, yet different enough between the various segments

Activity 5.1 Read the following scenario and answer the questions that follow: You wish to open a restaurant in your town. However, you are unsure whether to open an upmarket restaurant like Squire's Loft or a cheaper restaurant such as a Spur, Steers or McDonald's. Now answer the following questions: Is it necessary to analyse consumers before you open the restaurant? Explain your reasoning. Is the restaurant market a homogeneous or heterogeneous market? Give reasons for your answer. If, in your opinion, the restaurant is a heterogeneous market, why would it be beneficial to segment the market?

Feedback You should have taken the following into account:

42 Retail businesses such as restaurants can only be successful if their owners or managers knows their customers and adapt their products (in this case, food) to meet the customers' needs. There are different types of restaurants in your area that focus on different types of consumers. The restaurant market can therefore be defined as a heterogeneous market. One restaurant might focus primarily on married people with children, that is, it is a family restaurant. In comparison, young married couples with a high joint income would rather visit more expensive restaurants, where the food and service are of a higher standard. In a heterogeneous market such as this, the retailers will not be able to serve all their customers equally well. They will have to choose a specific group of customers who exhibit unique personal characteristics and requirements for a restaurant. Such a group of customers is known as a market segment. By focusing on one or a few such market segments, retailers will be able to satisfy their customers better than their competitors who focus on other segments. In the next section we will see how a marketer can segment a market by using the bases for market segmentation. 5.2.3 The bases for segmenting the consumer market

(Study secs 4.3.3 and 4.3.4 in the prescribed book.) When you study this section in the prescribed book, note the levels of market segmentation in figure 4.2. The marketer, in researching the market, will be able to identify those consumers who may be interested in a particular product. It is therefore necessary to consider the bases for market segmentation, namely geographic, demographic, psychographic and behavioural. We will look at each one briefly: ! Geographic segmentation

The geographic segmentation approach assumes that customers within a particular geographic location, be it a country, region, city or even suburb, may be targeted with the same product offering and marketing mix. One or more locations would then be targeted by the organisation. This is a particularly important variable in the retailing sector, as retail outlets usually serve a specific geographic location. For a manufacturer that supplies the whole country, location may not be important at all. This approach on its own doesn't define a marketing strategy; it doesn't define the product or service required, or the promotional stance to take. It can, however, play a role in segmentation by providing further help in identifying how to reach customers found in

43 particular segments. The logic is that people who live in the same area share some of the same needs and wants and these differ from those who live in different areas, for example:

Johannesburg: city of diverse market segments In a fairly small geographic area such as Johannesburg, marketers realise there are diverse markets, such as the central, southern, northern, western and eastern areas of Johannesburg that can be treated as separate market segments with diverse needs. Many small entrepreneurs have decided to confine their marketing and operations to only one or two of these segments, such as the spaza businesses which concentrate on the northern areas of the city. ! Demographic segmentation

This approach assumes that customers differ according to certain personal variables, such as age, gender, marital status, race, religion, family size, occupation, income or education. Demographic information helps marketers identify a profile of the typical customer to be found in each segment, which will guide them in what marketing strategy to use to reach the segment in question. Marketers rely on demographic characteristics of consumers because they are closely linked to a consumers product needs and purchasing behaviour, and because they can be easily measured. When you study demographic segmentation in the prescribed book, note in particular the significance of the LSM (Living Standards Measure) groups for South African marketers. You need not study the LSM groups, but use this information when you answer assignment questions and to clarify the theory. If you want more information on LSMs you will find it on the Internet at: http://saarf.co.za ! Psychographic segmentation

Psychographic segmentation involves the breaking up of the market in terms of attributes such as social class, lifestyle and personality. Consider the lifestyles (or value groups) compiled by AC Nielsen MRAs Sociomonitor Value Groups survey, the most authoritative psychographic profile of its kind in South Africa, on pp 119 to 121 in your prescribed book. You need not study these value groups in table 4.4 but you are encouraged to use them in your assignments and to illustrate the theory. Psychographic variables refer to the inner or intrinsic qualities of individual consumers. Using this base, marketers are able to segment markets according to variables impacting on the psyche of consumers such as lifestyle, personality and social class. In the process of segmenting a market using this basis, the marketer would normally make use of information about consumers' attitudes, interests and opinions (AIO) and values and lifestyles (VALS). Using a statistical technique called factor analysis, information gathered is used to identify subgroups of consumers.

44 ! Behavioural segmentation

Behavioural segmentation is the division of a mass market on the basis of characteristics of the consumers relationship to the product. Here segmentation is done based on consumer buying behaviour and the variables that may be considered include the following: Purchase occasion. Here the marketer looks at the occasion for which the product is being bought, whether it is for everyday use or for use on special occasions. Benefits sought. This variable attempts to understand the value that a consumer seeks when buying a particular product. User status. User status divides consumers into non-users, ex-users, potential users, occasional users or regular users. Usage rate. This variable looks at the frequency of use of a particular product such as heavy versus light users, so that these can receive special attention. Loyalty status. Here the marketer attempts to identify how loyal the consumer is to a product. Buyer readiness stage. This variable measures whether consumers are ready for a product or whether they first need to be made aware of the product and its benefits. Attitude towards the product. Here the effort is focused on identifying whether consumers are indifferent, negative, hostile, positive or enthusiastic towards a product.

Activity 5.2 Assume that you are the marketing manager of a company that plans to market an imported shoe in South Africa. Explain how you used the geographic, demographic and psychographic segmentation variables to identify market segments for the product.

Feedback You first of all have to describe the product. Is it a casual shoe or a court shoe? What are the features of the shoe? Is it reasonably priced or very expensive? Let us assume it is a teenage shoe.

45 In order to identify market segments that would be interested in the shoe, you have to research the market. Your research may show the following with regard to the geographic, demographic and psychographic bases. Geographic segmentation. According to demographic segmentation, consumers are grouped in terms of their geographic location. The following potential consumers were identified: Teenagers in the large cities with a high population density, namely Cape Town (size +60 000), Johannesburg (size +100 000) and Durban (size +40 000). No segments were identified in the rural areas while climate was not relevant.

Demographic segmentation. Demographic characteristics are closely linked to customer needs and purchasing behaviour and include age, gender, income, education and race. The following potential consumers were identified: Age: 10 - 18 years; 16-24 years Gender: teenage boys and girls Income: parents of teenagers earning R6 000+ per month Education: parents who are managers/executives; professional; teachers Race: all races

Psychographic segmentation. The potential consumers are further classified in terms of social class, lifestyle and personality. The research revealed the following potential consumers: The social classes identified for the shoes were teenagers from the middle and upper classes. The lifestyles included those who are interested in sport, outdoor life, going to movies, mainly the nonconformists and progressives, as well as those who want to impress with their individuality.

Now you should do the same for the behavioural characteristics of potential consumers. In the next section we will be discussing market targeting. The next step in market segmentation (see sec 4.3.4 in the prescribed book) is to develop segment profiles, based on the consumers identified by using the bases for market segmentation (as above). That means you have to identify and describe a few segments in terms of the geographic, demographic, psychographic and behavioural characteristics as done in activity 5.2. You should try to identify at least two or more possible segments to be used as the target market(s). Please note: You need not study sections 4.3.5 and 4.3.6 in the prescribed book

46 5.3 MARKET TARGETING

(Read sec 4.4.1 in the prescribed book and study the sec below.) 5.3.1 Selecting potential target markets

Once a business has identified potential market segments (see sec 4.3.4 in the prescribed book), it must target its marketing efforts to selected segments. This is known as market targeting. The market segments on which a business focuses its efforts are the business target markets. In selecting potential target markets, the following evaluation criteria are used: ! Target market size and growth possibilities: this entails looking at each market segment in terms of its present size and its future growth potential attractiveness and potential profitability The resources and skills of the organisation: this entails an analysis of the likely competitive situation and, ultimately the profit potential of the segment. Compatibility with the organisations objectives: this entails deciding whether the marketer is able to serve the market segment profitably, given its strengths and weaknesses. Cost of reaching the target market: this entails an analysis of whether the cost of serving this segment, in terms of investment and operating costs, is not too high for the firm.

! !

Consider the following example: The Edgars Group The Edgars group caters for the "black and white, rich and semi-poor, old and young, credit and cash buyer". Their mission statement, which is "to be the first choice fashion retailer in every market segment and community which it seeks to serve", reflects their task of serving different target markets namely: Edgars serves the middle and upper-income groups and its product assortment includes both basic and fashion merchandise. Sales House markets classic fashion ranges to a large number of South Africans with moderate but reliable incomes. These are mostly blue- and white-collar workers. The Jet chain markets a wide range of commercial fashion, designed to appeal to the majority of middle- and working-class consumers. The characteristics of the major group of blacks who claim to be Jet consumers are female, aged between 16 and 25, with children. Jet is also a "children's wear" retailer.

47 5.3.2 Approaches to market targeting

(Study sec 4.4.7 in the prescribed book.) The exercise of choosing which market segments to serve is called market targeting. Many business ventures fail not because of a poor product being offered to customers, but because the wrong customers were chosen to be served. An important responsibility of marketing management is to advise top management about the potential of serving the different market segments in the marketplace. Such advice should be based on an in-depth knowledge of the market, gained through experience and by conducting market research on customer and competitor behaviour. There are three basic approaches to the market. Undifferentiated marketing exists in a homogeneous market where all customers are basically similar in their needs and usage of the product, very few opportunities exist for competitors to distinguish their products from one another. In such a market a business can only pursue an undifferentiated marketing strategy by developing a product that will appeal to most customers in the market. The organisation therefore ignores market segment differences and goes after the whole market with one market offering. An example of undifferentiated marketing is the Coca-Cola Company's early marketing of only one drink in one bottle size in one taste to suit everyone. In differentiated targeting the firm operates in several market segments and designs different programmes for each segment. For example, IBM offers many hardware and software packages for different segments in the computer market. Concentrated targeting occurs where the organisation decides to focus all its efforts on one segment in the market by satisfying the unique needs of this segment better than its competitors can, for example, Lamborgini focuses on the luxury sports car segment and directs all its marketing efforts at high-income individuals who want to own high-performance luxury cars.

Two more approaches to the market have emerged recently, namely: Niche marketing means that there is an opportunity for a business to use a niche within a segment and to customise its marketing effort on the groups of customers in that niche. Mass customisation refers to the special and unique needs of the customer.

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Activity 5.3 Which market targeting approach do you think the following retailers apply? a greengrocer a Ferrari dealer American Swiss jewellers Engen Woolworths Food Stores Hi-fi Corporation (selling electronic goods)

Feedback The greengrocer and Engen are examples of enterprises that compete in homogeneous markets where separate market segments are not really evident. The needs of most consumers for fruit and vegetables and petrol are basically the same - hence these enterprises usually follow an undifferentiated market approach. The Ferrari dealer and Woolworths Food Stores serve a single segment in a heterogeneous market, namely the A-income group, and therefore follow a concentrated or focus market approach. Hi-fi Corporation and American Swiss also compete in a heterogeneous market, but each serves more than one of its market segments. They sell from basic to luxury products, and also different product lines. They therefore follow differentiated marketing. Since American Swiss and Hi-fi Corporation cannot satisfy the needs of all consumers, they serve only some market segments in their markets.

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Assessment 1 2 3 3 4 Explain the differences between mass marketing and market segmentation. Explain the criteria for market segmentation to be effective. Explain and illustrate how the bases of market segmentation can be used to identify segments for a particular product of your choice, and also describe at least two segments that can be used as potential market segments. Explain the evaluation criteria that can be used in selecting potential target markets. Discuss the various approaches that can be used in target marketing.

