B2B Markets and CRM N

B2B MARKETS AND CRM
(FOR PRIVATE CIRCULATION ONLY)

2019
PROGRAMME COORDINATOR
Dr. Narendra Parchure
COURSE DESIGN AND REVIEW COMMITTEE

Dr. Narendra Parchure Prof. Nazima Shaikh
Prof. Dr. Pramod Jogdeo Dr. A. K. Sood
Dr. Shailesh Kasande Prof. Jayant Saha
Dr. Avinash Joshi Prof. Avinash Nene
COURSE WRITER
Mr. Sanjeev Phatak
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2006 (Revision 01, 2015)
Copyright © 2019 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book..
PREFACE
There’s a saying that the customer is always right, but what is it that keeps someone coming back
to buy your products or services? Lucy Reiter explores the issue of customer experience and what it
means to the B2B marketer in the 21st century.
It’s a simple enough concept: keep your customers happy and they’ll keep coming back. It’s also a
proven fact that by offering a consistently positive customer experience, you will not only enhance
your brand offering, but it can also be instrumental in its overall success. So why do so many brands
overlook the importance of providing good customer experience – particularly B2B brands, which
are failing to cement this vital element into their company’s overall strategy?
Customer experience covers all interactions between an organisation and a customer. Every direct or
indirect contact you have is measured against their expectations, whether it’s the actual performance
of the company or the emotions that the interaction evokes.
Customer satisfaction and loyalty are vitally important aspects of today’s business. In reality, the
business in core sector is as essential as business through relationships. No business or marketing
is complete without CRM (Customer Relation Management). The concept of CRM is still evolving
and there is a need for focused and properly structured course material on the subject. This SLM has
therefore devoted one full unit on CRM, considering its importance.
For business to succeed, one must have proper human resource for the task. It is now being increasingly
realised that specialised people are required to man specialised fields in order to get optimum results.
Supplier’s human resource, their attitude, orientation and negotiating skill assume paramount
importance for marketing. Probably, this is one area in which core sector marketing needs tremendous
professionalism.
The SLM also discusses in detail business through internet, as this medium is shortly going to change
the way business is done.
This SLM has been written from a practical point of view with factual case studies to vividly illustrate
the concepts. It is felt that such an approach would help the reader to have quick and complete grasp
of the subject.
We hope the book will be able to bridge the knowledge and skill gap that presently exists in this area.
The students will definitely benefit from this endeavour. We would be grateful for any suggestions
for improvement.
Sanjeev Phatak
iii
ABOUT THE AUTHOR
Sanjeev Phatak is an Electronic and Telecom engineer with a Masters in Management Services
(Marketing).
He has over 20 years of experience in business development, client acquisition and client relationship
management for domestic and overseas clients and markets.
His strength lies in solving critical business issues for CRM and profitability for his FMCG, IT and
Telecom clients.
iv
CONTENTS
Unit No. TITLE Page No.

1 Introduction to Business Marketing 1 - 16
1.1 Introduction
1.2 Marketing
1.3 Process of Marketing
1.4 Marketing Concepts
1.5 Role of Marketing
1.6 Selling vs. Marketing
Case Study
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Buyer Behaviour 17 - 36
2.1 Introduction
2.2 Organisational Buying
2.3 Organisational Buying Behaviour Process
2.4 Factors influencing Organisational Buying Behaviour
2.5 Buying Process
2.6 The Marketing Mix
2.7 Positioning and Competition
2.8 Image and Identity
Summary
Key Words
Suggested Reading
v
3 Enterprise Selling 37 - 54
3.1 Introduction
3.2 Sales Management
3.3 Sales Planning
3.4 Models of Selling: Enterprise vs. Transactional
3.5 What is the Enterprise Selling Process
3.6 Typical Enterprise Selling
3.7 Identifying Value
3.8 Understand the Customer’s Economics
3.9 Engage the Customer
3.10 Organising for Success
3.11 Choose the Right Relationship Manager
3.12 Develop the Account Team
3.13 Involve Senior Executives
3.14 Establish Incentives
Summary
Key Words
Suggested Reading
4 Segmentation 55 - 74
4.1 Introduction
4.2 Market Segmentation and Target Marketing
4.3 Bases for Segmentation
4.4 Seven Steps to Market Segmentation
4.5 Advantages and Disadvantages of Segmentation
4.6 Recent Developments in Segmentation
Case Study
Summary
Key Words
Suggested Reading
5 Targeting and Sales Planning 75 - 90
5.1 Introduction
5.2 Target Market
5.3 Finding Target Market
5.4 Sales Planning
Case Study
Summary
Key Words
Suggested Reading
vi
6 Relationship Marketing and CRM 91 - 114
6.1 Introduction
6.2 Customer Commitment and Loyalty
6.3 Are Loyal Customers more Profitable
6.4 What is Loyalty
6.5 Foundations of Relationship Marketing
6.6 Relationship Marketing in Practice
6.7 Customer Retention
Case Study
Summary
Key Words
Suggested Reading
7 Product Differentiation of Business Products 115 – 128
7.1 Introduction
7.2 Basis of Differentiation
7.3 Competitive Advantage
7.4 The Value of Product Differentiation
7.5 The Surprising Secret of Successful Differentiation
Summary
Key Words
Suggested Reading
8 Pricing 129 – 148
8.1 Introduction
8.2 Setting the Price
8.3 Pricing Strategies and Policies
8.4 Consumer and Industrial Products
8.5 Reactions to Price Changes
8.6 Price versus Non-price Competition
Case Study
Summary
Key Words
Suggested Reading
vii
9 Customer Service Management 149 – 164
9.1 Introduction
9.2 Understanding Customer Behaviour
9.3 Customer Relations
9.5 Customise your Customer Care
9.6 Managing Customer Expectations
Case Study
Summary
Key Words
Suggested Reading
10 Product Differentiation and Solution 165 – 176
10.1 Introduction
10.2 Significance
10.3 Vertical Differentiation
10.4 Horizontal Differentiation
10.5 Determinants
10.6 Impact on other Variables
10.7 Long-term Trends
10.8 Behaviour during the Industry Life-Cycle
10.9 Solution Selling
10.10 Solution Selling Definition
10.11 The Art of the Presentation
10.12 Sales Force Deployment
Case Study
Summary
Key Words
Suggested Reading
11 B2B Hub 177 – 194
11.1 Introduction
11.2 The What’s and How’s of Business Purchasing
11.3 Classifying B2B Hubs based on Purchase Situations
11.4 How Hubs Add Value: Aggregation versus Matching
11.5 Who Hubs Serve: Biased versus Neutral Hubs
11.6 More about Reverse Aggregators: Enter the “Reverse VAR”
11.7 Challenges in Implementing B2B Initiative
Case Study
Summary
Key Words
Suggested Reading
viii
12 International Business 195 – 214
12.1 Introduction
12.2 The Theory of Comparative Cost
12.3 Trade Policies
12.4 Tariffs
12.5 Commercial Treaties
12.6 Dumping
12.7 International Monopolies
12.8 Important Export Policy of Government
12.9 Export Promotion Measures
12.10 Exports House
Case Study
Summary
Key Words
Suggested Reading
13 Marketing Communication 215 – 242
13.1 Introduction
13.2 Communication Theory
13.3 Understanding how Consumers Process Information
13.4 Communication Strategy
13.5 Rational of Advertising Expenditure
13.6 Advertising Budget
13.7 Ethics in Advertising
Case Study
Summary
Key Words
Suggested Reading
ix
x
Introduction to Business Marketing
UNIT
1
Structure:
1.1 Introduction
1.2 Marketing
1.3 Process of Marketing
1.4 Marketing Concepts
1.5 Role of Marketing
1.6 Selling vs. Marketing
Case Study
Summary
Key Words
Suggested Reading
Introduction to Business Marketing 1

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain business marketing
----------------------
• State the concepts of marketing
---------------------- • Differentiate between selling and marketing
----------------------
1.1 INTRODUCTION
----------------------
Business-to-business marketing or business marketing is a broad concept
---------------------- which encompasses the marketing of business services, industrial products
---------------------- and reseller phenomena with domestic and/or global perspectives. Business
marketing phenomena occur with all transactions, exchanges and relationships
---------------------- between any dyad involving organisations, institutions or resellers and within
social networks. Individuals are included only when not personally motivated
---------------------- (i.e. acting on behalf of organisational buying needs as opposed to those needs
of households).
----------------------
Many people often use the term ‘business to business (B2B) markets,’
---------------------- but most of them do not know exactly what it refers to. B2B activity, both
online and offline, involves the marketing of services and goods that help other
----------------------
companies operate. Manufacturers, resellers, the government and non-profit
---------------------- institutions are the most common examples of B2B markets.
Business to business marketing associates with five distinct concepts - the
----------------------
exchange concept of marketing, the turn of production concept, the product
---------------------- concept, the phenomenon of marketing myopia and the sales concept.
Converting prospects into customers is an important objective of B2B
----------------------
marketing. A few B2B companies do make some money of a customer base.
---------------------- But most of their capital is made of other businesses. A non-profit institution
is a good example. Its operations normally depend on private donations from
---------------------- individuals like government funding, corporations etc.
---------------------- B2B marketing is now one of the fastest developing fields of marketing.
New technologies bring more businesses together; thereby companies start to
---------------------- court each other far more sharply. Technology also makes the world a smaller
place. So it becomes essential for sales and marketing experts to understand and
---------------------- apply the new techniques / technology.
----------------------
1.2 MARKETING
----------------------
Marketing is not Tactics
----------------------
When most people think of marketing, they think of marketing tactics.
---------------------- People associate marketing with tactics, partly because they are fun. Advertising
is fun, promotions are fun, and so are sending out email campaigns and every
---------------------- other similar tactic. But tactics, the most salient aspects of marketing, are similar
2 B2B Markets and CRM

