Chapter 1: Marketing: creating value

CHAPTER 1 OVERVIEW

This chapter provides an introduction to the basic concepts addressed throughout the book.
The premise running through this chapter, and through the principles covered in the book, is
that marketing is the delivery of customer value at a profit (this does not necessarily mean
excess profit). The process of exchange through which both parties benefit is central to this
chapter. As such the concepts of needs, wants and demands are explored, and the concept of a
product as that which provides a solution to a need, forms the basis of the discussion about
the difference between customer satisfaction and customer value. In sum, understanding
customer perceptions of value can aid marketing companies in building good relationships in
the belief that profitable transactions will follow.
The marketing environment though has fundamentally changed. Many products and services
available to consumers during the first decade of the twenty-first century have been in
existence for a short time, for example broadband services, digital TV, i-pods and mp3
players and online computer games. There are changes in the delivery of many products and
services to consumers via the internet, for example online shopping and gambling, which
raise expectations of value and speed of transactions and can create concerns for public policy
makers. It is a challenge for marketers to meet consumer expectations of value at lower costs,
in a shorter time whilst meeting financial objectives and satisfying the concerns of
government and the wider society.

CHAPTER OBJECTIVES

1. Define marketing and outline the concepts of needs, wants, and demands.
2. Discuss marketing management and express the basic ideas of demand management
and building profitable customer relationships.
3. List the marketing management philosophies and be able to distinguish among the
production concept, the product concept, the selling concept, the marketing concept, and
the societal marketing concept.
4. Analyse the key marketing challenges in this century, including growth of non-profit
marketing, rapid globalisation, the changing world economy, the call for more ethical
behaviour and social responsibility, and the new marketing landscape.

Note to Instructors: Questions and answers to Marketing Highlights and Case Studies
are provided below. We have also included additional Extension Questions, which
are not found in the textbook, that may be used to supplement lectures or discussion.

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CHAPTER OUTLINE

What is marketing?
Marketing refers to the activities undertaken to create and exchange products and
values with others. Figure 1.1 on p. 6 summarises the changes in the focus of
marketing over the last 50 years. In that time marketing has moved from the notion of
‘telling and selling’ to that of building lasting long-term relationships with customers
to the newest form of real-time virtual interaction with customers. The influence of
marketing has also increased over time and this has impacted upon the function of
marketing and the activities marketers are expected to perform. As such, this text
places the marketing function at the centre of business success and emphasises the
necessity of integration of all functions (addressed further in Chapter 2).
A core premise is stated as follows:
‘The marketing organisation that excels in understanding consumer needs, develops
products that provide superior value, and then prices, distributes and communicates
effectively and efficiently should find that their products and services sell very easily’
(p. 7).
Challenges to a businesses ability to achieve the above are identified as:
• New technologies that bring the business into contact with the global market
place.
• Borderless markets leading to dilemmas about the extent of standardisation or
differentiation.
• The need to retain customers in increasingly competitive markets.

Marketing is defined as ‘A social and managerial process by which individuals and

groups obtain what they need and want through creating and exchanging products and
value with others’ (p. 7). In the twenty-first century what this means for the marketer
is that marketing is aimed at ‘satisfying customer needs by creating value through
interacting and working with the customer’ (p. 7).
Needs wants and demands

Needs: these are states of felt deprivation. Drawing from Maslow’s hierarchy,
these needs are summarised as being physical, social or individual. The type of
society in which people live will influence how these needs are specifically
satisfied.

Wants: these are the objects that satisfy the needs. The form these objects take
depends upon culture and individual personality. As society becomes more
sophisticated, people are exposed to a range of need-satisfying objects and as
such have greater choice about how to satisfy their needs. Producers compete
to satisfy these needs.
Demands: Producers are concerned with wants that are backed by buying
power. When people have the money to purchase the need-satisfying object

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 there is then demand for that object. Because people have limited resources
they choose objects that most satisfy their needs. Producers need to ensure that
they provide need-satisfying objects for which there is demand. To do so
effectively, producers need to understand the needs and wants of their
customers.
Products

A product is ‘anything that can be offered to a market to satisfy a need or

want’ (p. 9). In essence, a product is the need-satisfying object for which there
is demand. Products may be physical or intangible and people, places,
organisations, activities and ideas are all considered products as they each can
act as vehicles for need satisfaction. A central argument is that a product is the
solution to a need and as such product decisions and the product concept are
based upon this notion.
Value, Satisfaction and Quality