SUMMARY In this study unit we focused on market segmentation and targeting. Make sure that you know the meaning of mass marketing and market segmentation as well as their advantages and disadvantages. You also have to understand the bases for market segmentation, the criteria for selecting potential target markets and the approaches to target marketing. Once the market has been segmented, the marketer needs to consider positioning the product in the market, which is dealt with in the next study unit.

50 STUDY UNIT 6 Key concepts Getting an overview 6.1 Positioning maps and methods PRODUCT POSITIONING

Assessment Summary

Key concepts Positioning maps Attribute positioning Benefit positioning Use/application positioning User positioning Competitor positioning Product category positioning Quality/price positioning GETTING AN OVERVIEW Product positioning refers to the way customers perceive a product in terms of its characteristics and advantages, and its competitive positioning. It therefore involves the creation, in the minds of the targeted buyers, of a distinctive position with regard to the organisations product relative to the products of competing organisations. For positioning to be effective, it is important that the marketer understands customer buying criteria and recognises the performance of each competitor on each of the evaluative criteria. 6.1 POSITIONING MAPS AND METHODS

(Study only secs 4.5.1, 4.5.2, 4.5.5, 4.5.6 and 4.5.7 in the prescribed book.) 6.1.1 Defining product positioning

Positioning refers to the way consumers perceive a product and its competitive advantage. When you study this section in the prescribed book, take special note of the many factors which can influence brand positioning, in figure 4.7.

51 6.1.2 Positioning maps

Marketers often use positioning or perceptual maps to portray market positions visually. A perceptual map is a multidimensional graphic image depicting consumer perceptions. These maps assist marketers in developing focused marketing mixes or strategies. It also helps the manager to assess the advantage of an organisation relative to its competitors. 6.1.3 Positioning methods

Specific product positioning methods are the following: ! ! ! ! ! ! ! Attribute positioning Benefit positioning Use/application positioning User positioning Competitor positioning Product category positioning Quality/price positioning

When you study these positioning methods, try to find your own practical examples to illustrate each method. Product positioning Mercedes used quality/price positioning when it launched its 190 car as a means of extending downwards into a lower price bracket segment. This brought people onto the first rung of the Mercedes product range ladder much earlier. The average age of a first-time Mercedes buyer fell by about 10 years! This is important, as the company estimates that about 80 per cent of its customers remain loyal once they have owned a Mercedes. 6.1.4 Communicating market positions

Marketing communication is used to let current and potential customers of an organisation know about improvements in its products, and about its product assortment and store characteristics.

Activity 6.1 Pick 'n Pay has a considerably larger market share than Shoprite/Checkers in South Africa. Do you think that the consumer's perceptions of these stores play a role in this difference in market share? If so, which store characteristics contribute to these differences in perception? Make a list of the determinant (differentiation) variables that you think play a role in the consumers' perceptions of these retailing giants.

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Feedback You should have considered, among other things, the following determinant variables: price quality of merchandise mix in-store service and after-sales service general store appearance image of customer orientation convenient location

The perception consumers have of a specific product or store largely determines how successful it will be. Toyota sells more vehicles than Nissan because for a long time it has projected an image of products with a good quality/price ratio. Pick 'n Pay performs better than Shoprite on those things the consumer regards as important when it comes to supermarkets. After the marketer has decided on a particular positioning method, it must be communicated to the target market. 6.1.5 Common positioning errors

The common positioning errors that could occur are explained in the prescribed book, section. 4.5.7.When you study this section in your prescribed book, note the common positioning errors that should be avoided.

Assessment 1 2 3 4 5 Describe the meaning of positioning in your own words. Explain the use of positioning maps. Discuss, with the aid of practical examples, the various positioning methods that can be used by an organisation marketing a range of household appliances. Why must positioning be communicated to the target market? Explain, with the aid of practical examples, the common positioning errors that could occur.

SUMMARY In this study unit we focused on product positioning, as well as all the positioning methods that can be used by marketers to position their products in the minds of consumers.

53 TOPIC 4 AIM The aim of this topic is to enable you to understand the importance of the marketing information system and marketing research. LEARNING OUTCOMES INFORMATION FOR MARKETING MANAGEMENT

After studying this topic, you should be able to ! ! explain the role and nature of the marketing information system apply the steps of the marketing research process to a practical situation

TOPIC CONTENT Study unit 7 Study unit 8 The marketing information system Marketing research

54 STUDY UNIT 7 Key concepts Getting an overview 7.1 7.2 The role of information in marketing decision making The marketing information system (MIS) THE MARKETING INFORMATION SYSTEM (MIS)

Assessment Summary

Key concepts Marketing information External information Internal information Simple marketing information system Routine data component Special purpose data component Extensive MIS Decision support system Database GETTING AN OVERVIEW Whether competing in local markets or foreign markets, a companys ability to gather and monitor marketing information keeps it on track. In fact, information is the engine that drives todays global marketplace. Companies succeed by knowing what consumers want, when they want it, and where they want it - and by knowing what competing companies are doing about it. A sophisticated database of marketing information is a vital component in the strategy of cutting-edge companies that pull ahead and stay ahead in the race for customers. Mercedes-Benz relies on information Mercedes-Benz, for example, monitors luxury car markets around the world. The company relies on consumer research and marketing information from many sources to keep on top of what product benefits, features and services customers all over the world desire and will accept. Mercedes-Benz stays out in front of the highly competitive market by finding out what it takes to tempt consumers into spending up to R600 000 for their high-quality driving machines.

55 In this study unit we will look at the role of information in marketing decision making, as well as the marketing information system (MIS). 7.1 THE ROLE OF INFORMATION IN MARKETING DECISION MAKING

(Study sec 5.1 in the prescribed book.) Marketing managers should be future-oriented. They should anticipate environmental changes, forecast the direction and the impact these changes will have on their business and conduct their planning accordingly. In order to implement these tasks, management requires information regarding the businesss various internal and external environmental variables. Consider the following examples of information needed by marketing managers. Information is needed in the following areas: ! ! ! Technological trends, such as the increasing use of the computer Socio-cultural changes, such as the increasing urbanisation of the South African population, which has an impact on demand and consumption patterns Competitive activities, which are in many instances intensifying because of trends toward privatisation and deregulation of government enterprises THE MARKETING INFORMATION SYSTEM

7.2

(Study secs 5.2.1, 5.2.2 and 5.2.3 in the prescribed book.) Many companies develop a marketing information system (MIS) to gather sort, analyse, store and distribute relevant and timely marketing information to managers continuously. We first look a simple marketing information, then an extensive marketing information system. 7.2.1 Simple marketing information system (MIS)

Marketing information systems differ according to the type of company and industry. A small company usually has a simple MIS and a large company has an extensive one. A simple MIS, as illustrated in figure 7.1, consists of two data components: routine data and special purpose data.

56 FIGURE 7.1 A SIMPLE MARKETING INFORMATION SYSTEM Internal environment Routine data component External environment Internal marketing research Special purpose data component External marketing research

The components of a simple MIS are as follows, as illustrated in figure 7.1. Routine data component

For a local independent retailer, the routine data component would include, for example, routine information from internal sources such as sales, stocks, debtors and creditors. From external sources information such as local population growth, competitive activities and trade association statistics can be collected on a regular basis. Special purpose data component

The special purpose component includes marketing research, for example where a retailer engages a marketing research organisation to determine the feasibility of a particular retail space in a new shopping centre (external marketing research). The retailer conducting certain research projects on his/her own, for example, a survey among existing customers to determine their degree of satisfaction with its service, constitutes internal marketing research (launched from internal sources). 7.2.2 An extensive MIS

Larger companies which have the necessary resources usually operate an extensive marketing information system as shown in figure 5.2 of your prescribed book. The inputs into this MIS consist of marketing research, internal data sources and external data sources. Internal data sources Salespeople, for example, record orders on their laptop computers and this information is sent via modem to the company headquarters, which notifies the warehouse to expedite delivery. The information recorded during this process - customer name, location, goods ordered, prices, delivery location, method of delivery, date, and so on - becomes the information ingredients of the internal data system. The internal data system ensures that information generated is recorded, stored and made available for retrieval by managers.

57 The decision support system (DSS) helps change raw data, such as product sales for the previous day, into more useful information. For example, it may draw graphs to show relationships within data. A DSS could do this by comparing one days sales with another over a particular period. The DSS also allows the manager to see how answers to questions may change in various situations. For example, a manager may want to estimate by what percentage sales will increase if the business expands into a new market area. The DSS will ask the manager to estimate what percentage of business could possibly be won from each competitor in the market. Then, using this input and drawing on data in the database, the system will make a more informed estimate. A DSS therefore puts the manager on-line so the available data can be studied and better marketing decisions can be made more quickly. 7.2.3 Advantages and costs of marketing information

When you study this section in your prescribed book you will also see what the advantages and costs of marketing information are. Note that you need not study Information processing specialists on pp 153 to 154, and also not section 5.2.4 in the prescribed book.

Assessment 1 2 3 4 Explain why information is so important when making marketing decisions. Discuss the nature of an MIS is, as well is the components of a simple MIS. Explain the components of an extensive MIS. Explain the advantages and costs of an MIS.

SUMMARY In this study unit we examined the importance of information for marketing decisions. We looked at a simple marketing information system and a more extensive system. In the next study unit we will focus on marketing research, one of the subsystems of an MIS.

58 STUDY UNIT 8 Key concepts Getting an overview 8.1 The marketing research process MARKETING RESEARCH

Assessment Summary

Key concepts Research problem Research objectives Research design Sources of data Data collection approaches Data collection instruments Design sampling plan Fieldwork Processing, tabulation and analysis GETTING AN OVERVIEW According to the marketing concept, marketing managers should meet and anticipate the needs of customers. Yet today, many marketing managers are isolated in enterprise offices, far from potential customers. It is simply not possible to keep up with all the changes taking place in the market. This means that marketing managers have to rely on help from marketing research. Marketing research refers to procedures used to develop and analyse new information which helps marketing managers to make decisions. Marketing research is conducted on a special-project basis, with the research methods adapted to the problems being studied and to changes in the environment. It is usually characterised by an in-depth analysis of major problems or issues. Often the information needed is available only from sources outside a businesss formal channels of information. For example, a business may want to know something about its competitors or to gain an unbiased understanding of its own customers. Such information needs may require an independent investigation through marketing research.

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Marketing decisions require information ! ! ! Sales personnel rely on research to provide them with feedback on sales performance or to identify likely purchasers. Media planners need information to determine which specific magazines or television shows will most likely be seen by a market segment. Brand managers need to determine how their product is perceived in the marketplace, especially relative to other competing brands.

Let us now look at the marketing research process. 8.1 THE MARKETING RESEARCH PROCESS

(Study secs 5.3 to 5.10 in the prescribed book.) There are various reasons by marketing research is undertaken. Consider the following: Reasons why marketing research needs to be conducted ! ! Top management instructs marketing management to investigate the possibility of an attractive marketing opportunity. Marketing management must develop a marketing strategy for a new product.