to the tactics of sport. They’re very important, but useless without having a Notes
sound basic of knowledge.
Similar, is the case with marketing. Marketing is far more than tactics. ----------------------
Marketing is analysis, and a sound marketing strategy is based on this analysis. ----------------------
Obviously, marketing is about customers.
What type of analysis are we talking about? Well, analysis about customers, ----------------------
for example. Having a solid understanding of customers means having a solid ----------------------
understanding about how customers behave with their motivations, their
perceptions and preferences. It means segmenting the market correctly and not ----------------------
in the way that most companies think about segmentation (if they ever do). This
also means having a profound understanding of their attitudes, their knowledge ----------------------
and their emotions. Without having this knowledge, the tactics of marketing are ----------------------
just blowing in the wind. You will hope that the tactics work, but be blissfully
unaware about whether anyone would want to pay attention or listen. ----------------------
What about Competitive Analysis? ----------------------
Rarely, do we see marketing sites deal with competitive analysis (we do!).
----------------------
Marketing is also about understanding competition and not just listing of who
the competitors are. It means thinking about their competitive reactions, their ----------------------
objectives and capabilities. It means understanding competitive forces in an
industry as well. ----------------------
Too often we see firms acting as though they were monopolists; their ----------------------
competitors were unlikely to react or had little interest in capturing a market.
The Internet is a good example. How many Internet companies really seriously ----------------------
thought about the potential competitive reactions of the entrenched players?
----------------------
Did any of them consider long term competitive reactions? What about putting
together plans that were robust to future competitive reactions? ----------------------
No, marketing is also about competitive analysis, not just the ‘interesting ----------------------
and fun’ tactics that permeate the web.
What about company capabilities? ----------------------
Once again, to think about marketing you need to also think about a ----------------------
company’s abilities to actually survive in the market. I’m not talking about
----------------------
financial abilities, although that is a part of the story. What about the culture, the
sales force compensation, the relationships with distributors, suppliers, etc.? ----------------------
Some companies focus squarely on customers and even think about
----------------------
competitors. But these companies often forget about their ability to provide
what customers’ need, or the incentives in their distribution system to actually ----------------------
get the job done.
----------------------
No, marketing is not just about tactics, it’s also about understanding your
own company and its abilities and weaknesses. ----------------------
So, what is marketing? ----------------------
Marketing is, in fact, the analysis of customers, competitors and a
company, combining this understanding into an overall understanding of what ----------------------

Notes segments exist, deciding on targeting the most profitable segments, positioning
your products, and then doing what’s necessary to deliver on that positioning.
---------------------- How to do deliver on a positioning? Well, this is where the tactics come
---------------------- in. By branding correctly, by advertising correctly, by communicating via
email, letters etc. but all done in a way that is consistent with the analysis that
---------------------- marketing is really responsible for.
---------------------- If you want to get involved in tactics, that is fine. But just think about
artists, sports figures, doctors and scientists, and ask yourself whether in these
---------------------- other areas (which all, by the way, are as creative as marketing), it is just
necessary to understand tactics. I think what you’ll find is that tactics alone will
----------------------
not get you very far, but tactics along with a strategy based on great analysis
---------------------- will get you exactly where you want to go.
To help put things into context, you may find it helpful to often refer to the
----------------------
following diagram (Fig 1.1) which summarises the key elements of marketing
---------------------- and their relationships:
---------------------- Marketing
----------------------
What is the business attitude to marketing?
---------------------- Marketing Orientation
---------------------- Analysis current Persuade

Gain Information
---------------------- position & Customers to
on the Market :
opportunities : buy : Marketing
Market Research
---------------------- Marketing Audit Mix
---------------------- Market Analysis Quantitative Analysis Product
---------------------- Market Segmentation Qualitative Analysis Price

---------------------- Marketing Strategy Consumer Tests Place
---------------------- Promotion
---------------------- Fig. 1.1: Key Elements of Marketing and their Relationships

----------------------
Activity 1
----------------------
---------------------- Identify three unique companies and one unique product from each company.
For these products, find out who are the customers, who are their competitors,
---------------------- what market segment these products are targeting, how they have positioned
---------------------- the product, their marketing strategy and their communication ways.
----------------------
----------------------

1.3 PROCESS OF MARKETING Notes
Under the marketing concept, the firm must find a way to discover the ----------------------
unfulfilled customer needs and bring to market products that satisfy those
----------------------
needs. The process of doing so can be modeled in a sequence of steps: the
situation is analysed to identify opportunities, the strategy is formulated for a ----------------------
value proposition, tactical decisions are made, the plan is implemented and the
results are monitored. ----------------------
Situation Analysis ----------------------
A thorough analysis of the situation in which the firm finds itself serves ----------------------
as the basis for identifying opportunities to satisfy unfulfilled customer needs.
In addition to identifying the customer needs, the firm must understand its own ----------------------
capabilities and the environment in which it is operating.
----------------------
The situation analysis thus can be viewed in terms of an analysis of the
external environment and an internal analysis of the firm itself. The external ----------------------
environment can be described in terms of macro-environmental factors that
broadly affect many firms, and micro-environmental factors closely related to ----------------------
the specific situation of the firm. ----------------------
The situation analysis should include past, present, and future aspects. It
should include a history outlining how the situation evolved to its present state, ----------------------
and an analysis of trends in order to forecast where it is going. Good forecasting ----------------------
can reduce the chance of spending a year bringing a product to market only to
find that the need no longer exists. ----------------------
If the situation analysis reveals gaps between what consumers want and ----------------------
what currently is offered to them, then there may be opportunities to introduce
products to better satisfy those consumers. Hence, the situation analysis should ----------------------
yield a summary of problems and opportunities. From this summary, the firm
----------------------
can match its own capabilities with the opportunities in order to satisfy customer
needs better than the competition. ----------------------
There are several frameworks that can be used to add structure to the situation
----------------------
analysis:
• 5 C Analysis: Company, customers, competitors, collaborators, climate. ----------------------
Company represents the internal situation; the other four, cover aspects of
----------------------
the external situation.
• EST analysis: For macro-environmental political, economic, societal,
P ----------------------
and technological factors. A PEST analysis can be used as the ‘climate’ ----------------------
portion of the 5 C framework.
• SWOT analysis: Strengths, weaknesses, opportunities, and threats - ----------------------
for the internal and external situation. A SWOT analysis can be used to ----------------------
condense the situation analysis into listing of most relevant problems and
opportunities and to assess how well the firm is equipped to deal with ----------------------
them.
----------------------

Notes Marketing Strategy
Once the best opportunity to satisfy unfulfilled customer needs is identified,
---------------------- a strategic plan for pursuing the opportunity can be developed. Market research
---------------------- will provide specific market information that will permit the firm to select the
target market segment and optimally position the offering within that segment.
---------------------- The result is a value proposition to the target market. The marketing strategy
then involves:
----------------------
• Segmentation
---------------------- • Targeting (target market selection)
---------------------- • Positioning the product within the target market
---------------------- • Value proposition to the target market
Marketing Mix Decisions
----------------------
Detailed tactical decisions then are made for the controllable parameters of the
---------------------- marketing mix. The action items include:
---------------------- • Product development - specifying, designing and producing the first units
of the product
----------------------
• Pricing decisions
---------------------- • Distribution contracts
---------------------- • Promotional campaign development
---------------------- Implementation and Control

At this point in the process, the marketing plan has been developed and the
---------------------- product has been launched. Given that few environments are static, the results
of the marketing effort should be monitored closely. As the market changes,
----------------------
the marketing mix can be adjusted to accommodate the changes. Often, small
---------------------- changes in consumer wants can be addressed by changing the advertising
message. As the changes become more significant, a product redesign or an
---------------------- entirely new product may be needed. The marketing process does not end
with implementation - continual monitoring and adaptation is needed to fulfill
----------------------
customer needs consistently over the long-term.
----------------------
Check your Progress 1
----------------------
---------------------- State True or False.
---------------------- 1. The situation analysis should include past, present, and future aspects.
----------------------
----------------------
Activity 2
---------------------- Do a 5C, PEST and SWOT analysis for one product from the following
segments: packaged foods, electronic goods, banking products.
----------------------

1.4 MARKETING CONCEPTS Notes
Marketing concepts mean the philosophy which guides the marketing ----------------------
efforts, i.e. what weight should be given to the interest of the organisation,
----------------------
consumers and the society. Very often these interests are conflicting. There are
five marketing concepts which are adopted by organisations for their marketing ----------------------
activities. They are discussed below.
----------------------
1. The production concept
This concept holds that the consumer will support those products that ----------------------
are produced in large quantities at low unit cost. The authorities of this
----------------------
view believe that marketing can be managed by managing production. It
involves high production efficiency and wide distribution network. This ----------------------
concept holds good in cases where there is more demand than supply. In
such situation, consumers readily accept the product that is made available ----------------------
e.g. cooking gas. Hence, large scale production (easy availability) assumes
----------------------
much significance. There is another situation where the products cost is
high; to expand the market, it is desired to reduce the unit cost by large ----------------------
scale production e.g. price of cell phones, price of quartz watches have
come down considerably. But easy availability and low cost are not the ----------------------
only conditions governing customers buying decisions.
----------------------
2. The product concept
----------------------
“The product concept holds that consumers will favour those products
that offer the most quality, performance and features. Managers in these ----------------------
product- oriented organisations focus their energy on making good
products and improving them over time” - Philip Kotler. Here emphasis ----------------------
is on product excellence i.e. quality, performance and features. The ----------------------
assumption is that customers will automatically buy products of high
quality and evaluate product excellence and is willing to pay for ‘extras.’ ----------------------
Therefore, producers claim that they make the best and their products
have several extras, e.g. mobile tracker by Samsung cell phones, 6th ----------------------
Sense™ cool system by Whirlpool etc. They are much immersed in ----------------------
their product and they enter into a ‘love affair with products’ forgetting
the other factors that contribute to customers’ satisfaction. The problem ----------------------
is they fail to study the market and the consumers in depth, that is, the
consumer needs, what the consumer would gladly accept etc. ----------------------
3. The selling concept ----------------------

This concept assumes that consumers, in the absence of any selling effort, ----------------------
will not purchase the product. Hence, they must be induced or pleased to
purchase the products by means of selling and promotion efforts. This ----------------------
concept is often practiced in selling “unsought goods”, i.e., those goods
----------------------
that buyers normally do not think of buying. For example, unless some
promotional efforts are made, people will not purchase insurance policies, ----------------------
invest in saving schemes etc. People in non-profit areas also practice
selling concepts; e.g. by charitable institutions, educational institutions, ----------------------