Customer value: Customer value refers to ‘the difference between the values
the customer gains from owning and using a product and the costs of obtaining
the product’ (p. 9). This relates to the notion of exchange that underlies the
precepts within this book. Simply, the producer aims to ensure that the
customer is happier to have the product than to have what they exchanged for
the product.
Customer satisfaction: Customer satisfaction refers to ‘the extent to which a
product’s perceived performance matches a buyer’s expectations’ (p. 10). A
key idea within customer satisfaction is that the company should manage
customer expectations by promising what they can deliver on, but then aim to
exceed these expectations so that the customer will remain with the company
for future purchases. An idea explored in Marketing Highlight 1.1 is that
companies should aim for balance between customer delivered value and
business value.
Total Quality Management (TQM): It is argued that customer satisfaction is
closely linked to quality. Many companies, TNT and Motorola, for example,
have adopted total quality management (TQM) programs designed to improve
the quality of their products, services and processes constantly. It is argued
that TQM occurs only when a company’s offerings exceed customer
expectations.
Exchange, Transactions and Relationships

There has recently been some debate about the role of customer satisfaction in
marketing. Some argue that marketing has become about customer satisfaction
at any cost. However, the notions of exchange, transactions and relationships
clarify the need to pursue customer value within the capabilities of the
company. A core idea within this section is that ‘marketing consists of actions
taken to obtain a desired response from a target audience toward some product,
service, idea or other object’ (p. 10).

Exchange: This is ‘the act of obtaining a desired object from someone

offering something in return’ (p. 10). As the underlying concept of marketing
this needs to be combined with the concept of transaction.

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 Transactions: This is ‘a trade between two parties that involves at least two
things of value, agreed-upon conditions, a time of agreement and a place of
agreement’ (p. 11). What is traded varies in terms of service, physical good,
ideas etc. In essence, both parties must be satisfied with the exchange – the
customer must perceive that what they have of obtained is of greater value to
them than that which they traded (customer value). Likewise the producer
must perceive that what they have obtained is of more value to them than that
which they traded.
Relationship marketing: Successful transactions can pave the way for long-
term relationships. In competitive markets where there are many need-
satisfying objects offering the customer a variety of possible transactions, it is
important that producers obtain and retain customers. Transactions that
provide customer value and in which both parties are satisfied by the exchange
can increase the customer’s ‘cost of leaving’ thereby making it easier for the
customer to stay with the producer than to go to another producer. Many
companies therefore practice relationship marketing. ‘Relationship marketing
is the process of creating, maintaining and enhancing strong, value laden
relationships with customers and other stakeholders’ (p. 11).
Markets

‘A market is the set of all actual and potential buyers of a product’ (p. 11).
This is distinct from industry, which is a collection of sellers. The difference
between them and how each fits into the concept of exchange is illustrated in
Figure 1.3 (p. 14). The term ‘markets’ is a broadly used one. In the context of
exchange, markets refer to buyers and to groups of buyers (or non-buyers).
Understanding markets in this way becomes important when identification and
segmentation of markets is discussed in Chapter 8.
Marketing

Marketing refers to ‘managing markets to bring about exchanges for the

purpose of satisfying human needs and wants’ (p. 15). As such, it draws upon
all of the concepts addressed above. Figure 1.4, p. 15, illustrates the process
through which exchanges are bought about and includes the major actors in
the process – suppliers, competitors, intermediaries and end-user markets.
The central premise here is that exchange doesn’t just happen, it must be
facilitated. All elements in the marketing system add value and therefore the
entire chain needs to focus on the needs of end users.