The marketing research process is a series of carefully thought-out steps designed to attain a specific objective. These steps are shown in figure 5.4 of your prescribed book: Let us look at each of these steps more closely. 8.1.1 Description of the research problem and objectives Description of the research problem The marketing research process begins when a marketing problem or opportunity is identified and objectives determined. A marketing problem refers to those situations that could represent real problems for marketing decisions makers. A marketing opportunity refers to any favourable or unexploited situation in one or more of the marketing environments that may be utilised proactively by decision makers to the advantage of the organisation. Identifying a marketing problem or opportunity is probably the most important stage in the research process but it is sometimes overlooked by researchers. This stage is

60 crucial, because a poor diagnosis of the problem could lead to an inefficient solution. When you study this section in the prescribed book, note the hierarchy of questions that need to be asked. Also note that a situation analysis needs to be conducted to gather background information about the research problem. The next step is to establish the research objectives. Research objectives A marketing research objective refers to the specific information that is needed to solve a marketing research problem. In order to do this, researchers should state all objectives in terms of the precise information necessary and desired in solving the specific marketing problem or availing themselves of an opportunity. When determining the objectives of the research study, researchers should use the following questions as a broad guideline: Is there additional background information necessary before research objectives can be determined? What information is needed to make decisions or solve the marketing problem? How will the information gathered be used?

The next step involves determining the possible research methods that can be used in the investigation. 8.1.2 Deciding on a suitable research design

The classification of all available research designs includes the following (as explained in the prescribed book): Exploratory research Descriptive research Qualitative research Quantitative research Ad hoc research Ex post facto research Longitudinal research Causal research Predictive research Next the research design has to be prepared. 8.1.3 Preparing the research design As shown in figure 5.6, various activities need to be executed in preparing the research design. These activities are as follows:

61 Determine the sources of data (activity 1) Secondary and primary sources of data can be used to collect information needed for the research problem. In figure 5.7 examples of these sources of data are presented. Determine the data collection approaches (activity 2) The data collection approaches are the following: Observation method Survey approach Experimentation

When you study this section in the prescribed book, make sure that you understand the objective of each approach, its advantages and disadvantages. Determine the data collection instruments (activity 3) The researcher needs to choose the data collection instrument that will reach the target market most effectively. The two most common instruments are the following: The questionnaire Mechanical/electronic equipment

Determine the data collection (or contact) methods (activity 4) If the questionnaire is chosen as the method of survey research, the following methods can be used to distribute questionnaires and collect data (make sure you know the advantages and disadvantages of each method): Personal interviews Telephone interviews Self-administered surveys

The next step is to design the sampling plan. Design the sampling plan (activity 5) In the prescribed book, seven steps in the sampling plan are presented in figure 5.8. (1) (2) (3) (4) The first step is to define the population of interest. The second step involves choosing a data collection method. determines the nature of the following steps. Choose a sampling frame Select a sampling method This step

62 The different sampling methods are the following: (5) (6) (7) Random sampling which consists of simple random sampling, stratified random sampling, cluster sampling and systematic sampling Nonrandom sampling which consists of convenience, judgement, quota and snowball sampling. Determine the sample size to ensure reliable and valid research results Develop and specify operational plan for selecting sample elements Execute operational sampling plan

You should ensure that you know what happens in each of these seven steps. The next step in the marketing research process involves the actual research that is conducted. 8.1.4 Fieldwork

In this stage of the process the researcher actually collects the data. The survey methodology is finally put into practice and research instruments are completed by fieldworkers. Supervisors will have the responsibility of controlling the quality of the fieldwork. Although fieldworkers are trained and supervised while collecting the information, errors may still occur. These errors result due to bias. The following sources of bias can cause serious measurement errors: Respondent bias Situational factors Fieldworker bias The data collection instrument There are also other important considerations in fieldwork (see sec 5.8.2 of the prescribed book)

The use of interviewers and fieldworkers Administrative procedures Quality and cost control Evaluation of interviewers

Next, the data collected has to be edited, verified and coded to facilitate data capture or computer.

63 8.1.5 Processing, tabulation and analysis

Note the following steps in this regard: Data preparation Data entry Tabulation and analysis

This brings us to the final step of the marketing research process. 8.1.6 Reporting the research results

In this phase of the process researchers should interpret the information and draw conclusions so that they can communicate the findings to the decision makers. A report should then be prepared to communicate the conclusions and recommendations formally to the marketing decision makers. The process used to conduct the research should be included in the marketing research report.

Activity 8.1 When you have studied the steps in the marketing research process in the prescribed book (see secs 5.4 5.10), answer the following question: Assume that you are the marketing manager of Hi Tech SA, a retailing group selling expensive hi-fi equipment and cameras. Hi Tech SA experienced a drastic decline in the sales of one of its most expensive cameras. You had to conduct a marketing research investigation to establish the causes of the decline in sales. How did you prepare the research design for the project?

Feedback In your marketing research investigation you should follow the steps of the marketing research process as indicated in figure 5.4 in the prescribed book. In each step, while you explain the theory, you should also, for example, indicate what happened in your particular marketing research investigation into the decline of sales of Hi Tech SA. The activities involved in preparing a research design are shown in figure 5.6 in the prescribed book. You should first provide some practical background by giving a brief summary of step 1 of the marketing research process (see fig 5.4 in the prescribed book), for example:

64 It was found at Hi Tech SA that the decline in sales was restricted to the Samsung A5 model camera, and more specifically in the main metropolitan areas. Then the sources of data were determined. Activity 1 Determine the sources of data. In this step Hi Tech determines what information was required and from what sources it could be obtained. Secondary data sources consulted included internal company records such as statistics of sales of all models of cameras and sales trends during the last year, in the main metropolitan areas. Discussions were also held with dealers. External secondary data were obtained from the Bureau of Market Research about consumer spending patterns, since it was important to determine whether sales of all cameras had declined, and not just those of Samsung A5. The cause of the decline in sales was not solved by using secondary data. It was, therefore, necessary to gather primary data. Activity 2 Determine the data collection approaches. The observation approach, survey approach and experimentation were considered for collecting the primary data. The survey approach was chosen (always justify your choices). Activity 3 Determine the data collection instruments. The questionnaire and mechanical/electronic equipment were considered, and it was decided to use the questionnaire method. The questions were carefully chosen (refer to all the relevant theory and how you applied it). Activity 4 Determine the data collection (ie contact) methods. Hi Tech decided to contact the respondents by means of a personal survey. They decided against a mail and telephone survey because the personal survey is more reliable. Activity 5 Design the sampling plan. Hi Tech considered the population, the sample frame and the different methods of sampling, namely random sampling and non-random sampling and decided to use a probability sample because it provides more reliable results and the researcher is able to control the selection of respondents. Remember that the above five activities (see fig 5.6 in the prescribed book) form part of step 3 of the marketing research design (see fig 5.4 in the prescribed book) Will you be able to continue with the marketing research process on your own?

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You only have to read section 5.11 in the prescribed book. It is also not necessary to study section 5.12 in the prescribed book.

Assessment 1 Explain, with the aid of practical examples, the steps to be followed by an organisation manufacturing washing machines, in investigating a decline in sales of one of their washing machine models. Use your own practical examples to illustrate each step. SUMMARY In this study unit, we described the procedure that should be followed when a marketing problem is investigated by means of marketing research project. Ensure that you understand the step-by-step process involved in marketing research.

66 TOPIC 5 AIM The aim of this topic is to enable you to understand the basic principles involved in making decisions about the product. LEARNING OUTCOMES PRODUCT DECISIONS

After studying this topic, you should be able to explain the nature of the product and related concepts which include the following: - product concept - classification of consumer products - product line and product mix decisions - different types of brands and packaging that can be considered explain and illustrate the new product development process describe the different phases in the product life cycle

TOPIC CONTENT Study unit 9 The nature of products Study unit 10 New product development Study unit 11 The product life cycle

67 STUDY UNIT 9 Key concepts Getting an overview 9.1 9.2 9.3 9.4 9.5 The product concept Classifying products Product line and product mix decisions Branding decisions Packaging decisions THE NATURE OF PRODUCTS

Assessment Summary

Key concepts Marketing mix 4 Ps of marketing Product concept Product classification Product line Product mix Branding Packaging GETTING AN OVERVIEW The product decision is the first of the four decision-making areas of the marketing mix. The other three are distribution, marketing communication and price. Products are not bought merely on their real physical features but rather on the customers perception of the package of need-satisfying attributes that the product possesses. Marketing incorporates all these physical and non-physical, and real and perceptual attributes of the product into the following four categories: 1 2 3 Product. This refers to the product and/or service the company offers. Place. This refers to the place where the product is to be sold (distribution). Promotion (or marketing communication). Promotion is the marketing communication method used to inform the target market of the product.

68 4 Price. The price of the product should reflect its value to the consumer. This also entails the relative price versus quality level that the product maintains against competitors.

The marketing mix is a combination of marketing decisions designed to influence customers to buy the enterprises products and/or services. A more common term used to describe this mix is the 4 Ps of marketing (product, place, promotion and price). The product aspect of the marketing mix tries to ensure that the product characteristics match the benefits sought by the target customers. The place or distribution component of the marketing mix tries to deliver the right product to the right place at the right time to satisfy customer needs. The promotion element tries to communicate the enterprises ability to satisfy the customer through the use of communication such as advertising, personal selling, sales promotions and publicity. The price component of the mix tries to match the money that customers will pay for the product with the value customers receive through the purchase and use of the product. These four components work together to help the enterprise achieve its marketing objectives, as shown in figure 5.1 below. FIGURE 5.1 THE 4 Ps OF MARKETING PRODUCT PLACE (DISTRIBUTION) PROMOTION PRICE Aimed at a target market Let us look at how Harley Davidson used the 4 Ps of marketing. Harley Davidson motorcycles and the 4 Ps of marketing Harley Davidson used the 4 Ps of marketing to position its motorcycles to a new customer segment: the baby boomer generation in the United States. The product was changed by introducing a new engine, but the heavy metal look was retained. The promotional strategy was changed by shifting the advertising to promote a softer image. It featured celebrities, such as actress Elizabeth Taylor, on a Harley Davidson. The objective was to attract the high-income segment. Harley Davidson changed its distribution strategy by cleaning up the dealerships so that they did not look so dark and so that they were more customer-friendly. Harley Davidson does not only sell motorcycles now but also motorcycle fashion accessories that are displayed in a clean, bright atmosphere. They price their motorcycles to reflect the value that the high-income earners place on living out their fantasies on a Harley Davidson motorcycle. The upper end of the motorcycle range often runs into the $30 000 price range. All these components demonstrate a well coordinated marketing mix targeted to a specific segment of the market.

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In this study unit we will look at the product concept, the classification of products, product line and product mix decisions, and some brand and packaging decisions. 9.1 THE PRODUCT CONCEPT

(Study secs 6.1 and 6.2 in the prescribed book.) A product entails more than just its physical characteristics. As a consumer, you will probably agree that even products satisfying the same basic need vary to the extent in which they can satisfy your needs, depending on their value-added components. An example here is clothing. Clothing is not only used to cover the body for reasons of modesty and warmth, but can provide extra value (for example, owing to the material from which it is made, styling, the brand name and quality). Clothing can be bought to enhance our self-image, for protection from the cold, for acceptance by a group and for many more reasons. Cosmetics are not bought just for their content; the consumer buys beauty, acceptance, self-confidence and youth. A handyman is not just interested in the components of a drill; he actually buys the holes, the convenience, the quality and new capabilities of a drill. No marketer should think about the product merely as a physical object, but as a total needsatisfying market offering. Marketing managers must have a clear idea of what product is really being marketed to the target market. The organisation often sees the attributes of its product in a completely different way to what the consumer sees in the product. Different meanings can be attached to products. The following basic product elements of the product concept can be identified: The core product the essential benefit expected The tangible product the physical object or service The augmented product the tangible product plus additional features such as product repairs The potential product a way of providing product value (eg through product differentiation) The product image all of the above elements (ie total product concept)

The product image The promotion message, the chosen retail outlets, and the price level convey a certain 'message' to the consumer. This message is called the product image. Marketers operating in a very competitive market sometimes rely more on the image it has created for its product than on its real attributes, as a means of counteracting the actions of competitors. For example, BMW uses product image extensively.