Notes political parties etc. At the time of election a political party sells its
candidate as the “most fantastic person for the job.” He offers “namaste”
---------------------- with folded hands, shaking hands, fondling children, enquiring about the
welfare of old people etc.
----------------------
Many firms give prime importance to selling. They try to sell what they
---------------------- have manufactured; rather it should be the other way: make what they
can sell. They forget the fact that if selling is to be effective, it should be
---------------------- preceded by an assessment of the need, marketing research, product, price
---------------------- and distribution. Pre-occupation with selling concepts gives an impression
that marketing is aggressive selling and advertisement. The fact that
---------------------- selling is only one aspect of marketing is not taken into consideration.
---------------------- 4. The marketing concept
According to William J. Stanton, the marketing concept means that
----------------------
• All company planning and operations should be customer oriented.
----------------------
• The goal of the firm should be profitable sales volume and not just
---------------------- volume for the sake of volume.
---------------------- • All marketing activities in a firm should be organisationally

coordinated.
----------------------
In other words, marketing concept is philosophy of business that states that
---------------------- the customers want satisfaction is the economic and social justification
for a firm’s existence. As a result, all activities of a company should be
---------------------- directed towards finding out the needs of the customer and then satisfying
those needs; at the same time make profits by fulfilling customers’
----------------------
satisfaction.
---------------------- The distinguished features of marketing concepts are: market focus,
customer orientation, coordinated marketing and profitability. No
----------------------
company can satisfy the needs of customers in a particular market. For
---------------------- example, a company cannot manufacture different types of dress materials
for the readymade garment industry. So it focuses on particular segment,
---------------------- say readymade shirt for gents and so on. In customer orientation, the
company finds the needs from customer’s point of view and not from
----------------------
the point of view of the company. In the above example, the company
---------------------- may manufacture shirt from the finest textiles for upper class market to
suit their requirements. Fuel efficient motor bikes are another example.
---------------------- Coordinated marketing indicates that various marketing functions such
as sales force, advertising, distribution, marketing etc. must be fully
----------------------
coordinated. It also stresses the need that marketing must be coordinated
---------------------- with other departments such as finance, manufacturing etc. in the company.
Profitability in a business firm is to be achieved by the organisations by
---------------------- satisfying the needs of the customer.
----------------------
----------------------

5. The societal marketing concept Notes
No doubt that the customer’s needs are to be satisfied. But a school of
thought that is gaining momentum is that while satisfying the needs of ----------------------
the customer, in the long run, the society’s welfare also should be looked ----------------------
into. The new thinking is slowly encroached upon the marketing concept.
The new concept is known as ‘human concept’, ‘intelligent consumption ----------------------
concept’, and ‘the ecological imperative concept’ - all stressing different
aspects. Philip Kotler calls it ‘the societal marketing concept.’ According ----------------------
to Kotler: ‘The Societal marketing concept holds that the organisations’ ----------------------
task is to determine the needs, wants, and interests of target markets and
to deliver the desired satisfactions more efficiently and effectively than ----------------------
the competitors in a way that preserves or enhances the customers’ and
the society’s well-being.’ The distinguishing feature is that the company ----------------------
should balance three factors: profits, consumer want satisfaction and public ----------------------
interest. Under this approach a company has to take into consideration
several factors affecting the product and the society, e.g. product safety, ----------------------
non-pollutant motor vehicle, using containers which decompose naturally
etc. The societal marketing approach imposes several responsibilities on ----------------------
marketers. ----------------------
1.5 ROLE OF MARKETING ----------------------
Marketing has assumed much importance in the present day business ----------------------
world. The success or failure of any organisation - profit-making or nonprofit ----------------------
making - depends on marketing. A business organisation may produce goods
and services by adopting efficient management techniques. But by merely ----------------------
producing goods or services, there will not be any profits. It has to market these
and only marketing will generate revenues, all other activities result in expenses. ----------------------
In the words of Peter F. Drucker, “Marketing is a distinguishing and unique ----------------------
function of business. A business is set apart from all other human organisations
by the fact that it markets a product or service. Neither the church, nor the army, ----------------------
nor the school, nor the state does that. Any organisation that fulfills marketing a
product or service is a business. Any organisation in which marketing is either ----------------------
absent or incidental is not a business and should never be run as if it were one.” ----------------------
The activities of a business organisation range from production of goods
and services to marketing. For obtaining maximum results, the management ----------------------
process takes into its sphere of activity marketing also. A marketing-oriented ----------------------
firm determines first the wants of a market segment. This is taken as an objective
and then the firm works back in producing goods or services for the market ----------------------
segment. For example, in budgeting, the functional budgets are prepared only
after preparing sales budget. It is, therefore, obvious that the market is the key ----------------------
activity to other operations. In other words, the market objective then becomes ----------------------
the overall guide to formulating subsidiary objectives which collectively
constitutes the plan for meeting the overall company goal. Management cannot ----------------------
function by making decisions or coordinating efforts until such objectives
have been established. Hence, marketing is the prime mover of all functions ----------------------

Notes of management like planning, setting of goals, organising, directing and
controlling.
---------------------- Activities of any type of business would be forward-looking. For this,
---------------------- a business undertaking makes use of marketing survey as the forerunner of
the collection of data. Production of different market segments, vertical and
---------------------- horizontal expansion of market go to constitute the basis of production activities.
It even determines the advertisement expenditure, the distribution system and
---------------------- promotional activities. Marketing in modern times has developed into a big
---------------------- field where itself management techniques could be utilised. Thus, functions of
management are applied both in marketing and resultant production activities.
---------------------- Marketing is an organised human activity which encompasses all functions of
management and triggers off a series of management activities in other fields
---------------------- of business also. Control tools of higher management can be applied with
---------------------- equal efficiency in both marketing and production. Marketing plays the role
of a window of business undertaking to the society. It educates the people
---------------------- by drawing their attention, developing interest which grows into desire and
culminates its action.
----------------------
What marketing creates is a permanent existence of the entity of customers.
---------------------- As Drucker has said, “the purpose of the company is to create a customer”. The
sustenance of a particular group of customers or different group of customers
---------------------- for company’s products reduces its business risk and expands its planning
---------------------- horizon. It serves the business and business in turn serves the market through
planning, research and development. Growth is thus ensured in the economy.
---------------------- Market potential is ascertained for various products and the consumer’s
sovereignty is maintained by a scientific approach to the behavioural pattern of
---------------------- different income groups of people. This in turn opens new vistas of scientific
---------------------- management in the business undertaking for production control and through
that increases factor productivity. In short, marketing plays a significant role in
---------------------- providing a causative action to business management.
---------------------- Many people have a notion that marketing concepts have application only
in business undertaking. It is now used widely in banks to serve the customers
---------------------- efficiently, by political parties for propaganda purpose and in conducting
election campaigns, educational institutions in image building among students
----------------------
and public, hospitals to attract more patients and government to sell ideas for
---------------------- welfare e.g., family planning, polio drive, campaigns against smoking, drink
and drive, AIDS awareness etc.
----------------------
---------------------- Check your Progress 2

----------------------
Fill in the blanks.
---------------------- 1. Marketing is a distinguishing and unique function of _____________.
----------------------
----------------------

1.6 SELLING VS. MARKETING Notes
“Selling focuses on the needs of the seller; marketing on the needs of ----------------------
the buyer. Selling is pre-occupied with the sellers’ need to convert his product
----------------------
into cash; marketing with the idea of satisfying the needs of the customers by
means of the product and the whole cluster of things associated with creating, ----------------------
delivering and finally consuming it” - Theodore Levitt.
----------------------
The selling concept looks at marketing from inside or it takes an ‘inside-
out perspective.’ It focuses on production facilities, existing products and tries ----------------------
to sell the products with heavy selling and promotion activities so as to produce
profits. On the other hand, marketing concepts begin with a well defined target ----------------------
market, concentrates on customer- needs, coordinates all marketing activities ----------------------
and profits are generated by customer satisfaction. Table 1.1 given below
basically provides at a glance the differences between selling and marketing. ----------------------
Table 1.1: Difference between Selling and Marketing ----------------------
Selling Marketing ----------------------
Introvert Extrovert
----------------------
Demand > Supply Supply > Demand
----------------------
Focus on production Focus on customer
Seller’s market Buyer’s market ----------------------
Supplier has the options Customer has the options ----------------------
Supplier satisfaction is the objective Customer satisfaction is the objective
----------------------
Supplier is the driver Customer is the driver
----------------------
Competition non-existent Severe competition
No thrust on product improvement, Major thrust on product improvement ----------------------
cost reduction or product substitution and cost reduction ----------------------
No priority for technological Technological improvement is the
improvement priority area ----------------------
Concept of market share Concept of opportunity share ----------------------
----------------------
----------------------
State True or False. ----------------------

1. The selling concept looks at marketing from inside. ----------------------
----------------------
----------------------
----------------------

Notes
Case Study
----------------------
---------------------- Amway
Corporate Social Responsibility
----------------------
Introduction
----------------------
Amway is one of the world’s largest direct sales organisations. It has over 3
---------------------- million Independent Business Owners (IBOs). These IBOs source products
from Amway. They sell them in their own local businesses. Many of them are
---------------------- for children. This makes them happy to support a child based charity. Amway
supports UNICEF, the United Nations Children’s Fund. This is a part of
----------------------
Amway’s Corporate Social Responsibility (CSR) strategy. CSR refers to the
---------------------- way that businesses work in a responsible manner. They put something back
into communities where they work.
----------------------
One by One
---------------------- Amway’s vision is to help people lead better lives. Amway supplies branded
---------------------- products to its IBOs. This provides a low cost and low risk chance to start
a business. The IBOs are Amway’s link into local communities. They are
---------------------- given support to bring others to start with Amway. Amway believes in helping
children. It has a campaign called ‘One by One’. This aims to help children all
---------------------- over the world. Since 2001, Amway, Europe has worked with UNICEF. It has
given around £1.4 million to help its work. It supports the ‘Immunisation Plus’
----------------------
programme. This involves providing vaccines to children. The ‘Plus’ refers
---------------------- to the way the programme is used to provide other benefits. The IBOs act as
‘Champions’. They travel to meet the children and spread the message in their
---------------------- own groups.
---------------------- Values
---------------------- One of Amway’s main values is to be a caring company. It has developed a

strategy, called a global cause, to help it reach this aim. A strategy is a set of
---------------------- plans. Its work with UNICEF is shaped by partnerships in Europe and the UK.
It aims to raise around £350,000 a year, every year until 2010 to help combat
---------------------- children’s diseases. In 2005, Amway UK became an official corporate partner
---------------------- of UNICEF UK. This means it set up a close long term relationship.
Stakeholders
----------------------
The CSR aims to support all of Amway’s stakeholders. These are as follows:
---------------------- � Amway itself - being responsible helps to grow the business
---------------------- IBOs - these want Amway to show that it cares
---------------------- Customers - being responsible is seen as a good thing
Staff - people want to work for a business that shows it cares
----------------------
UNICEF - it wants to work with a business that shares its values and helps it
---------------------- raise funds.