Marketing Management
Successful marketing activities need to be managed and so marketing management
involves the analysis, planning, implementation and control of these activities. The
aim is to produce profitable customer relationships by facilitating exchanges that
result in customer value by meeting or exceeding customer expectations. To do so
profitably requires that the company do so within their own capabilities.
Demand Management

For a company to exceed customer expectations, marketing managers must

ensure that they are able to meet the quality and quantity of product demanded

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 by customers. Demand may be non-existent, adequate, irregular or excessive.
The aim is to reach the optimal demand for the product. To do so may
necessitate temporarily or permanently reducing demand for that product. This
is called de-marketing. This is particularly relevant to products that may be
loosing their quality with over-use – such as eco-tourism, or which are less
effective when demand is too high – such as power supply.
Building Profitable Customer Relationships

Building profitable relationships is one of the key premises within this text.
The emphasis is upon retaining customers. In mature markets in which growth
has slowed and there are many competing products, marketing managers are
required to develop strategies aimed at keeping existing customers as obtaining
new customers becomes more difficult in such a market. Other challenges that
marketers face are identified as
• Changing demographics
• A more turbulent economy
• More sophisticated competitors
• Over-capacity in many industries.
A long-term perspective towards building customer relationships therefore
becomes essential. The aim is not to have one successful transaction with a
customer but several transactions with that customer that are profitable overall.

Marketing Management Philosophies

There are several concepts that reflect different philosophies about the role of
marketing activities. The marketing concept and the societal marketing concept are
the only concepts that reflect the notion of each party benefiting from the exchange
process.
1. The production concept: Companies dominated by this concept focus their efforts
on improving production efficiencies in order to obtain economies of scale. The
philosophy driving this concept is that ‘consumers will favour products that are
available and highly affordable’ (p. 19). This is useful in two situations: 1) when
demand exceeds supply and 2) when improved productivity can bring the cost of the
product down.
2. The product concept: Companies dominated by this concept focus their efforts on
research and development in order to produce improved and/or innovative products.
The philosophy underlying this concept is that ‘consumers favour products that offer
the most quality, performance and features’ (p. 19).
3. The selling concept: Companies dominated by this concept focus their efforts on the
sales process in order to sell large quantities of the product. The philosophy
underlying this concept is that ‘consumers will not buy enough of the organisation’s
products unless the organisation undertakes a large-scale selling and promotion
effort’ (p. 20). This is typically used with unsought goods and may be practiced when
there is over-capacity.
4. The marketing concept: Companies dominated by this concept are following an
approach to marketing that is based upon the satisfaction of both parties to the

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 exchange – customer value within the capabilities of the company. The philosophy
underlying this concept is that ‘achieving organisational goals depends on
determining the needs and want of target markets and delivering the desired
satisfactions more effectively and efficiently than competitors do’ (p. 20). The key idea
in this concept is balance between customer satisfaction and profits.
5. The societal marketing concept: Companies dominated by this concept are
following the marketing orientation. The key difference is that the interests of society
are also factored into the equation. The philosophy underlying this concept is that
companies should aim to follow the marketing concept but in ‘a way that maintains or
improves the consumer’s and societies well-being’ (pp. 21-23). The key idea in this
concept is balance between customer satisfaction, profits and society’s interests.

Marketing challenges in the twenty-first century

Several challenges are emerging from changes to the macro environment.
Growth of non-profit marketing: Marketing is not only for traditional profit-based
companies. Any product offered in the market place needs to compete for the
attention of consumers. Those that provide essential services are also finding the need
to engage in developing long-term relationship based transactions aimed at satisfying
both parties in the exchange.
Rapid Globalisation: Changes to macro-environmental factors have resulted in ease
of interaction and communication with consumers in other countries. Many
companies have attempted to expand their markets by finding new customers in new
markets. Resistance from various public interest groups have bought discussion of the
ethics of such behaviour to the fore.
Information technology and electronic marketing: Changes to the macro-
environment have also bought about new infrastructures useful for reaching and
retaining customers. The information also enables the company to obtain useful data
about consumers. Although consumers have not responded to these new
infrastructures to the degree predicted, it is argued that those without access may be
disenfranchised in the future.
The changing world economy: The premise of marketing discussed at the beginning
of this chapter is that producers provide products that satisfy needs to those that have
the resources to purchase them. Changes to the cost of living, spending patterns and
employment are resulting in a large number of consumers without the resources to
satisfy their wants that have been shaped by an affluent society. Creating customer
value within the capabilities of the company may become increasingly difficult.
The call for ethical behaviour and social responsibility: Changes to the macro-
environment have resulted in calls for companies to act more responsibly in terms of
preserving the environment or at least not unduly harming the environment. Public
interest has also resulted in calls for companies to be more fiscally responsible and
humanitarian. There are many examples in recent months of the implications for
companies, their directors and the general public when companies do not have a social
conscience or act unethically.

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