70 9.2 CLASSIFYING PRODUCTS

(Study sec 6.3 in the prescribed book.) Product decisions can be considerably simplified if they are taken in accordance with basic product classification. As far as the marketer or product manager is concerned, products include physical objects, services, personalities, places, institutions and ideas that satisfy one or more needs of a specific target market. However, the particular characteristics, production and marketing methods of all products differ, as does the purpose for which they are used. Consequently, it is useful for marketing managers to classify products into more or less homogeneous groups according to a classification system. Products are basically divided into three main groups, namely industrial products, commercial services and consumer products. As we focus on consumer product decisions, we will discuss the characteristics and marketing considerations of consumer products in more detail. 9.2.1 Consumer products

Consumer products are intended for direct consumption by household or end-users. Different bases can be used to classify consumer products, such as durability and consumer buying habits. Consumer products can be classified according to their durability: - durable products - non-durable products - services Consult figure 6.2 in the prescribed book in this regard. Consumer products classified according to consumers' buying habits as follows (this classification is illustrated in fig 6.3 in the prescribed book): - Convenience products Convenience products are further classified into staple, impulse and emergency products. - Shopping products Shopping products are further classified into uniform and non-uniform products.

71 - Speciality products These classifications help marketers to design effective marketing strategies. If they know how consumers buy a certain product, they will have a basic idea of how it should be marketed

Activity 9.1 Describe the classification of convenience products and refer to product examples that indicate how the same product can be classified into different categories in different situations, depending on the consumer's relevant shopping behaviour.

Feedback You should have referred to staple, impulse and emergency products. A good example of a product that can be classified into any of these categories is cold drink. If bought regularly with the monthly groceries, for example, cold drink can be seen as a staple product, but if it is bought on impulse while you stand in a queue in a supermarket, it can be regarded as an impulse product. On the other hand, if it is bought while the consumer is travelling through the dry Karoo in mid-summer, it can be classified as an emergency product. The same arguments can be applied to ice-cream. Sometimes ice-cream is bought on the spur of the moment, with the groceries. Alternatively, it may be bought in an emergency if, for example, the consumer is preparing a dinner for important guests and the planned dessert is a disaster.

(Read sec 6.3.3 in the prescribed book.) 9.3 PRODUCT LINE AND PRODUCT MIX DECISIONS

(Study secs 6.4 and 6.5 in the prescribed book.)

72 9.3.1 Product line decisions

A product line is a group of products that are closely related because they function in a similar manner. There are few organisations that manufacture and market only a single product item. Product line decisions include (as illustrated in figure 6.5 in the prescribed book): Trading down Trading up Trading both ways Product mix decisions

9.3.2

A product mix is the set of all product lines that a particular organisation offers for sale. Product mix decisions include the following: Breadth of product mix Depth of product mix Consistency of product mix Product diversification

The Sony Corporation operating in new markets Product mix and product line decisions are largely influenced by technological advancements. Sony Corporation has not, up to now, competed in the still-picture market. However, advancements in the electronics fields have opened up a market for digital stillcameras, with computer linked attributes. Sony has strongly entered this market, competing against giants like Nikon, Canon and Pentax which still focus on the 'older' 35 mm technology. 9.4 BRANDING DECISIONS

(Study sec 6.6. in the prescribed book.) What is your name? Think about a few friends and/or colleagues. Do you know their names? Do you see a picture of them in your mind when you mention these names? When I hear the name Charles, I can think of a few people with that same name and each one is associated with different qualities, personality traits and life circumstances. I have a certain attitude towards each of these people. When I hear the name Prince Charles, however, I immediately recall the familiar lines of his face and remember that he was married to the late Princess Diana. Branding is providing a name and an accompanying distinguishing character to a particular product item. Each product has a name that carries a certain meaning and various

73 associations. The brand name is nothing else but the name of the brand used to identify it and to distinguish it from other brands. A brand thus provides identity to a product in the same way that a name and face provide identity to a person. Coca-Cola - A name like no other Worldwide, Coca-Cola has been the best-known brand name by far (except for Microsoft in the last few years). The company has attained this position by spending huge amounts of money on marketing communications over many years. Part of the communication campaign budget is spent on outdoor advertising, for example, billboards, neon-lit signs and window displays usually at cafs, stalls and caravans at sporting events. These displays always use the well-known red and white corporate colours. The next time you are on the road, count the number of times you are exposed to promotion of Coca-Cola! You will realise that it is so common that you hardly take notice of it. Subconsciously, however, each of these exposures leaves its mark. 9.4.1 Types of brands

We distinguish between the following brands: Manufacturer (or national) brands and private (dealer) brands Generic brands Family brands or individual brands When you study the section on types of brands in your prescribed book, you must ensure that you understand the meaning, advantages and disadvantages of each type of brand (from both the consumers and the manufacturers perspective), and illustrate it with the aid of practical examples. 9.4.2 Other branding issues

Further important branding issues include the following: 9.5 Brand extension Brand equity Selecting a brand name PACKAGING DECISIONS

(Study secs 6.7.1 and 6.7.2 in the prescribed book.) We have all received a packaged item as a present and felt excited as we opened it! Packaging adds so much value to whatever is inside, even in the case of a not-so-welcome

74 present. In the past, consumers usually bought different products from a supply store where the shopkeeper placed the purchased items into multi-purpose brown paper bags bearing no identification. Nowadays, many of these early forms of packaging find their way into antique shops. Most of these packages indicated only the brand name, manufacturer's name and the contents. The old system could not, however, cope with the tremendous and continuous increase in the number of product items on shop shelves, particularly during the decades immediately following World War 2. Shopkeepers and traditional grocery stores had to make way for the supermarket system. 9.5.1 Tasks or functions of packaging

The most important roles of packaging (see table 6.1 in the prescribed book) are as follows: Basic protection, ensuring preservation and durability against damage or wear and tear in the store, the home and in transit. Convenience in use and for handling, storage and transportation. Environmental adaptability emphasising returnable and recyclable materials. Promotion, including the communication of product information, the use of shape, design and colour to stimulate visual appeal and product differentiation. Economic viability, taking into account research and material costs and the need for different packaging decisions to satisfy protection, promotion and transportation requirements. Types of packaging

9.5.2

The marketer has different forms of packaging to choose from in order to reach the marketing objectives. The different choices with regard to the types of packaging are: Family or individual packaging Special packaging Reusable packaging Multiple packaging Kaleidoscopic packaging

Multiple packaging Multiple packaging is also being used in the computer industry. For example, NetActive is selling a modem together with their program and other software in the same package. A replacement cartridge for an inkjet printer is sometimes sold with a CD containing computer programs or some special inkjet paper.

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Assessment 1 2 3 4 5 6 7 8 Explain the term product concept and its components. Discuss the classification of consumer products based on the buying behaviour of consumers and provide practical examples of each category. Why are product line and product mix decisions important? Explain the product line and product mix decisions that need to be taken. Describe the meaning of brand in your own words. Explain the different types of brands and provide practical examples of each type. Explain the functions of packaging Explain, with the aid of practical examples, the various types of packaging.

SUMMARY In this study unit, we considered some of the important product decisions that have to be made by the marketer. In the next study unit, we will look at the development of new products.

76 STUDY UNIT 10 Key concepts Getting an overview 10.1 10.2 New product options The new product development process NEW PRODUCT DEVELOPMENT

Assessment Summary

Key concepts Idea generation Idea screening Concept testing Business analysis Product development Test marketing Commercialisation GETTING AN OVERVIEW We are all probably aware of the huge number of new products that appear on the market every year. In the field of technology especially, new products appear on the market virtually every month of the year. Cellphones, TV satellite dishes, computer programmes and motorcars are all examples of such products. If a business does not actively look for new product opportunities, these opportunities are likely to be grabbed by someone else who can meet new consumer needs with new technology. The economic, technological, institutional, social, political, physical and international markets and the competitive environment are continuously changing. Think, for example, about the changes in electronics, computers and cars. New needs and desires also develop in the consumer market. These changes can offer new opportunities or threats, depending on the way in which the business is able, and willing, to react. One way to keep abreast with these changes is to develop new products to meet the challenges and demands of the changes. The continuous development and marketing of new products and services have become vital to the growth of the modern business.

77 10.1 NEW PRODUCT OPTIONS

(Study this section below.) Before an organisation decides to develop a new product, a great deal of research has to be done to ensure that the exercise does not turn out to be futile and costly. New product development can be done either by modifying the existing product, extending the product line, developing new related products or by entering a new field. NEW PRODUCT OPTIONS Product modification

The computer industry is well known for its upgrading of old products. A word-processing package such as WordPerfect has been adapted about seven times over the last decade. Similarly, the capacity of personal computers has also been improved a number of times. Eight years ago, the modern personal computer was an XT model. After that, the third generation Pentium, with an Intel 3 processor, became the product to own. Product line development

Clothing manufacturers often use this option by climbing on the 'special event' bandwagon. South Africa hosted the African Cup of Nations in 2006, and will host the Soccer World Cup in 2010. This is good news for clothing manufacturers as special hats, scarves, T-shirts, track suits and ties are usually launched onto the market in the colours and logos of these competitions. Entry into related products

Many of the world's leading electronic companies, such as Sony, Panasonic, Motorola and Phillips ventured into the lucrative cellphone market, based on their involvement in other highly related electronic fields. Entry into a whole new field

Reunert, a firm operating in the heavy engineering field, has decided to enter the electronics field and has already bought out a prominent Japanese firm operating in the electronics industry. We next look at the steps in developing new products. 10.2 THE NEW PRODUCT DEVELOPMENT PROCESS

(Study secs 6.10.6 to 6.10.12 in the prescribed book.)

78 The new product development process is a logical sequence that commences with a new product idea and ends with the commercialisation of the product. In a very complex, hightech market, for example, the process may be formal and may take a number of years. In fastmoving consumer goods or in the fashion business, however, the process could be much shorter and could take place a number of times each year. Of every 100 ideas, it has been estimated that only five arrive at the launch stage and, of these, only one will be successful. This means a failure rate of 99%. The extremely low success rate for new product ideas means that, at each phase of the development process, an organisation needs to actively ensure that only the products with the highest probability of success are allowed to progress. The ones more likely to fail must be dropped before the business devotes too much time and effort to them. This ruthlessness is necessary if a company is to minimise the risk factor in a competitive business environment. The steps in the new product development process are as follows: Idea generation Idea screening Concept testing Business analysis Product development Test marketing Commercialisation

When you study this section in the prescribed book, ensure that you can explain each of the steps in the product development process.

Activity 9.1 You are a well-known marketing expert. A marketing magazine contacts you for comments on the following problem. Many new products in South Africa fail and even cause financial problems for those businesses. The magazine wants to know if you can offer any advice to people who suddenly have a bright idea and immediately want to start manufacturing and marketing 'their invention.

Feedback Of course, this problem invites many comments. But to keep to the topic of product development, have you mentioned the following?

79 New product ideas must be screened an evaluated before they can be commercialised. Consumers' acceptance of the product concept must first be analysed and then a business analysis must be done before a product prototype is even tested. You must rather start with numerous ideas and evaluate them all to select the best alternative.

Assessment 1 2 Explain the various new product options an organisation can follow. Explain the steps in the new product development process and provide practical examples in each step.