Amway supports UNICEF through sales of items. These include greetings Notes
cards, wrapping paper and children’s toys. Its staff also gets involved in fund-
raising events. ----------------------
Communication ----------------------
Clear communication helps the strategy to run smoothly. This includes:
----------------------
face-to-face communication - regular meetings between the various partners
----------------------
printed material: Amway produce a monthly magazine for IBOs
public relations ----------------------
e-mail to keep IBOs up to date ----------------------
online, for example, the site at www.unicef.org.uk/amway ----------------------
Conclusion
----------------------
Amway is a family business. It has strong family values. It is also still family
owned. It wants to have a good effect in the communities where it works. This ----------------------
is why it has strong links between its IBOs, itself and UNICEF.
----------------------
Summary ----------------------
• arketing is the means by which your business identifies, anticipates and

M ----------------------
then satisfies customer demand. If carried out effectively it will not only
ensure that your business is seen and heard but will give the business ----------------------
flexibility to adapt to changing customer demands and a changing business ----------------------
environment.
• usinesses that really succeed are those where the owner has a vision for
B ----------------------
the firm and is dedicated to seeing it through. A marketing plan will help ----------------------
achieve focus and establish the vision.
• arketing will help you understand who your potential customers
M ----------------------
are, place and price the product compared to the competition and also ----------------------
position the company in the market place. It will also help identify future
opportunities for self-promotion. ----------------------
• hough there are established guidelines to follow, marketing is more of
T
----------------------
an art than a science and is a difficult skill to develop. But in terms of
successful impact on the future commercial effectiveness of business, it ----------------------
is worth cultivating. It can offer improved returns and profitability and a
greater understanding of realistic business development opportunities. ----------------------
----------------------
Keywords
----------------------
• yad: Two individuals or units regarded as a pair: the mother-daughter
D
dyad. ----------------------
• Myopia: Sightlessness or blind spot - A visual defect in which distant ----------------------
objects appear blurred because their images are focused in front of the
retina rather than on it; nearsightedness. Also called short sight. ----------------------

Notes • Causative: Functioning as an agent or cause
• CSR: Corporate Social Responsibility
----------------------
• erspectives: A mental view or outlook: “It is useful occasionally to look
P
---------------------- at the past to gain a perspective on the present” (Fabian Linden)
---------------------- • actics: A procedure or set of manoeuvers engaged in to achieve an end,
T
an aim, or a goal.
----------------------
• onopolist: A person, group or organisation with a monopoly. In other
M
---------------------- words, an individual or company that controls all of the market for a
particular good or service
---------------------- • Forecast: To calculate or estimate something in advance
---------------------- • SWOT: Strengths, Weaknesses, Opportunities, and Threats
---------------------- • PEST: Political, economic, societal, and technological
• egmentation: The act of dividing or partitioning; separation by the
S
---------------------- creation of a boundary that divides or keeps apart.
---------------------- Monitoring: The act of observing something (and sometimes keeping
a record of it); “the monitoring of enemy communications plays an
---------------------- important role in war times”
---------------------- • roposition: A plan suggested for acceptance; a proposal. Societal:
P
Relating to human society and its members; “social institutions”; “societal
---------------------- evolution”; “societal forces”; “social legislation”
---------------------- • I ntrovert: A person who tends to shrink from social contacts and to
become preoccupied with their own thoughts.
----------------------
• xtrovert: An individual interested in others or in the environment as
E
---------------------- opposed to or to the exclusion of self
• Stakeholders: One who has a share or an interest, as in an enterprise.
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. Define the terms Market, Marketing, Marketing Management.
---------------------- 2. What are the various types of marketing?
---------------------- 3. Discuss the role of Marketing in business management.

4. Distinguish between marketing and selling.
----------------------
5. What are the different concepts of marketing?
----------------------
6. Define marketing as a modern concept and explain its functions.
----------------------
----------------------
----------------------
----------------------

Answers to Check your Progress Notes
Check your Progress 1 ----------------------

1. True ----------------------
----------------------
Fill in the blanks.
----------------------
1. Marketing is a distinguishing and unique function of business.

1. True ----------------------
Suggested Reading ----------------------
1. http://www.startups.co.uk ----------------------
2. http://www.marketingmo.com ----------------------
3. http://www.tutor2u.net ----------------------
4. http://www.marketingprofs.com
----------------------
5. http://aux.zicklin.baruch.cuny.edu
----------------------
6. http://ezinearticles.com
7. www.thetimes100.co.uk ----------------------
8. Cohen, Herb. You can negotiate anything. ----------------------

9.
Cunningham, Cunningham and Swift. Marketing - A Managerial ----------------------
Approach.
----------------------
10. Drucker, Peter F. The Practice of Management.
11. Jain, A. K. Critical Success Factors. ----------------------
12. Kurtz & Boone. Marketing. ----------------------

13. Raish, Warren D. The e Marketplace - Strategy for success. ----------------------
14. Sugandhi, R. K. Business to Business Marketing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------

Buyer Behaviour
UNIT
2
Structure:
2.1 Introduction
2.2 Organisational Buying
2.3 Organisational Buying Behaviour Process
2.4 Factors Influencing Organisational Buying Behaviour
2.5 Buying Process
2.6 The Marketing Mix
2.7 Positioning and Competition
2.8 Image and Identity
Summary
Key Words
Suggested Reading
Buyer Behaviour 17
Notes
Objectives
----------------------
----------------------
• Explain organisational buying process
----------------------
• State different factors that can influence the buying process and
---------------------- behaviour
• Discuss the role of the purchasing functions in modern organisations
----------------------
• Show the internal and external influences which shape the behaviour
---------------------- of organisational buyers
---------------------- • Identify the discrete stages of the buying process undertaken by
organisational buyers
----------------------
• Appreciate how an understanding of buyer behaviour can be used in
---------------------- market segmentation and target marketing
----------------------
2.1 INTRODUCTION
----------------------
Organisational buying behavior is a very complex area. Understanding of
---------------------- the key factors is fundamental to marketing strategy and hence an organisation’s
---------------------- ability to compete effectively in the market place.
Organisational markets consist of producer, reseller, government, and
---------------------- institutional markets. Business-to-business markets refer to both producer
---------------------- markets and reseller markets. Organisational transactions differ from consumer
transactions in several ways. Organisational transactions tend to be larger,
---------------------- and frequently involve more than one person or department in the purchase,
and purchases occur as a result of derived demand. They may also involve
---------------------- reciprocity. Organisational customers are usually better informed than ultimate
consumers and are more likely to seek information about a product’s features
----------------------
and technical specifications.
---------------------- When purchasing products, organisational customers are particularly
concerned about quality, service and price. To achieve an exact level of
----------------------
quality, organisations often buy products on the basis of a set of expressed
---------------------- characteristics, called specifications. As services have such a direct influence
on a firm’s costs, sales, and profits, such matters as market information, on-
---------------------- time delivery, and availability of parts are crucial to an organisational buyer.
Although organisational customers do not depend solely on price to decide
---------------------- which products to buy, price is of prime concern because it directly influences
---------------------- profitability.
Organisational buyers use several purchasing methods, including
---------------------- description, inspection, sampling, and negotiation. Most organisational
---------------------- purchases are new-task purchases, straight re-buy purchases, or modified re-
buy purchases. Organisational purchase decisions are made through a buying
---------------------- centre, which includes users, influencers, buyers, deciders, initiators, and

gatekeepers. The whole buying centre for organisational markets engages in Notes
organisational buying behaviour.
----------------------
2.2 ORGANISATIONAL BUYING
----------------------
The need for an understanding of the organisational buying process has
----------------------
grown due to the many competitive challenges presented in business-to business
markets. There have been a number of key changes in this area, including the ----------------------
growth of outsourcing, the increasing power enjoyed by purchasing departments,
and the importance given to developing partnerships with suppliers. ----------------------
Basis in business-to-business marketing is organisational buying because ----------------------
marketing solutions should always be made through purchase operations. The
better the marketer knows the clientele and their purchase behaviour, the better ----------------------
footing it has for successful marketing. ----------------------
Even though organisational purchasing has some incorporating factors,
there are also notable differences in multiplicity purchasing and it is one ----------------------
difference in every case. Fig. 2.1 shows that this is attributable to the fact ----------------------
that there are several factors affecting in organisational marketing and for
implementing the buying decision, such as: ----------------------
• Product that is offered ----------------------
• Companies and competitors in markets
----------------------
• Buying organisation
----------------------
• Purchase situation
Company - and Competition ----------------------
Product factors
Factors ----------------------
 Physical Factors or Product
 Familiarity
 Image Character ----------------------
 Image
 Usability
 Market Positioning
----------------------
 Amount of Supply
----------------------
Organisational Factors Occasion Factors ----------------------
 Business Field  Products Meaning to the
----------------------
Organisation
 Size of the Organisation
 Buying Situations Repetition ----------------------
 Individuals in the Organisation
 Geographical Factors ----------------------
 Purchase Team
 Physical Environment
 Roles in Purchase Process ----------------------
 Technology
 Organisational Culture
----------------------
 Purchase Policy
----------------------
Fig. 2.1: Factors affecting the Buying Decision ----------------------
Buyer Behaviour 19
Notes B2B Marketing
In business-to-business marketing, the buyer is an organisational company,
---------------------- institution or fellowship that the marketing is aimed for. In business-to-business
---------------------- marketing, it is important to notice that the buying organisation themselves
are not buying anything and never will, but the person is. Depending on if the
---------------------- person is representing organisation or is he a consumer on the market reflects
only a certain frame on his actions. One of the basic perceptions in business-to-
---------------------- business marketing is that the target group is not the organisation but the people
---------------------- that work in an organisation.
To realise a person’s individual behaviour and what his blueprint as a
----------------------
part of the organisation is, is very important in business-to business marketing.
---------------------- Frame of reference is so-called modern, all-inclusive marketing thinking.
The aim in business marketing is to create value for both organisations
----------------------
by matching and combining the capabilities of the supplier with the desired
---------------------- outcomes of the customer.
---------------------- B2B Markets

Business markets present different types of challenges and opportunities
---------------------- than consumer markets. Business markets consist of all organisations that
---------------------- purchase goods and services to use in the creation of their own goods and
services, which then are offered to their customers. Generally, business markets
---------------------- consist of fewer but larger customers than consumer markets and are involved
in purchases of significantly large value having complex economic, technical
---------------------- and financial considerations.
---------------------- Business-to-business marketing combines the fact that the buyer is either a
company or another organisation. The clientele that belong to the organisational
---------------------- marketing can be classified as following:
---------------------- i)
Commercial organisations such as industrial enterprises, service
enterprises and wholesale- and retail business.
----------------------
ii) Public organisations such as government and municipality agencies, and
---------------------- community service institutions like hospitals, schools etc.
---------------------- iii) Non-profit organisations like fellowships, unions etc.
---------------------- A customer can be from any of the categories stated above but the main
impact that combines all business-to-business marketing is that the product
---------------------- purchased is not for the individual use but the organisational demand. This
means that the basis for making procurement decisions comes from the person’s
---------------------- individual experience, organisational operations and from the functions that are
---------------------- related to the organisations’ actions.
----------------------
----------------------
----------------------

Corporate Marketing Characteristics Notes
It is crucial to understand the context of business marketing. Vitale and
----------------------
Giglierano have described business-to-business marketing characteristics as
follows: ----------------------
The Market Structure in corporate market is geographically concentrated
----------------------
and has relatively fewer buyers than consumer markets. It also has oligopolistic
competition, which means a competitive structure where a few sellers control ----------------------
the supply of a large proportion of a product.
----------------------
Products can be technically complex and are customised to user preference.
Service, delivery, and availability are very important factors concerning ----------------------
products. In business-to-business, marketing products are purchased for other
than personal use. ----------------------
Buyer Behaviour in business marketing includes functional involvements ----------------------
at many levels, personnel are more professionally trained in purchasing, and
task motivates to predominate. ----------------------
Buyer-Seller Relationships are interpersonal in business markets. ----------------------
Significant information is exchanged between participants on a personal level,
and stable, long-term relationships encourage loyalty. Technical expertise is ----------------------
considered as an asset. ----------------------
Channels in corporate marketing are shorter and more direct compared to
consumer marketing. ----------------------
Promotions emphasis is on personal selling. ----------------------

Price is either competitive bidding or the result of a complex purchase process. ----------------------
The nature of demand is very important in business marketing. Derived
----------------------
demand is a characteristic of business demand that arises because industrial
demand stems from the demand for consumer products. According to Vitale ----------------------
and Giglierano, “Derived demand is the demand experienced by the chain of
suppliers and producers that contribute to the creation of a total offering. Without ----------------------
initial consumer demand, there is no demand on the chain of suppliers”.
----------------------
Inelastic demand is a type of demand where a price increase or decrease
will not significantly affect the quantity demanded. Demand in business markets ----------------------
is also discontinuous and volatile (leveraged) because of the greater swings
----------------------
occurring than in consumer markets.
----------------------
Activity 1 ----------------------
Give two examples to show which factors affect the organisational buying ----------------------
decisions.
----------------------
----------------------
----------------------
Buyer Behaviour 21
Notes 2.3 ORGANISATIONAL BUYING BEHAVIOUR PROCESS
---------------------- The organisational buying behaviour process is documented with many
models depicting the various phases, the members involved, and the decisions
----------------------
made in each phase. The basic phases of organisational buying behaviour
---------------------- process proceeds on following:
---------------------- i) The buying process starts by specifying the demand that is associated
with organisational need.
---------------------- ii) Finding out alternative solutions includes searching for such approaches
---------------------- that gives a solution for the need.
iii) Searching for suppliers contains information retrieval from the suppliers
---------------------- that will offer products or services which will give a functional solution
---------------------- for the company’s demand.
iv) Evaluation offers - The buying organisation seeks the solution that will
----------------------
be entirely the best choice from the alternative suppliers based on the
---------------------- demand criterions
v) Purchasing phase is composed from the choice of the supplier and from
----------------------
the purchasing
---------------------- vi) Experiment phase follows these steps and is telling how the product
---------------------- is working within expectations that the buying was made. Essential in
marketing is that the purchase process is positive because it effects to the
---------------------- image that spreads to markets, and offers the possibility to sale more for
the same customer.
----------------------
In organisational markets, it is crucial to assure the positive buying
---------------------- experience because the markets are:
---------------------- Internally compact which means markets are like small circle where
people know each other and the word goes through the organisations very fast.
----------------------
Limited, which means that not every customer that has been lost can be
---------------------- replaced with the new one.
Customer loyal - When a marketer has been able to create a functional,
----------------------
deep and personal relationship to the buying organisations’ key person, it is
---------------------- hard to break up only with replacing the product.
One essential emphasis in business-to-business marketing is the customer
----------------------
maintenance and so-called nursing period that ensure the customer satisfaction
---------------------- and continuing relationships.
---------------------- The mission of business-to-business marketing can be described as follows:

• Creation of the business relationship
----------------------
• Ensures the function of the relationship
----------------------
• Deepens and maintenance of the relationship
----------------------

The purchasing function is of great importance because its actions will Notes
affect directly on the organisation’s profitability. Purchasing strategy aims to
evaluate and classify the various items purchased in order to be able to choose ----------------------
and manage suppliers accordingly. Classification is along two dimensions
namely importance of items purchased and characteristics of the supply market. ----------------------
Actions can be taken to influence the supply market. Based on the type of items ----------------------
purchased and on its position in the buying matrix, a company will develop
different relationships with suppliers depending upon the number of suppliers, ----------------------
the supplier’s share, characteristics of selected suppliers, and the nature
of customer-supplier relationships. The degree of centralisation of buying ----------------------
activities, and the missions and status of the buying function can help support ----------------------
purchasing strategy. The company will adapt its procedures to the type of items
purchased which in turn will influence relationships with suppliers. ----------------------
Lyson and Farrington have described some strategic considerations that ----------------------
should be determined when choosing the supply source that would offer the
best competitive advantage from the standpoints of: price, differentiation of ----------------------
product, security of supplies and reliability of delivery, quality, added value in
terms of specialisation, production facilities, packaging, transportation, after- ----------------------
sales services and so on. ----------------------
----------------------
Activity 2
----------------------
Your organisation is planning to buy the latest type of laptop computers
----------------------
for the sales force. You being the Head of Procurement and Commercial
department, what are the checkpoints you would create and verify before ----------------------
signing the purchase order?
----------------------
2.4 FACTORS INFLUENCING ORGANISATIONAL ----------------------

BUYING BEHAVIOUR ----------------------
Forces that influence organisational buying behaviour are environmental, ----------------------
organisational, group and individual factors.
----------------------
Environmental factors are normally outside the buyer’s control and
include level of demand, economic outlook, interest rates, technological change, ----------------------
political factors, government regulations, and competitive development.
----------------------
Organisational factors such as strategic priorities, strategic role of
purchasing and strategic trends of purchasing. Buying decisions are affected ----------------------
by the organisation’s system of reward, authority, status and communication,
including organisational objectives, policies, procedures, and structures (Lyson ----------------------
& Farrington 2006:422).
----------------------
Interpersonal factors involve the interaction of several people of different
status, authority, empathy and persuasiveness who comprise the buying centre ----------------------
(Fig. 2.2). For example, in purchase roles: buyer, decider, influencer, user,
initiator and gatekeeper. ----------------------
Buyer Behaviour 23
Notes People in Organisational Markets
---------------------- Position (Factors) Background (Factors)

 By Field of Work  Demographic Factors
----------------------
 By Status  Work Experience
----------------------  Time in Organisation
 Education
----------------------
Purchase Role (Factors) Attribute (Factors)
----------------------
 Buyer  Risk taking
----------------------  Decider  Decision Making Speed
 Influencer  Capability to Make Independent
----------------------
 User Decisions
----------------------  Initiator  Willingness to Renewal
 Gatekeeper
----------------------
---------------------- Implementation of the Purchase
---------------------- Fig. 2.2: Person in Organisational Markets

---------------------- Individual factors - Buying decisions are related to how individual
participants in the buying process form their preference for products and
---------------------- suppliers, involving the person’s age, professional identification, personality
---------------------- and attitude towards the risk involved in their buying behaviour. Individual
factor forms are differing evaluative criteria, info processing, and risk-reduction
---------------------- strategies.
---------------------- Risk and Uncertainty
The level of risk depends upon the characteristics of the buying situation
----------------------
faced. The supplier can influence the degree of perceived uncertainty by the
---------------------- buyer and cause certain desired behavioural reactions by the use of information
and the implementation of certain actions. The risks perceived by the customer
---------------------- can result from a combination of the characteristics of various factors: the
transaction involved, the relationship with the supplier, and his position vis-à-
----------------------
vis the supply market.
---------------------- Information is concerned with the role of risk or uncertainty on buying
behaviour. The marketing manager needs timely, systematically gathered
----------------------
information about the organisations customers, environment, and marketing
---------------------- activities. Without these, the marketing manager has no accurate basis on
which to make decisions. Information reduces uncertainty and helps to define
---------------------- problems and identify opportunities.
----------------------
----------------------
----------------------