SUMMARY In this study unit, we looked at the development of new products. You should ensure that you understand the steps in new product development and apply the steps to a practical situation. In the next study unit, we will learn more about the product life cycle.

80 STUDY UNIT 11 Key concepts Getting an overview 11.1 11.2 11.3 The different phases in the product life cycle Different kinds of product life cycles Characteristics of the phases of the product life cycle THE PRODUCT LIFE CYCLE

Assessment Summary

Key concepts Introductory phase Growth phase Maturity phase Declining phase Traditional life cycle Classic life cycle Fashion fad Extended fashion fad Season or fashion Revival curve Integrated marketing strategy GETTING AN OVERVIEW Numerous products appear on the market virtually every day. This is the introductory phase of these products' life cycles. The marketers of each of these products are not satisfied just knowing that the product is on the market, but want the product's sales to grow to a level beyond the break-even point and thus be profitable. This objective can only be reached in a growth situation, because the growth phase of the product life cycle is the most profitable phase. It is, therefore, essential that the marketer knows how to bring about growth in the product life cycle. However, marketers also need to know what to do when they are faced with mature and declining markets.

81 11.1 THE DIFFERENT PHASES IN THE PRODUCT LIFE CYCLE

(Study sec 6.12.1 in the prescribed book.) We have all seen products appear, become popular and then disappear from the market; and we feel that this is quite natural. We even expect some fashion products to have a very short introductory period, gain rapid popularity and disappear very quickly from the scene. The product life cycle has four phases which are essentially an analytical and planning tool, namely: 1. Introduction 2. Growth 3. Maturity 4. Decline The sales and profit curves in your prescribed textbook (figure 6.11) usually reveal the traditional s-shaped curve of a product's life cycle. But not all products have this type of life cycle. 11.1.1 Different kinds of product life cycles Product life cycles differ widely in terms of duration and the shape of their curves, as indicated in figure 6.12 of your prescribed textbook. The following particular product life cycles can be identified: Traditional Classic Fashion fad Extended fashion fad Season or fashion Revival curve

Snackpot - a fiasco curve The fiasco curve occurs when a product fails right from the outset. Brooke Bond launched a product in the early eighties called 'Snackpot', which was sold in plastic packaging as an instant pasta dish. Although the idea was a good one, consumers were not interested in the product. We will now look at the characteristics of the phases of the product life cycle.

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11.2

CHARACTERISTICS OF THE PHASES OF THE PRODUCT LIFE CYCLE

(Study sec 6.12.2 in the prescribed book.) We will now look at the characteristics of the phases of the product life cycle. 11.3 CHARACTERISTICS OF THE PHASES OF THE PRODUCT LIFE CYCLE

(Study sec 6.12.2 in the prescribed book.) When you study this section in your prescribed book, you will see that each of the phases of the product life cycle has distinct characteristics. Introductory phase. Common problems that may occur in this phase relate to product quality and availability of the product at the retail level. Growth phase. During this phase, the product becomes well known to most potential consumers and competitors enter the market or start to counteract the company's strategies. Maturity phase. Sales usually level out during this phase. Many important decisions have to be made in this phase to extend the maturity phase. Declining phase. When sales start declining on a fairly consistent basis, marketers should make decisions about the future of the product.

11.3.1 The product life cycle phases: integrated marketing strategy The main marketing decisions in each phase revolve around the following: Introductory phase - creation of primary demand. Growth phase - creation of selective demand. Maturity phase - fight competition and extend market share. Declining phase - try to maintain market share or eliminate the product.

When you study section 6.12.2 in the prescribed book, pay particular attention to the following examples of the integrated marketing strategy in each phase of the product life cycle. Integrated marketing strategy in introductory phase, on pages 246 to 247, in the shaded section Integrated marketing strategy in the growth phase, on pages 248 to 249, in the shaded section

83 Integrated marketing strategy in the maturity phase, on pages 249 to 251, in the shaded section Integrated marketing strategy in declining phase, on page 253, in the shaded section

Assessment 1 2 3 4 Explain the different phases in the product life cycle. Identify and discuss the different kinds of product life cycles. Discuss the characteristics of the phases of the product life cycle. Explain the marketing considerations in each of the phases of the product life cycle.

SUMMARY In this study unit, we investigated the product life cycle. Ensure that you understand the meaning of a product life cycle, the different types of life cycles, the characteristics of each phase and the marketing considerations in each phase. In the next topic, we will deal with distribution, the next marketing instrument.

84 TOPIC 6 AIM The aim of this topic is to enable you to learn about all the factors involved in the distribution decision. LEARNING OUTCOMES DISTRIBUTION DECISIONS

After studying this topic, you should be able to explain the nature and basic broad functions of distribution explain the distribution channel decisions explain the various activities of physical distribution

TOPIC CONTENT Study unit 12 Introduction to distribution Study unit 13 Distribution channel decisions Study unit 14 Physical distribution

85 STUDY UNIT 12 Key concepts Getting an overview 12.1 12.2 Basic channel functions Types of distribution channels INTRODUCTON TO DISTRIBUTION

Assessment Summary

Key concepts Distribution channel Functions of distribution Types of distribution channels GETTING AN OVERVIEW The distribution channel is the marketing instrument that delivers the product to the final consumer. In this process, wholesalers, retailers and other middlemen are used to present a product, service or idea to the final consumer. A gap usually exists between the provider of a product and the final consumer. Distribution is, therefore, the only way to make the product available to the final consumer. Distribution A university distributes study guides and related study material to its students. Manufacturers sell to stores, which sell and distribute goods to final customers. News media, such as Primedia, M-Net and the SABC distribute media items to their readers, listeners and viewers. Non-profit groups, such as churches, distribute a service to their supporters or congregations.

Distribution is the one element of the marketing mix that creates value for the manufacturer and the consumer. This is done by providing the manufacturer with a distribution channel that will distribute the product as cost-effectively as possible whilst providing the consumer with optimum accessibility to the product. There are different participants in the distribution of the product to the consumer.

86 This gives rise to the development of different distribution channels that must be evaluated by the manufacturer 12.1 BASIC CHANNEL FUNCTIONS

(Study sec 11.5 in the prescribed book.) Certain activities are involved in the distribution channel which consists of different participants. Irrespective of the number of participants involved in the following activities, these activities all create value for both manufacturers and customers: Transportation of the product By transporting the product, place value is added, making it possible for Ann Brown in Pinetown to buy size 5 Adidas tennis shoes at her local sports shop. Storage of the product This creates time value by making warehouse storage possible. For example, maize meal is only harvested in May or June, thus it must be stored for the rest of the year by the members of the distribution channel to make sure that it is available throughout the year. Rearrangement of the product Maize meal is one of many products that is stocked by supermarkets. Some consumers (for example, restauranteurs) prefer to buy 50 kg unbranded bags of maize meal while a housewife may prefer to buy Iwiza maize meal in 5 kg paper bags. It is thus the job of the members of the distribution channel to provide value to the consumer in terms of the size and packaging of the maize meal. Creating possession value for the consumer A growing trend in South Africa is the use of credit facilities such as those provided by a bank, a credit card or shopping card to buy food. Consumers are also helped to purchase more expensive products such as cars. Banks such as Wesbank and Stannic specialise in this kind of motor vehicle finance to make it easier for the consumer to obtain finance to buy a car. Getting information to the consumer Volvo truck dealers might decide to place advertisements in transportation journals. By doing this, members of the distribution channel provide value (information) to the consumer who can now make an informed decision.

87 All these value activities are performed by some or all of the members of the distribution channel. These activities can further be categorised into three broad functions, namely: Transactional functions Logistical functions Facilitating functions 12.2 TYPES OF DISTRIBUTION CHANNELS

(Study sec 11.6.1 in the prescribed book.) We have seen that there are consumer products, industrial products and services that are marketed to the consumer. In this module, we focus on consumer products. You are encouraged to read about the distribution channels for industrial products (sec 11.6.2) and services (sec 11.6.3) in your prescribed book. Consumer products are those products that we buy as final consumers, such as bread to eat and tyres for our cars. Consumer products are distributed in a certain way so that the millions of consumers can buy them. When you study this section in your prescribed book, you will see that, in figure 11.5, the basic distribution channels for consumer products are depicted. One-link chain Two-link chain Three-link chain Four-link chain

Assessment 1 2 Discuss the basic channel functions. Explain the various types of distribution channels available to marketers.

SUMMARY In this study unit, we looked at the basic concepts involved in distribution. In the next study unit, we will consider specific distribution channel decisions.

88 STUDY UNIT 13 Key concepts Getting an overview 13.1 Selection criteria 13.2 Market coverage decisions 13.3 Franchising Assessment Summary DISTRIBUTION CHANNEL DECISIONS

Key concepts Selection criteria Market coverage Franchising GETTING AN OVERVIEW We have seen that there are various channels that can be used to sell products and services. To select the right channel is obviously a time-consuming, but important, process. Selecting a distribution channel has long-term implications for a business because the business cannot switch distribution channels overnight. Various factors must be considered in the selection process. In this study unit, we will consider two of these factors, namely the selection criteria, and the market coverage. 13.1 SELECTION CRITERIA

(Study sec 11.7.1 in the prescribed book.) The following factors must be considered in the selection of the best distribution channel: Environmental factors. Factors such as the disposable income of the consumer, the inflation rate and social trends (such as more women joining the workforce), all exert an influence on the use of a particular distribution channel. In the urban areas, for example, there is a growing trend towards extended shopping hours in retailing stores. Market factors. The choice of a distribution channel will depend on the needs and wants

89 of the consumer. If small quantities of the product are frequently bought by small retailers in the rural areas, then a longer distribution channel (using more intermediaries) will be needed. Intermediaries. The availability and quality of existing intermediaries are also determining factors in the selection process. Manufacturer. The larger the manufacturing enterprise, the better the chance of selling directly to a large retailer or to the final consumer. A small manufacturing business does not have the resources to be able to dictate where and how its products must be sold. Product. The product will, to a large extent, determine the type of channel to be selected. Perishable products, such as vegetables, require a fairly short distribution channel, preferably from the farmer directly to the final consumer.

13.2 MARKET COVERAGE DECISIONS

(Study sec 11.7.2 in the prescribed book.) After the most suitable channel has been selected, you must decide what type of distribution intensity is required. This means that the marketer must determine the number of retail outlets that are needed to sell the product. This involves the following decisions about market coverage: Intensive market coverage Selective market coverage Exclusive market coverage

Activity 13.1 John Brown is the owner of a private cement factory called JB Cement, situated at Ottosdal in the North West Province. The cement produced is distributed in the following way: Transportation by railway truck to the Anglo Alfa Cement factory in Lichtenburg where it is sold as part of Anglo Alpha's cement output to large building contractors in South Africa. Brown has developed his own brand name, JB Cement, in the North West Province, and is selling 50 kg bags of cement to hardware stores in this province. He is using his own fleet of delivery vehicles to deliver the cement.

Which, of the previously-mentioned factors, influenced the selection process of distribution channels for this product?

90

Feedback Did you identify the following? John has two channels through which cement is sold - thus hybrid channels are used. Hybrid channels are developed when a manufacturer or supplier uses more than one channel at a time to sell its product. Cement is a low value, high volume product that is very expensive to transport over long distances. As such, the characteristics of the product will be a factor in selecting a distribution channel. Another variable that will influence the choice of distribution channel is the characteristics of the target market. Anglo Alpha cement is the industrial buyer of JB Cement and the product is transported directly by rail to the customer. (You may not have identified this one as industrial products are not the focus of the module - we are concentrating on consumer products.) The characteristics of the manufacturer (JB Cement) are also important. Owing to its position as a private cement manufacturer, JB Cement is not in a position to market its cement directly to all the consumers in South Africa. To this end, John is using Anglo Alpha as a distribution channel to sell his product. The characteristics of existing intermediaries will also influence the channel decision. There are very few alternative channels for this kind of product. It can be said that hardware stores and bulk selling are the two most important distribution channels and that additional channels will be difficult to develop.