Organisational Buying Situations Notes
Buying Situations
----------------------
Straight Modified New
Rebuy Rebuy Buy ----------------------
----------------------
Less Involvement More Involvement
----------------------
Zikmund and d’Amico has described organisational buying behaviour
as a multistage decision-making process. However, the amount of time and ----------------------
effort devoted to each of the stages or buy phases depends on a number of
----------------------
factors such as the nature of the product, the costs involved, and the experience
of the organisation in buying the needed goods or services. The three basic ----------------------
organisational buying situations are the straight rebuy, the modified rebuy and
the new task purchase. ----------------------
The straight rebuy requires no review of products or suppliers; materials ----------------------
are reordered automatically when the need arises. The modified rebuy occurs
when buyers are discontent with current products or supplier performance and ----------------------
investigate alternative sources. The new task purchase involves evaluating
product specifications and reviewing possible vendors in a purchase situation ----------------------
new to the organisation. ----------------------
The Buying Centre
----------------------
Initiator Decider ----------------------
Buying
Centre ----------------------
Influencers Roles Buyer
----------------------
----------------------
Gatekeeper Users ----------------------
----------------------
The buying centre consists of those people in the organisations that
are involved directly or indirectly in the buying process, i.e. the user, buyer ----------------------
influencer, decider, initiator and gatekeeper. The buyers in the process are subject
to a wide variety and complexity of buying motives and rules of selection that ----------------------
fig. 2.2 demonstrates. ----------------------
Buyer is responsible for dealing with suppliers and placing orders (for
example purchasing agent). Buyer can also help to determine specifications, but ----------------------
their main role is to select vendors and negotiate within purchase constraints. ----------------------
Decider has either formal or informal power to make the final purchase
decision (for example CEO). ----------------------
Influencer has the ability to affect directly or indirectly what is ordered ----------------------
such as setting order specifications (for instance engineers, researchers, and
product managers). ----------------------
Buyer Behaviour 25
Notes Users are those who will actually use the product or service when it is
received, and often initiate the purchase and specify what is bought.
---------------------- Initiator is any buying centre member who is the first to determine that a
---------------------- need exists.
Gatekeeper is anyone who controls access to other buying centre members
---------------------- like preventing salespeople from seeing users or deciders, and controls the flow
---------------------- of information to others, such as buyers. Gatekeeper can be for example an
administrative assistant.
----------------------
In a buying centre, a group of employees are responsible for purchasing
---------------------- an item for the organisation. They participate in the purchasing decision process
and share some common goals and the risks arising from the decision. In a
---------------------- business setting, major purchases typically require input from various parts
of the organisation including finance, accounting, purchasing, information
----------------------
technology management, and senior management.
----------------------
----------------------

---------------------- 1. The level of risk depends upon the characteristics of the buying situation
faced.
----------------------
---------------------- Activity 3
----------------------
Your organisation has almost decided on the vendor from whom you are
---------------------- planning to purchase the Laptop. Explain the buying centre concept with
responsibility of each stakeholder with respect to the situation mentioned
----------------------
above.
----------------------
---------------------- 2.5 BUYING PROCESS

---------------------- Essential in the business-to-business markets purchase process is that the
purchase criterion is not only one decision but also a chain of decisions. In the
----------------------
decision line where the selections are made between offerings, the steps are as
---------------------- follows:
While considering known organisations or products in a market, the first
----------------------
selection is made from competing offerings or alternative products. The second
---------------------- selection is made from the offerings left seeking for the best choice, and from
where the purchasing decision is made to buy the best product.
----------------------
In buying decision process there are two stages of choosing the product
---------------------- from the market. An invitation of bids is the first phase and the amount of bids
claimed depends on the following:
----------------------

• The stage of the competition Notes
• Amount of people participating in the buying process and their knowledge
----------------------
about markets
• Buying process ----------------------
• Buying organisation ----------------------
• Organisations buying policy ----------------------
In this phase there are no useless bids, all the offerings are possible purchase
----------------------
targets. There are prerequisite factors that the company and the product must
fulfill, such as: operating capacity, delivery reliability, quality standards, equal ----------------------
quality products or services, organisations solvency, maintenance reliability,
and price. ----------------------
For the marketer besides product recognition, it is equally important to be ----------------------
able to make a certain image for the product that fulfils the prerequisite factors.
With these factors buyers raise company’s products as one potential buying ----------------------
target, which the final buying criteria is made from. In this final stage, following
----------------------
criterions are been emphasised:
a. Profitableness ----------------------
b. Factors effecting products’ quality (products’ stability, minor need for ----------------------
service, superior technology)
----------------------
c. Image - Image factors can be supported by market share, sales statistics,
positive feedback from customers, and reference lists. All these combined ----------------------
with good overall image create a foundation for a buying decision.
----------------------
d. Personal relationships - Often final decision is made based on these
personal relationships. It can be based on acquaintance or long-term ----------------------
customer relationship. Importance of these personal relationships is
emphasised when it is hard to discover clear functional differences ----------------------
between supplies. ----------------------
Above-mentioned selection factors does not shut one another out but rather
----------------------
support each other. For example, a good product quality gives a company a
good image that marketing can successfully give through customer relationship ----------------------
and furthermore make it deeper. Although selection criteria vary in business-
to-business markets in different ways, in different situations, the basic rule of a ----------------------
marketer is that:
----------------------
Everything is sold by Feeling
----------------------
Buyer needs to be able to reason the decision to him and to others involved.
This means that even though the decision is basically emotional (based on ----------------------
relationship- or image factors), the buyer should be able to use rational factors
when needed (such as quality factors) for argument to his decisions acceptability. ----------------------
In marketing, it is very important to separate those factors, which are said to ----------------------
be the arguments for making a buying decision from those that are the real reasons
to buy. To make this kind of observation, following factors need to be considered: ----------------------
Buyer Behaviour 27
Notes A person tells only those things for selection criteria that he considers
being selection criteria as in cognitive level. Respectively, he cannot say those
---------------------- subconscious factors that guide his actions.
---------------------- A person tells from cognitive decision criteria only those that hold out
rational observation. Those factors that a person recognises in himself but
---------------------- which are based on feeling are not recognised as a selection criteria because
un-rational behaviour is not considered acceptable in western society’s set of
----------------------
values.
----------------------
2.6 THE MARKETING MIX
----------------------
The marketing mix is probably the most famous phrase in marketing. The
---------------------- elements are the marketing ‘tactics’. Also known as the ‘four Ps’, the marketing
---------------------- mix elements are product, price, place and promotion.
Marketing is the process of creating, distributing, promoting, and pricing
---------------------- goods, services, and ideas to facilitate satisfying exchange relationships with
---------------------- customers in a dynamic environment. Organisations focus their marketing
efforts on a target market. Marketing involves developing and managing a
---------------------- product that will satisfy customer needs, making the product available in the
right place and at a price that will be acceptable to buyers, and communicating
---------------------- information that will help customers determine if the product will satisfy
---------------------- their needs. This is a process known as developing a marketing mix. Before
marketers can develop a marketing mix, they must collect in-depth, up-to-date
---------------------- information about customer needs.
---------------------- Product
Business-to-business product also preferred as total offering will provide
----------------------
a complete solution to the buyer’s needs. This may include financing, delivery,
---------------------- service, or based on the buyer’s preference only the core product. As business-
to-business products are often incorporated into the buyer’s offering to their
---------------------- own customers, they are often defined and created by a partnership between
the buying organisation and the marketing organisation. This process produces
----------------------
a product that is specific to the buying unit’s needs while maximising the value
---------------------- creation capabilities of the marketer. Some examples of the product decision
to be made are brand name, functionality, styling, quality, safety, packaging,
---------------------- repairs and support, warranty, accessories and services.
---------------------- The basic alternatives for building a competitive advantage are price
and processing strategy. When focusing in quality, the natural goal is to ensure
---------------------- fulfilling qualitative condition factors, and to create competition advantage so
---------------------- that the buying criterion would be more than just price.
On the basis of buying decision, only clear value added factors or
---------------------- competitive factors can be separated from the dominating position of the price,
---------------------- for example ISO 9000, the international quality standard.
----------------------

Product Related Services Notes
As Zikmund and d’Amico has stated: service is an important variable in
----------------------
organisational purchasing. Before a sale is completed, the marketer may have
to demonstrate the ability to provide rapid delivery, shelving service, repair ----------------------
service, or technical support. After the sale, the supplier need to be able to
deliver the promised services, because waiting costs money and may be a great ----------------------
source of frustration for the buyer.
----------------------
Customers often expect more from an organisation than a simple, tangible
product; the task of marketing management is to provide a complete offering, ----------------------
a total product that includes not only the basic good or service but also the ----------------------
‘extras’ that go with it.
In business-to-business marketing, relationship marketing often means ----------------------
effectively being part of a collaborator’s organisation. By providing extra ----------------------
services is a vital aspect of marketing efforts for maintaining and enhancing
relationship with customers. ----------------------
Price ----------------------
Price is a key element in the marketing mix because it relates directly to
----------------------
the generation of total revenue. Usually price is viewed as a flexible marketing
mix variable in that it can be adjusted quickly and easily to respond to changes ----------------------
in the external environment.
----------------------
Price is a measure of value exchanged and it is determined by the market.
In business-to-business markets, price determination can be the final step in a ----------------------
complex design, development, and negotiation.
----------------------
The most fundamental pricing objective is the organisation’s survival.
Price often can be adjusted to increase sales volume or to combat competition ----------------------
so that the organisation can stay alive. Many factors affect pricing decisions,
including organisational and marketing objectives, pricing objectives, costs, ----------------------
other marketing mix variables, channel member expectations, customer
----------------------
interpretation and response, competition, and legal and regulatory issues. Due
to of the interrelation of the marketing mix variables, price can affect product, ----------------------
promotion, and distribution decisions.
----------------------
Pricing for business customers often varies from fixed price, includes
far more special discounts and allowances, and involves complex financing. ----------------------
Business pricing may also involve other forms than a one-time price payment of
fee, such as commissions or profit sharing. Examples of different price decisions ----------------------
can be pricing strategy, volume discounts, bundling, and price flexibility. ----------------------
Place
----------------------
Place or distribution is the element of the marketing mix that encompasses
all aspects to assure that products are available at the right place. Transportation, ----------------------
storage, materials handling, and so on are physical distribution activities.
Channel of distribution is the sequence of marketing organisations involved in ----------------------
bringing a product from the producer to the customer. ----------------------
Buyer Behaviour 29
Notes Economic utility is a necessary part of the concept of value in business-
to business markets, which often takes the form of supply chain management,
---------------------- inventory services, and material resource planning. Businesses design their
marketing channels to provide maximum value to their customers while
---------------------- minimising costs associated with the creation of economic utility. The
---------------------- quantities purchased in business-to-business marketing are substantially larger
with timing of delivery a critical factor, leading to direct relationships between
---------------------- manufacturer and customer and eliminating channel intermediaries.
Promotion
----------------------
In the context of the marketing mix, promotion represents the various
---------------------- aspects of marketing communication about the product with the goal of
generating a positive customer response including promotional strategy,
----------------------
advertising, personal selling and sales force, sales promotions, public relations
---------------------- and publicity, and marketing communications budget.
In business-to-business markets, personal selling is the most used and
----------------------
effective type of promotion. Personal selling allows rapid and accurate feedback
---------------------- to the marketer. Products in business-to-business marketing are often the result
of collaboration between the supplier and the customer. This collaboration
---------------------- requires the building of relationships between individuals in their respective
organisations, necessitating a strong personal selling effort.
----------------------
Businesses need advertising for the following four main reasons:
----------------------
1. To raise customer awareness
---------------------- 2. To remind customers about existing facilities
---------------------- 3. To persuade customers to switch from rival businesses
4. To improve and maintain the image of the business
----------------------
The ultimate aim of these points is to attract more customers. The places
---------------------- where the business will advertise from depend on three things: its audience, the
size of their market, and the size of their advertising budget.
----------------------

----------------------
Fill in the blanks.
----------------------
1. Place or distribution is the ___________ of the marketing mix.
----------------------
---------------------- 2.7 POSITIONING AND COMPETITION

---------------------- According to Zikmund and d’Amico, positioning strategy is the basis
---------------------- for marketing mix decisions. Positioning relates to the way consumers think
about all the competitors in a market. After a target market has been selected,
---------------------- marketing managers choose the position they hope the brand will occupy in
that market. A market positioning, or competitive position, represents how
---------------------- consumers perceive a brand relative to its competition.

Each brand appealing to a given market segment has a position in the Notes
consumer’s mind. The purpose of a positioning strategy is to identify a product’s
or brands’ competitive advantage and to stress relevant product characteristics ----------------------
or consumer benefits that differentiate the product or brand from those of the
competitors. ----------------------
The target market strategy and the positioning strategy provide the ----------------------
framework for the development of the marketing mix. Thus, target marketing,
----------------------
positioning, and the marketing mix are interdependent.
Competitors are rival companies engaged in the same business. One of the ----------------------
fundamental marketing tasks is identifying and understanding the competition.
----------------------
The marketer does this by analysing product classes, product categories, and
brands. Product categories are subsets of a product class containing products of ----------------------
a certain type. Product class is a broad group of products that differ somewhat
but perform similar functions or provide similar benefits. ----------------------
There are four general types of competition: price, quality, time, and ----------------------
location. Competition based on price is especially important in the marketing
of products that are not distinctive, such as raw materials. Price competition ----------------------
is associated with possession utility. Quality based competition is associated
----------------------
with form utility. Competition based on providing time utility by delivering a
product when the consumer wants it, and competition based on providing place ----------------------
utility by delivering a product where the consumer wants it.
----------------------
A company strives to obtain an edge, or competitive advantage, over
industry competitors. To establish and maintain a competitive advantage means ----------------------
to be superior to or different from competitors along some dimensions important
to the market. This means to be superior in terms of price, quality, time, or ----------------------
location. ----------------------
2.8 IMAGE AND IDENTITY ----------------------
Image marketing is connected to the company’s business idea, which ----------------------

makes it one of the essential operating arenas in marketing. Image marketing’s
----------------------
purpose is to create such image from the company’s operations to the different
interest groups that it will further the company for its aims. ----------------------
Image ----------------------
Image is a person’s subjective impression/opinion of the matter. The
image will develop from the person’s knowledge, experience, attitude, and ----------------------
feelings on the matter examined (see figure 2.4). According to this, the image ----------------------
from the company creates corporate image and the image developed from the
product creates product image. If image consists from corporate image and ----------------------
product image, the images are deeply in interaction with each other.
----------------------
There are many psychological factors that create the image. The image
that person has developed is the base of corporate image in business-to-business ----------------------
markets. We could say that the image is prejudiced, feeling based, possibly
----------------------
Buyer Behaviour 31
Notes fictional, subjective, and sincere based on own values and therefore does not
need any explanation.
----------------------
Values
----------------------
Experiences Emotions
----------------------
----------------------
Information IMAGE Prejudices
----------------------
----------------------
Beliefs Attitudes
----------------------
---------------------- Observations
----------------------
Fig. 2.3: Psychological Factors influencing Image
----------------------
Corporate image is the carrying force of the company and logo the pillar
---------------------- of the image. Good logo makes image for the company and its products. Well-
groomed corporate image gives a trustworthy and professional picture from the
---------------------- whole company.
---------------------- Corporate image is not only the picture that company has created to their
customers to purchase their products or services. Corporate image is the key
---------------------- card that helps the customer to make the buying decision, to get the service
---------------------- offered or product manufactured, and prefer the company from the competitors.
In the present-day people work more and more in the image world; products
---------------------- are almost identical from the part of technology and the compositional capacity
reminds one another, perhaps the image or extra functions can solve the deal.
----------------------
Good corporate image supports marketing, protects the company when
---------------------- small failures occur, indirectly enhances customer contentment, improves
personnel’s motivation and commitment, and raises confident in interest groups.
----------------------
Bad corporate image respectively slows down the growth of the company,
---------------------- complicates the creation of permanent customs, and can be an obstacle in
recruiting capable personnel.
----------------------
Identity
----------------------
Identity means all the methods which a company uses to make it well
---------------------- known to others (Fig. 2.4). Identity provides information, which customers
use as a base to determine the nature of the company. It is essential for the
---------------------- company to be able to create visible elements for its identity. Idea of the identity
itself creates the image. Company’s functional solutions that are related to the
----------------------
company’s identity create foundation for the company’s internal and external
---------------------- image.
----------------------

In Fig. 2.4, the level of image tells average value of positive characteristics Notes
connected to the image. The level does not inform what are the possible strengths
and weaknesses in the image. Image profile tells what kind of image it is: what ----------------------
are the factors and in what way are the images strong or weak.
----------------------
Internal image means organisations’ internal target groups (such as
personnel, management) image of the company or its products. External image ----------------------
means organisations’ external target groups (usually customers) image of the
----------------------
company or its products. Internal and external image interact with each other.
Functional factors such as price, quality, delivery reliability, services, ----------------------
assortments etc. are related to image and influence on what kind of image,
----------------------
target group will have about the organisation. Image factors like traditional,
internationality, efficiency, cheerfulness, sporty etc. are related to the image ----------------------
about the organisations] or products’ personality. Functional and image factors
combination forms the level and profile of the image. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 2.4: Image Marketing ----------------------
----------------------
----------------------
Fill in the blanks. ----------------------
1. Image is a person’s _____________ impression or opinion of the matter.
----------------------
----------------------
Buyer Behaviour 33
Notes Summary
---------------------- • Procurement is a function that is gaining in importance. Managements
have realised that a good procurement department helps in the growth
----------------------
of the company and increases the profits considerably. The procurement
---------------------- function has both task-oriented objectives and non-task objectives, and is
usually governed by a clearly articulated purchase policy.
----------------------
• The buying decision process starts with identifying the buying needs,
---------------------- followed by identifying the product characteristics. At this point, the
buyer takes a ‘make or buy decision’. If the decision is to buy, then
---------------------- the buying process continues with the search for vendors followed by
---------------------- qualifying them. The vendors are then requested to send in their proposals
and quotations relating to the purchase requirement.
---------------------- • While evaluating the quotations, the buyer may revisit the ‘make or buy
---------------------- decision’ if the vendor quotations do not meet requirements. If a particular
vendor’s quotations are up to the buyer’s expectations, then the contract
---------------------- is awarded to the vendor. Payment and delivery terms are finalised and an
order routine is mutually agreed upon.
----------------------
• The vendors are also regularly monitored for their performance. A firm
---------------------- purchases goods under three situations. In a new task, the firm buys a
totally new product or an existing product for the first time. This involves
---------------------- extensive information and supplier search. The second situation is straight
---------------------- re-buy. Here the firm purchases the same material from the same supplier
without any alterations in the contract.
----------------------
• The last situation is modified re-buy. It involves modifications in the
---------------------- form of change in supplier, change in terms of the contract, etc. A buying
centre involves people from across the departments of the firm to make
---------------------- the buying decisions for the firm. The buying center is influenced by the
individual and group factors. Hence, the decisions taken by the buying
----------------------
centre will bear these influences.
---------------------- • Value analysis is used in the firm to assess the value of the product to
be purchased and consequently to take ‘make or buy’ decisions. It helps
----------------------
the firm to reduce unnecessary costs in the purchase of the product or
---------------------- materials. Vendor evaluation helps in choosing the right vendor. Vendor
rating is performed to appraise vendors from time to time with respect to
---------------------- the products supplied and services rendered; it is done on the parameters
of price, quality, delivery, and service.
----------------------
• There are different factors that influence organisational buying behaviour
---------------------- such as environmental factors, organisational factors, group factors,
and individual factors. The different models of organisational buying
----------------------
behaviour discuss these factors with differing levels of attention being
---------------------- given to each. They include the Sheth model, Webster and Wind model,
and the Anderson and Chambers Reward/Measurement Model.
----------------------