In the next section, we will look at franchising. 13.3 FRANCHISING

(Study p 423 - 'Franchising' in the prescribed book.) Franchising is a business arrangement whereby a company or individual (the franchisor) grants an independent party (the franchisee) the right to sell the business's products or services according to guidelines set down by the franchisor. The franchisee uses the companys name, goodwill, products and services, marketing procedures, expertise, systems and support facilities. Franchising is a contractual distribution system that enables the franchisor to reach a very wide target market. It provides profitable opportunities for SMEs, where the owner is prepared to work hard under the guidance of the franchisor.

91 13.3.1 Types of franchises The three basic types of franchises are the following: Manufacturer franchise Manufacturer to wholesaler franchise Service sponsor franchise 13.3.2 Advantages of a franchise The advantages of a franchise can be summarised as follows: Fewer than 5% of franchises fail in their first year, compared to 33% of other businesses. The risk taken is, therefore, far lower. Management support and training is available. A franchise becomes profitable sooner than other businesses. Start-up and financial assistance are provided. The ability to bulk purchase through the group provides savings.

13.3.3 Disadvantages of a franchise The disadvantages of franchises are the following few: Ownership is for a limited time, for example, 20 years with an option of renewal. The franchisor must be able to live with "someone looking over your shoulder" all the time. Franchise rights are expensive. An up-front fee of between R60 000 and R100 000 and an investment of up to R500 000 is usually required.

Assessment 1 2 3 Discuss the factors or criteria marketers need to take into account when selecting a distribution channel. Explain, with the aid of practical examples, the type of decisions when considering market coverage in distribution, and highlight the marketing implications of each. Discuss the types of franchises, as well as the advantages and disadvantages.

SUMMARY This study unit dealt with two important distribution decisions, namely selection criteria and market coverage, and a specific type of distribution known as franchising. In the next study unit, we will consider one important aspect of distribution, namely physical distribution.

92 STUDY UNIT 14 Key concepts Getting an overview 14.1 The activities of physical distribution Summary PHYSICAL DISTRIBUTION

Key concepts Logistics Warehousing Inventory management Order processing Transportation GETTING AN OVERVIEW Physical distribution, which is also known as logistics, is the process of moving raw material, half-finished and finished products, to and from the manufacturer to the intermediaries, and then further on to the final buyers. As such, physical distribution creates time and place utility by providing some of the services, such as transportation, to enable the consumer to buy the product when and where he or she needs it. In this process, factors such as ordering enough product, the quick delivery of the product on a reliable basis, and so on, are very important. Most of us have heard the dreaded words "I am sorry but we are out of stock at the moment". The resulting inconvenience of this out-of-stock situation has been the source of many a consumer communicating his or her negative experience to other friends. Physical distribution is thus a very important part of the distribution channel planning exercise and it can mean the difference between a successful and an unsuccessful product. 14.1 THE ACTIVITIES OF PHYSICAL DISTRIBUTION

(Study sec 11.10 in the prescribed book.) Physical distribution activities have one generic goal, namely to develop and maintain a steady flow of products from the manufacturer to the final consumer. The following activities in respect of the physical distribution process can be identified:

93 Selecting warehouses Inventory management Order processing Transportation

Activity 14.1 John Roux is the owner of a protea farm in the Cederberg area. The proteas on the farm are harvested by a team of workers and are carefully packed in cartons, each carrying a dozen king proteas for the export market. What kind of physical distribution network would you recommend to deliver the proteas to the target markets in the UK and New York?

Feedback Did you notice the following about John Roux's physical distribution problem? Cut flowers are a fragile product, and are very perishable with a short lifespan. As the target market for this product is thousands of kilometres away, a short and very quick physical distribution channel is required. The best mode of physical distribution must be air cargo from Cape Town international airport. No inventory will be kept because of the perishability of the product and no warehousing is needed. John will have to transport the boxes to Cape Town airport in time to be accepted by SAA or one of the other international air cargo carriers which fly to Heathrow Airport in London and JF Kennedy Airport in New York.

SUMMARY We have now come to the end of distribution decisions. In the next topic, we will look at the next marketing instrument, namely marketing communication.

94 TOPIC 7 MARKETING COMMUNICATION DECISIONS

The aim of this topic is to enable you to learn about all the factors involved in marketing communication. LEARNING OUTCOMES

After studying this topic you should be able to explain the components of the communication model explain the components of the marketing communication mix, which includes the following: advertising personal selling sales promotion public relations online marketing

TOPIC CONTENT Study unit 15 Marketing communication through advertising Study unit 16 Personal selling and sales promotion Study unit 17 Public relations, direct marketing and online marketing

95 STUDY UNIT 15 MARKETING COMMUNICATION THROUGH ADVERTISING Key concepts Getting an overview 15.1 15.2 15.3 The communication model The marketing communication mix Advertising

Assessment Summary

Key concepts Marketing communication/promotion Communication model Two-way process Marketing communication mix GETTING AN OVERVIEW Marketing communication (or promotion) is undoubtedly the most visible element of the marketing mix. There are few people, be they marketing professionals or members of the general public, who do not have strong opinions about their likes and dislikes in respect of promotion activity. For example, Vodacoms 'Yebo Gogo' campaign is one of the many memorable advertising campaigns of the latter half of the 1990s. All businesses regard effective communication as essential for survival as no business can exist without communication. To achieve this, communication within the company has to be as effective as possible. Companies also have to communicate with other companies and suppliers, since good relationships with external markets are essential. The most important activity of all is, however, communication with customers, since without customers no company would remain in business. In this topic, we will first consider the communication model. We will then discuss the different elements of communication, namely; advertising, personal selling, sales promotion, public relations and direct marketing.

96 15.1 THE COMMUNICATION MODEL

(Study this section in the learning guide) When IBM wants to communicate the attributes of a new computer to consumers, various elements are involved in the whole process. The communicator or sender, namely IBM, designs a specific marketing message which it communicates to the receivers of the message, namely IBM's target market (for example, the State Tender Board). In order to transmit this message, IBM has to make use of specific media, such as advertisements in computer magazines or on television. It is important to know how information flows from the sender of a message to the receiver. The following elements can be identified in the communication model. See the figure below. FIGURE 15.1 COMMUNICATION MODEL

NOISE Sender Encode Message Medium Feedback Decode Receiver

Communication consists of eight components. The communication model appears above. Understanding this model and its components will help you to communicate effectively. The sender

The communication process begins with the sender the person who transmits a message. This could be a sales manager making a presentation to a client, a computer programmer explaining a new program to a co-worker, or a company representative making a speech at a conference or an advertising message on TV. Encoding

The sender must carefully design the message by selecting words and nonverbal signals that clearly convey the message. The process of selecting and organising the message into meaningful symbols is called encoding. The message

A message has three objectives: to inform, to persuade and to remind. You might want to inform your colleagues of a new bonus scheme, persuade them to accept it and remind them of the details of the scheme and of what is expected of them in order to use the scheme. All

97 the words and nonverbal signals that you use in your message must achieve the above three objectives. The medium

Once you have formulated your message, it has to be delivered via a medium to the receiver. As a communicator, you can choose to deliver your message in writing, for example via a letter or memo, or you can deliver it by hand or send it via the post or use an overnight delivery service. You can send a fax or electronic mail or you can communicate it orally, either over the phone or face to face (in person), on TV or in newspapers. Decoding

Once the message gets to the receiver, it has to be decoded, which means that the message is translated from its symbol form into meaning by the receiver. Communication has occurred when the message is received and some degree of understanding occurs. The message as understood by the receiver might not have the same meaning as the sender intended. The difference between intended and understood messages is partly how we measure whether communication is effective or not. The greater the degree of shared meaning between the sent message and the received message, the more effective is the communication. The receiver

A receiver is any person who notices and attaches some meaning to a message. It can be someone outside the company, such as the customers to whom your advertisement is directed, or it can be someone inside your organisation, for example the colleague to whom your e-mail is sent. All receivers decode the message according to their needs. Feedback/Analysis

The verbal and non-verbal responses of the receiver create feedback. Feedback helps you know whether the message was received and understood, and makes the communication a two-way process. During this stage you need to analyse whether your message has been correctly understood or not and if necessary, you need to supply additional information or design a follow-up strategy to ensure the correct interpretation or the desired results. Some feedback is non-verbal, for example smiles, sighs, and so on. It can also be oral, for example when you respond to a co-workers ideas with questions or comments. Feedback can also be written when you respond to a colleagues memo or letter. In some cases, no message can also be a kind of feedback. Failure to answer a letter or to return a phone call can suggest how the receiver feels about the sender. As indicated above, for the communication process to be effective it must always be well planned, and when implemented, it must be evaluated to ensure that the desired outcome has been achieved.

98 Noise (barriers)

Anything that disrupts the transmission and receipt of your encoded message (with its intended meaning) is classified as noise or barriers to communication. Noise can be technological or human problems such as a bad telephone line, faded photocopies, poorly printed documents, lack of credibility or any other factor that interferes with a message.

Activity 15.1 Salina's grocery store has placed an advertisement in The Sowetan to inform customers of a big discount sale (less 30% on all the products) which will be taking place at the store. On the day of the sale, many people turn up to buy the marked-down products. Now do the following activity: Identify, and then explain, the five elements of the communication model which you can identify from our example.

Feedback You probably discovered the following five communication elements: The communicator or sender of the message is Salina's store. The message entails information about the discount sale (the 30% discount). The medium is the Sowetan newspaper. The receivers of the message are the customers (the people living in Gauteng). The fact that a lot of people turned up on the day of the sale provides feedback on the effectiveness of the message and medium.

15.2 THE MARKETING COMMUNICATION MIX Marketing managers use various elements of marketing communication to communicate with their target market. The marketing communication elements that can be used are advertising, personal selling, sales promotion, public relations (or publicity) and direct marketing. This combination of marketing communication elements is referred to as the marketing communication mix or strategy. Deciding on the nature of the combination presents a challenge to managers because, as circumstances change, the whole combination must change as well. Not only does the composition of the various elements repeatedly change, but also the messages contained

99 therein and the different techniques and media used. There is also a lot of variation in the way in which competitors allocate expenditure from the marketing communication budget to the various elements in their marketing communication mixes. Avroy Shlain, for example, emphasises personal selling, whereas Revlon emphasises advertising. We will deal with advertising in this study unit. 15.3 ADVERTISING Large enterprises, such as Toyota and the OK Bazaars, spend huge amounts on advertising in the mass media, as they face intensive competition in nationwide markets. Toyota spent R54,1 million in 1997, whereas the OK Bazaars allocated R79.3 million for the same period. Advertising is a pervasive influence in our daily lives. Can you imagine not being exposed to Coke or BMW advertisements? 15.3.1 The Advertising Management Process

(Study secs 12.3.1 to 12.3.5 in the prescribed book.)

A successful advertising campaign In order to differentiate its product from competing products, Sasol petrol embarked on an advertising campaign in the 1990s. The task was to encourage motorists to fill up at the Sasol pump in preference to other pumps. The advertisement for this campaign featured a little boy with a red Ferrari toy car which, filled with Sasol petrol, burned rubber when taking off from the Sasol pump. This advertisement made Sasol a household name.

It should now be clear that the basic functions of advertising are to inform consumers (of a product or service), persuade them to act in a certain way (buy and use the product or service) and reinforce their existing favourable attitudes (so that they will continue to buy the product or use the service). All the activities in an advertising campaign are aimed at fulfilling these basic functions of advertising. The steps in an advertising campaign do not necessarily follow each other in consecutive order-some may occur simultaneously while others may take place in an inverted order, depending on the situation. Bear in mind too, that some steps are, in fact, a prerequisite before any other steps may be taken. We identify the following steps in managing an advertising campaign: Marketing objectives and strategies Marcom objectives Advertising objectives

100 Advertising strategy Budgets Execution Placement Assess advertising effectiveness

Activity 15.2 Explain to the manufacturers and marketers of the new high-priced, luxurious Venus motorcar, the decisions involved in choosing the correct media.

Feedback You could refer to the following (see page 456 in your prescribed book.) Reach. This indicated the number of people from the target audience which will be exposed to the particular media. Should Venus for example be aired on TV during Car-Torque on Sunday afternoons there is high reach for the product Frequency. This indicates the number of times within a particular period of time an average person is exposed to the Venus message. Should the New Venus be advertised on TV the average person might be exposed to the message a couple of times during the period of the advertisement being run on TV. Impact indicates the qualitative value of an exposure through a given medium. Should the Venus motorcar be in a TV advertisement, impact will determine the emotional feeling of people looking at the particular advertisement on television.

Assessment 1 2 Discuss the marketing communication model. Discuss the steps in the advertising campaign.

SUMMARY In this study unit, we considered the communication model and advertising, the first of the elements of marketing communication. In the next study unit, we will deal with personal selling and sales promotion.

101 STUDY UNIT 16 Key concepts Getting an overview 16.1 16.2 Personal selling Sales promotion PERSONAL SELLING AND SALES PROMOTION

Assessment Summary

Key concepts Face-to-face presentation Personal selling Sales process Sales promotion Sales promotion methods GETTING AN OVERVIEW In this study unit, we will deal with personal selling first, and then discuss sales promotion. Personal selling is a highly selective form of communication that permits the marketer to tailor a persuasive message to the specific needs of an individual buyer. It is an active effort to communicate with high potential buyers on a direct, usually face-to-face basis. Sales promotion is designed to obtain a specific response or action from the target audience in the short term, for example, to revive sales of a mature brand or to generate trial purchases from consumers. 16.1 PERSONAL SELLING

(Study sec 12.3.6 in the prescribed book.) A very simple description of personal selling is that it is the face-to-face presentation of a product to a potential customer by a representative of the organisation. The salesperson tries to influence prospective buyers to favour his/her company or products. Can you imagine buying a new car, washing machine or lounge suite without a lengthy, information-gathering session with one or more salespeople?

102 When you study this section in your prescribed book, note in particular the following: Advantages and disadvantages of personal selling Roles and functions of salespeople Qualities and attributes of salespeople

16.1.1 Sales process The selling process is the successive series of actions taken by the salesperson to achieve his/her objectives. These actions are the following (you should be able to explain each step very briefly): Prospecting for customers Qualifying prospects Developing the relationship Presenting the sales messages Handling queries and objections Closing the sale Developing the relationship Providing service and support Maintaining trust and commitments

Next we discuss sales promotion. 16.2 SALES PROMOTION

(Study secs 12.3.7 in the prescribed book.) When Pick 'n Pay make use of coupons to sell their products and Clinique hand out samples of their perfume to consumers, they are making use of sales promotion methods to increase sales. Let us look at the characteristics of sales promotion: Sales promotion is action-focused. Most sales promotions are designed to elicit a specific action or response from the target audience in the short term. It is generally planned as a specific marketing event. This means that it is planned as a unique event or activity. Sales promotion involves specific sales promotion materials, for example, inexpensive give-aways. Sales promotion is designed to achieve short-term results. Time is one of the key elements of sales promotion and may range from a 'one-time-only' offer, which calls for an immediate response from the customer, to a limited time offer stretching over a few days or weeks.

103 16.2.1 Sales promotion methods aimed at consumers The different sales promotion methods aimed at consumers include the following (see table 12.5 for the objectives, advantages and disadvantages of each method): Samples and free trials Premiums Tie-ins Coupons Price cuts Prizes Trade promotions Trade shows

When you study these sections in your prescribed book, also pay particular attention to the advantages and disadvantages of each method of sales promotion.

Assessment 1 2 3 4 5 Describe the nature of personal selling. Explain the roles and functions of salespeople. Explain the characteristics of sales promotion. Explain the qualities and attributes of salespeople. Explain, with the aid of practical examples, the different sales promotion methods aimed at consumers.

SUMMARY In this study unit, we dealt with personal selling and sales promotion, two of the elements of marketing communication. In the next study unit, we will consider public relations, direct marketing and online marketing.

104 STUDY UNIT 17 Key concepts Getting an overview 17.1 17.2 17.3 Public relations and sponsorships Direct marketing E-communications PUBLIC RELATIONS, DIRECT MARKETING AND ONLINE MARKETING

Assessment Summary

Key concepts Public relations Sponsorships Direct marketing Online marketing GETTING AN OVERVIEW Public relations is aimed at fostering goodwill between a company and its various publics. Public relations contributes to the marketing effort and covers a broad range of relationships and goals with many stakeholders, both internal and external to the organisation. Direct marketing is a method of marketing communication that combines the elements of advertising, sales promotion and personal selling to lead to a direct sales transaction without the presence and mediation of an intermediary. In South Africa, it is estimated that at least one billion pieces of direct mail are sent in direct marketing efforts to consumers, at a total estimated expenditure of R3 billion per year. We will first deal with public relations and will then discuss direct marketing. We will also briefly deal with online marketing or e-communications. 17.1 PUBLIC RELATIONS AND SPONSORSHIPS

(Study secs 12.3.9 and 12.3.10 in the prescribed book.)

105 In South Africa, many firms (such as SA Breweries) have their own managers dealing with public relations, or use public relations specialists to manage this important function (also called outsourcing). Examples of such specialists are TWS Communications and SussensMann. As we mentioned earlier, public relations covers a broad range of relationships with many stakeholders. A variety of public relations techniques are used to communicate efficiently between organisations and stakeholders, both internally and externally. Sponsorships provide a way of obtaining media exposure and getting brand names across for a positive association with people or events. When you study section 12.3.10 in the prescribed book, note the following: Objectives of sponsorship Types of sponsorship involvement

17.2 DIRECT MARKETING

(Study sec 12.3.11 in the prescribed book.) One of the marketing communication methods that is being used more regularly is direct marketing which requires some action or response from the consumer. The response can be in the form of an order, a request for more information, or a visit to a channel member's place of business. This marketing communication mix element has shown enormous growth in South Africa, especially direct response advertising on television by companies such as Verimark and Glomail. The various media and techniques of direct marketing include the following: Direct mail Telemarketing Mail order Direct-response advertising

17.3 E-COMMUNICATIONS

(Study sec 12.3.12 in the prescribed book.) Online marketing or electronic commerce, uses cybermedia to reach one person via his or her computer and modem. A modem connects the computer to a telephone line so that the

106 computer user can reach various online information services. When you study these sections in your prescribed book, note in particular the meaning of the Internet and World Wide Web, and why the Web is seen as unique, as well as the different types of e-marketing that can be used.

Assessment 1 2 3 Explain the following to an organisation of your choice: the value and objectives of public relations, the types of public relations, and sponsorships. Explain the different types of media and techniques in direct marketing. Discuss the nature of e-communications.

SUMMARY In this study unit, we examined public relations, direct marketing and online marketing. We have now come to the end of this topic. In the next topic, we will consider the last marketing instrument, namely pricing decisions.

107 TOPIC 8 PRICING DECISIONS AIM The aim of this topic is to enable you to learn about all the factors involved in pricing decisions. LEARNING OUTCOMES

After studying this topic, you should be able to explain the nature and meaning of price describe the influence of the pricing constraints on the determination of a price for a product or service explain the use of profit objectives and sales-volume objectives illustrate the approaches in determining the basic price explain, with the aid of practical examples, the price adjustments that can be made to the final price explain the skimming and penetration-pricing strategies that can be followed in the introductory phase of the product life cycle

TOPIC CONTENT Study unit 18 PRICING CONSTRAINTS AND OBJECTIVES Study unit 19 DETERMINING THE BASIC PRICE Study unit 20 PRICE ADJUSTMENTS

108 STUDY UNIT 18 Key concepts Getting an overview 18.1 18.2 18.3 The nature of price Pricing constraints Pricing objectives PRICING CONSTRAINTS AND OBJECTIVES

Assessment Summary

Key concepts Pricing constraints Pricing objectives Consumers price behaviour Cost constraints GETTING AN OVERVIEW The price charged for an organisation's product is often the most visible part of the organisation's marketing mix (the others being product, distribution and marketing communication) and it generally plays an important role in satisfying the needs and desires of the organisation's consumers. It is, therefore, a critical element in the marketing mix of any organisation. All companies find price setting a difficult task and it is important that one identifies constraints on prices and that pricing objectives are set. Imagine that you go to your local caf and pay R25,50 for a packet of Benson and Hedges cigarettes, and then you find out that the caf on the next corner charges R19.50 for the same product. Do you think the caf charging R25,50 will sell a lot of cigarettes? Of course not. A constraint on pricing is, therefore, competition. If there were no other shops selling cigarettes within, say, 50 or 100 km, then the caf owner might manage to charge these types of prices. In this topic, we will consider some of the important aspects in pricing decisions, namely: pricing constraints and objectives determining the basic price price adjustments

109 18.1 THE NATURE OF PRICE

(Study secs 9.2 and 9.3 in the prescribed book.) Price is the amount of money charged for a product or service. More broadly, price is the sum of the values consumers exchange for the benefits of having or using the product or service. To the consumer, price represents the amount of money paid in return for a product or service and thus for the need satisfaction received. The consumer will generally view the price as acceptable if it is perceived that the value received is equal to, or more than, the value (amount of money) that he or she pays for the product. To the business, price is important because it relates directly to the organisation's income and profitability because: Profits = total income total costs Profits = (price x sales) total costs If the price is set too low, the business will have difficulty surviving and, if this situation continues for an indefinite period, the business will go bankrupt. Avia and Phoenix Airlines are good examples of this. 18.2 PRICING CONSTRAINTS There are numerous pricing constraints that influence the determination of the price of a product or service. We will deal only with competitor's offers, the consumer's price behaviour patterns that influence the demand for the product, and cost constraints in pricing. 18.2.1 Competitors' offers

(Study sec 9.5.3 in the prescribed book.) Competitors' costs and prices influence a company's pricing decisions. A consumer who is considering the purchase of a Canon camera will evaluate Canon's price and value against the prices and values of comparable products made by Nikon, Minolta, Pentax, and others. In addition, the company's pricing strategy may affect the nature of the competition it faces. If Canon follows a high-price, high-margin strategy, it may attract competition. A low-price, low margin strategy, however, may eliminate competitors or drive them out of the market.

110 18.2.2 Consumer's price behaviour

(Study sec 9.4.3 in the prescribed book.) Consumers' behaviour patterns also influence the demand for a product. When consumers perceive prices and purchase situations, they often do not evaluate them completely rationally and are inclined to base their decisions on imperfect but convenience decision rules. These irrational evaluations of, and reactions to, prices have been labelled consumer price behaviour, or psychology of pricing and include: Perception of price differences Reference prices Price-quality relationships Demand band Price as a statement of value

18.2.3 Cost constraints

(Study secs 9.5.1 and 9.5.2 in the prescribed book.) In the long run, a company's price must cover all the costs of producing and marketing the product. If the price does not at least cover costs, the company will fail. In this regard, the marketer has to determine the following types of cost: Total cost Fixed cost Variable cost Marginal/incremental cost

Marketers also need to know how costs vary with different levels of production. They should thus take the following cost-volume relationships into account: Economies of scale Learning curve 18.3 PRICING OBJECTIVES

(Study secs 9.6.1 and 9.6.2 in the prescribed book.)

111 Companies need pricing objectives that are specific, attainable and measurable, to survive in today's highly competitive marketplace. Realistic pricing goals then require periodic monitoring to determine the effectiveness of the company's strategy. We distinguish between the following price objectives: Profit objectives Sales-volume objectives

Assessment 1 2 3 4 5 Discuss the various pricing constraints and highlight competitors offers and consumers behaviour. Briefly discuss the various types of costs marketers could encounter. Discuss the two various cost-volume relationships to show how costs vary with different levels of production. Marketers should have pricing objectives in mind when determining price. Which objectives should be taken into account? Explain profit objectives and sales-volume objectives.

SUMMARY In this study unit, you were introduced to the nature of pricing and the pricing constraints that influence the determination of the price for a product or a service. You also learnt about the different pricing objectives that need to be considered. In the next study unit, we will consider how the basic price is determined

112 STUDY UNIT 19 Key concepts Getting an overview 19.1 Cost-plus pricing 19.2 Customer-oriented pricing 19.3 Competition-oriented methods Assessment Summary DETERMINING THE BASIC PRICE

Key concepts Cost-plus pricing Customer-oriented pricing Competition-oriented pricing GETTING AN OVERVIEW It is not always easy to know exactly what price to charge for a product or service. If somebody were to ask you to paint a wall for them, you might look and quote a price of, say, R250. This price may be too high or low, but it at least provides you with a starting point. If the client does not accept and says that it is too expensive, you know the price is too high. On the other hand, if the client accepts your offer eagerly, this suggests that your price might be too low. Marketers must approach price setting in a similar way. One of the keys that a marketer can use to set a final price for a product is to find a basic price to use as a reasonable starting point. The common approaches to finding this basic price level are cost-plus pricing, customeroriented pricing and competition-oriented pricing. 19.1 COST-ORIENTED PRICING

(Study sec 9.7.1 in the prescribed book.) Many businesses establish prices on the basis of their costs. The general approach is to set a price high enough to recover production and marketing costs and to make a profit.

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Cost-plus pricing is the simplest and most commonly-used pricing method and involves adding a standard mark-up to the cost of the product. In other words, the cost of the product is determined and a set percentage is added to the cost price as the profit margin. When you study this section in your prescribed book, note the following cost-oriented pricing methods: Cost-plus pricing Variable cost per product Rate-of-return pricing Break-even analysis

19.2 CUSTOMER-ORIENTED PRICING

(Study sec 9.7.2 in the prescribed book.) Customer-oriented pricing suggests that prices be set on the consumers' perceptions of value. Prices are thus based on the marketer's understanding of demand and the price behaviour of buyers. The customer-oriented pricing methods are: Value-pricing methods Demand-backward pricing Prestige prices Odd-number prices Price lines Traditional prices Bundle pricing

Activity 19.1 When you have studied the customer-oriented pricing methods, answer the following question: How should value-pricing and prestige pricing be taken into account for setting the price for a dry-cleaning business in an upmarket area in Constantia Kloof?

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Feedback In value pricing, the price reflects the value of the product or service to the customer. If the dry-cleaning business offers extra benefits such as the promise that curtains will not shrink when they are dry-cleaned, a higher price can be charged. The customers will, therefore, perceive the extra benefits as good value. In the case of prestige pricing, the higher price indicates the quality of the product or service. If the prices of the dry-cleaning business are higher (prestige pricing) than those of competitors, this will draw the attention of the upmarket residents, indicating that the service is much better than the rest of the dry-cleaners in the area. 19.3 COMPETITION-ORIENTED METHODS

(Study sec 9.7.3 in the prescribed book.) Some companies prefer to base their prices on what competitors are doing rather than on a demand, cost or profit basis. This does not imply that they charge the same as competitors they may add a premium or they may discount their prices. This can be done in the following ways: Follow-the-leader pricing Adaptive pricing Opportunistic pricing Predatory pricing Competitive bidding

Assessment 1 Discuss, with the aid of practical examples, the various cost-plus pricing methods. 2 Discuss, with the aid of practical examples, the various customer-oriented pricing methods. 3 Discuss and illustrate the various competition-oriented pricing methods SUMMARY In this study unit, we dealt with determining the basic price. This involved cost-oriented pricing, customer-oriented pricing and competition-oriented pricing methods. In the next study unit, we will look at price adjustments to the basic price.

115 STUDY UNIT 20 Key concepts Getting an overview 20.1 20.2 Price adjustments Skimming and penetration-pricing decisions PRICE ADJUSTMENTS

Assessment Summary

Key concepts Discount adjustments Geographical adjustments Skimming pricing Penetration pricing GETTING AN OVERVIEW A price strategy usually requires continual adjustment to reflect changes in costs, competitive conditions and demand. Companies usually adjust their basic prices to account for customer differences and changing situations. When you visit some stores, and you buy a large number of items, you can usually ask for a discount - and you may receive it. Some medical doctors often offer a 10% discount to patients if they settle directly with the doctor and claim back from their medical aid. (Work through this study unit in your leaning guide.) 20.1 PRICE ADJUSTMENTS There are a number of price-adjustment strategies that a company can follow, namely discounts and geographical adjustments. Let us look at each of these. 20.1.1 Discounts Most companies adjust their basic price to reward customers for certain responses. Examples are early payment of accounts, volume purchases, and off-season buying. The different types of discount are cash discounts, quantity discounts, trade discounts and seasonal discounts.

116 Cash discount A cash discount is a price reduction to buyers who pay their accounts promptly. A typical example is '2/10, net 30', which means that, although payment is due within 30 days, the buyer can deduct 2% if the account is paid within 10 days. The discount must be granted to all buyers meeting these terms. Such discounts are customary in many industries; they help to improve the seller's cash situation and reduce bad debts and credit-collection costs. Quantity discount A quantity discount is a price reduction offered to buyers who buy large volumes. A typical example might be R10 per unit for less than 100 units or R9 per unit for 100 or more units. Discounts provide an incentive to the customer to buy more from one seller, rather than buy from a number of sources. Trade discount A trade discount is offered by the seller to trade channel members who perform certain functions such as selling, storing and record-keeping. Manufacturers may offer different trade discounts to different trade channels because of the different services they provide, but manufacturers usually offer the same trade discounts within each trade channel. Seasonal discount A seasonal discount is a price reduction to buyers who buy merchandise or services out of season. For example, lawn and garden equipment manufacturers will offer seasonal discounts to retailers during autumn and winter to encourage early ordering in anticipation of the heavy spring and summer selling seasons. Hotels and airlines will offer seasonal discounts in their slower selling periods. Seasonal discounts allow the seller to keep production steady during an entire year. 20.1.2 Geographical adjustments In Durban, for example, the price of unleaded petrol is a few cents lower than in the Gauteng area. The price of the same petrol in the North-West Province is even higher than in the Gauteng area. We distinguish between the following geographical pricing adjustments: Free-on-rail pricing According to free-on-rail pricing (free on board), the marketer quotes prices for delivery at the marketer's location. The buyer pays the full transport costs of the products from the marketer's location. This geographical pricing decision means that, all other factors being equal, the marketer has a price disadvantage compared to marketers located nearer the buyer. Freight-absorption pricing A disadvantage of free-on-rail pricing is that it can help to create monopolies. To prevent this, some businesses follow freight-absorption pricing. Here, the marketer quotes

117 uniform prices irrespective of the buyer's location. The total transport costs are usually estimated, and an average transport cost for each order is included in the cost price of the product. Uniform regional pricing Uniform regional pricing is a combination of a free-on-rail pricing approach and freightabsorption pricing. Prices within a particular region are, therefore, uniform, but vary between regions because of transport costs (free-on-rail pricing). A typical example of uniform regional pricing in South Africa is the price of petrol. Base-point pricing A base-point price corresponds, to some extent, with a free-on-rail price, except that the seller quotes prices that include the transport costs from a certain place (base point). The seller often uses more than one base point; these base points may be located at the same places as the factories (although not necessarily so). Individual businesses or an entire industry can use base-point pricing. We conclude this study unit by considering two pricing decisions that are usually found in the introductory phase of a new product, that is, skimming and penetration pricing. 20.2 SKIMMING AND PENETRATION-PRICING DECISIONS Skimming and penetration-pricing decisions are two extremes that can be found in the introductory phase of a new product. A skimming decision is followed when a relatively high price is charged. This approach can be used in the following instances: The demand of the product is relatively price inelastic There are not many potential competitors Prices are used to segment the market The costs and demand have not yet been established - should the price be set too high, it can always be reduced at a later stage The consumer does not know much about the new product A quick return on investment is required

A penetration-pricing decision is followed when a relatively low price is charged and this is possible in the following situations: The price elasticity of the demand is relatively high Savings in production costs are possible with a higher production volume The existing market will not or cannot accept high prices There is a strong possibility of potential competition

118 A skimming pricing decision may result in lower sales and a penetration pricing decision may result in higher sales, all other factors being equal. Skimming and penetration pricing decisions are thus two extremes. The choice of a particular price often lies between these extremes.

Activity 20.1 Explain the use of a skimming price and a penetration price.

Feedback Price skimming is normally used when a new, unique product is launched onto the market. The marketer selects a high price to recover the costs of research and development as soon as possible. The problem with this method is, however, that it could attract new competitors to the market because of the lucrative profits. We can, therefore, say that the barriers of entry are usually quite low when price skimming is used. Patents can, however, protect a pharmaceutical company, for example, from competition entering the market for a certain period. Penetration pricing is the opposite of price skimming. The business decides to introduce the product at a low price. The reason for keeping the price level low is to make it more difficult for competitors to enter the market. We therefore say that the entry barriers are now higher because the profit margin is much lower. The business has more time to penetrate the market, while it is more difficult for competitors to enter the market, as there are fewer profit incentives and it is also less attractive for them to do so.

Assessment 1 Distinguish between the various discounts. 2 Discuss the different geographical adjustments marketers could use as a price adjustment. 3 Contrast price skimming and penetration pricing decisions. SUMMARY In this study unit, we dealt with the price adjustments that can be made to the final price of a product or service. This includes different types of discounts and adjustments according to geographical location. Also ensure that you understand the use of skimming and penetrationpricing strategies that can be used in the introductory phase of the product life cycle. The four

119 decision-making areas, namely product, distribution, marketing communications and price, have been discussed in isolation. CONCLUDING COMMENTS When you have studied the four marketing instrument, namely product, distribution, marketing and communication, note the following concluding remarks:

The 4 Ps of marketing All four marketing instruments (or 4 Ps of marketing) must now be combined into a strategy so that one decision supports and reinforces the other. It will serve no purpose, for example, to decide on a price that potential consumers are willing to pay, that covers costs and delivers handsome profits, if the product is not available in the stores (poor distribution), or if the marketing communication message provides the wrong or vague details.

We have now come to the end of this module in Marketing Management Principles, and we hope that you are adequately equipped to take your studies in marketing further.