Keywords Notes
----------------------
• Influencers: The action or process of producing effects on the actions,
behaviour, opinions, etc., of another or others: Her mother’s influence ----------------------
made her stay.
----------------------
• Initiate: To begin, set going, or originate: to initiate major social reforms
• Engages: To obtain or contract for the services of; employ: engage a ----------------------
carpenter.
----------------------
• Procurement: To obtain or get by care, effort, or the use of special means:
to procure evidence ----------------------
• Oligopolistic: The market condition that exists when there are few sellers, ----------------------
as a result of which they can greatly influence price and other market
factors Loyalty: An example or instance of faithfulness, adherence, or ----------------------
the like: a man with fierce loyalties. ----------------------
• Inelastic: Not elastic; lacking flexibility or resilience; unyielding
----------------------
• Economics: Relatively unresponsive to changes, as demand when it fails
to increase in proportion to a decrease in price ----------------------
• Volatile: Tending or threatening to break out into open violence; explosive: ----------------------
a volatile political situation
----------------------
Self-Assessment Questions ----------------------
1. What are the factors that influence a purchasing decision? ----------------------

2. Which are the clientele that belong to the organisational marketing, give ----------------------
one live example each from Indian Market?
----------------------
3. Why business need advertising? Explain with examples.
4. Explain the role of 4 P (product, price, place and promotion) of marketing ----------------------
in the buyer’s behaviour. ----------------------
5. What are the basic phases of organisational buying behaviour process?
----------------------
6. Which all are the key people who become a part of the buying centre?
----------------------
7. Explain the buying decision process.
----------------------
----------------------
----------------------
State True or False.
----------------------
1. True
----------------------
----------------------
Buyer Behaviour 35
Notes Check your Progress 2
Fill in the blanks.
----------------------
1. Place or distribution is the element of the marketing mix
----------------------
---------------------- Fill in the blanks.
---------------------- 1. Image is a person’s subjective impression or opinion of the matter.
----------------------
Suggested Reading
----------------------
1. http://www.oppapers.com
----------------------
2. Cunningham & Cunningham. Marketing.
---------------------- 3. Kotler, Philip. Marketing Management.
---------------------- 4. Kurtz and Boone. Marketing.
---------------------- 5.
Lyson & Farrington Hutt & Speh. Purchasing and Supply Chain
Management.
----------------------
6. Pride & Ferrell. Marketing.
---------------------- 7. Stanton, William J. Marketing.
---------------------- 8. Vitale / Giglierano. Business to Business Marketing.
---------------------- 9. Wright, Ray. Business-to-Business Marketing A Step-by-Step Guide.

10. Zikmund, William G., Michael D’Amico. Marketing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Enterprise Selling
UNIT
3
Structure:
3.1 Introduction
3.2 Sales Management
3.3 Sales Planning
3.4 Models of Selling: Enterprise vs. Transactional
3.5 What is the Enterprise Selling Process?
3.6 Typical Enterprise Selling
3.7 Identifying Value
3.8 Understand the Customer’s Economics
3.9 Engage the Customer
3.10 Organising for Success
3.11 Choose the right Relationship Manager
3.12 Develop the Account Team
3.13 Involve Senior Executives
3.14 Establish Incentives
Summary
Key Words
Suggested Reading
Enterprise Selling 37
Notes
Objectives
----------------------
----------------------
• Explain the sales process.
----------------------
• Discuss different models of sales.
---------------------- • Explain Enterprise selling in totality.
----------------------
3.1 INTRODUCTION
----------------------
---------------------- Sale means transfer of ownership for a consideration. When a firm sells,
it converts its stock of finished goods into cash or receivable. Obviously, a sale
---------------------- is the main source of revenue to all trading or manufacturing business firms.
Hence, a possible sale is the prime-mover of all other activities of the business.
---------------------- By the same reason, it is a limiting factor as well. If a firm wants to maximise
profit it must reach the optimum level of production which must be absorbed
----------------------
in the market through distribution and ultimate sale. But it is sale rather than
---------------------- production which is more influenced by uncontrollable factors. Consequently,
the success of the organisation depends on relating it dynamically to its markets.
---------------------- Market conditions are studied in this context to see if sale could be maximised.
Sale in this sense has come to be a process of “persuading people to want what
---------------------- you have to sell.” This is not an easy task.
----------------------
3.2 SALES MANAGEMENT
----------------------
Changing tastes, preferences and income levels of consumers add to its
---------------------- complexity. The growth in the size of modern business units, the widening, area
of the market and its heterogonous nature make selling a complex phenomenon.
----------------------
Moreover, the methods of selling and the types of expenses involved are
---------------------- numerous. The presence of competition and the strategies of rivals render
maintenance of the levels of sales and its increase challenge and struggle.
---------------------- Hence, maintaining a high level of sale is managerial problems of a highly
sophisticated nature. It requires a thorough study of exchange processes and
---------------------- relationship. Analysis of information as to its nature and controllability is to
---------------------- be done. Planning and organisation of a working mechanism must be made.
Responsibilities are to be fixed with delegation of authority. Appointment of
---------------------- expert staff, recruitment of sales personal and their training and motivations
are of prime importance. Finally, the work of all these functionaries is to be
---------------------- coordinated with the enterprises’ goal in view. Control of all activities with
materials, machines and time thus enables a successful management venture
----------------------
to take shape. In fact, sales management is the overall management of sales by
---------------------- applying the process of management as a whole.
Thus, sales management is defined as “the planning, direction and control
----------------------
of the personal selling activities of a business unit, including recruiting, selecting,
---------------------- training, equipping, assigning, rating, supervising, paying and motivating as
these tasks apply to personal sales force.”
Sales management differs from general management in two ways: Notes
•
The selling idea must be conceived as a necessary part of the operations
before applying management techniques on the sales personals. ----------------------
•
The types of costs are on the increase and the chances of waste are greater. ----------------------
The following factors have made selling a complex managerial problem:
----------------------
a. Technological advancement in advertisement
----------------------
b. Market research and analysis
c. Product planning ----------------------
d. Integration of customers’ wants and psychology ----------------------
e. Production scheduling and the like ----------------------
Objectives
----------------------
The objectives of sales management are as follows:
----------------------
• To enable the top executives to devote more time to planning policy
matters. ----------------------
• To divided and fix authority among the subordinates.
----------------------
• To avoid repetitive duties.
----------------------
• To locate responsibility.
• To establish sales routine. ----------------------
• To stimulate the efforts of those concerned with selling. ----------------------

• To enforce proper supervision of sales force. ----------------------
To enable top executives to devote more time to planning: Sales
----------------------
management occupies a very strategic position in the functional areas of
business management. All principles of general management are applicable ----------------------
here. Hence, (its identification as a wholesome subsystem requiring specialised
treatment relives the top management to concentrate on formulation of policy ----------------------
matters).
----------------------
To divide and fix authority among subordinates: Now, with the selling
idea having been obtained as a pretreated fabric, authority is divided among ----------------------
sub-managers who are appointed to handle the various function of sales ----------------------
management.
To avoid repetitive duties: A formal sales organisation will take shape ----------------------
which aims in ensuring the least cost on distribution. In that case, it should ----------------------
avoid repetitive duties. It identifies sales problems and provides a scientific
mode for solving them. ----------------------
To locate responsibility: Responsibility in a sales organisation is fixed ----------------------
on deference to authorities from top to bottom. Quotas may be fixed for sale;
time is fixed for effecting it and collection of money, etc. Higher authorities ----------------------
are responsible for motivating, problem-solving, compensating, etc. For the
execution of responsibilities fixed on each person, including the salesman, ----------------------
Notes sufficient powers or authority must be provided to each. Thus, authority is the
source from which the strength for executing responsibility comes.
---------------------- To establish sales routine: A well-established sales routine is the pathway
---------------------- through which the firm is related to the society. It is the channel that supplies
goodwill to the firm.
----------------------
To stimulate efforts of the sales force: Sales management aims at
---------------------- stimulating the efforts of all those connected with selling. All probable means
of motivation are to be provided to increase the productivity of the factors.
----------------------
To enforce proper supervision of sales force: Sales force represents the
---------------------- human factor whose merits cannot be overruled nor its limitations ignored.
(Sales management looks forward to making effective supervision, providing
---------------------- conducive environment and sufficient leadership).
---------------------- The per capita expenditure on the sales force will be the minimum if it is
result-oriented and if controlled sales activity is pursued in the most desirable
---------------------- manner.
---------------------- Thus, sales management aims at a steadily increasing sales volume with
defined pricing, etc. in proportion to the increase in the demand for products
---------------------- or services, keeping the rate of expenditure on the various overheads to the
---------------------- minimum.
---------------------- 3.3 SALES PLANNING

---------------------- A sales planning is deciding in advance the course of action for selling a
---------------------- product or products. It decides what is to be sold, how when and by whom it
is to be sold. It gives us a full-fledged sales programme of sales campaign and
---------------------- procedures included in the sales programme.
---------------------- Objectives are predetermined enterprise goals. A policy is a long-term line

of action from which plans and programmes emerge. Procedure is sequencing
---------------------- of a series of actions aimed at achieving an objective. Programmes are group
of projects while projects are integrated activities. Schedules are rationalised
---------------------- repeat actions. Thus, the whole set of rationalised and integrated activities of
---------------------- sales constitute sales planning.
Planning is a managerial function. Sales planning invokes laying down
---------------------- of enterprise’s objectives, policies and procedures, programmes and schedules.
---------------------- These are selected from a network of alternatives in a scientific manner. Sales
planning is that part of marketing planning which covers sales forecasting and
---------------------- sales programmes to achieve sales goals and preparation of sales budget.
---------------------- A sales plan is formulated after ways and means of study as follows: The
objectives are laid down. Different levels possible demands or states of nature
---------------------- are enumerated. The various course of actions within the firm’s control are also
enlisted. The planners than proceed to evaluate these alternatives and finally
----------------------
select the most appropriate course of action. The plan thus formulated is tested
---------------------- and updated for subsequent changes in the uncontrollable factors involved in

the plan ensuring realisation of sales targets. Flexibility is the very essence of Notes
success in planning. A sales plan must contain the following ways and means to
the sales goal. ----------------------
1. Market research ----------------------
2. Product research
----------------------
3. Branding, packing, etc.
----------------------
4. Recruitment and training of sales personnel
5. Allocation of sales territories and sales quotas ----------------------
6. Choice of channels of distribution ----------------------

7. Plan for advertising and sales promotion ----------------------
8. Provision for warehousing and transport
----------------------
9. Arranging sales contest
----------------------
10. Pricing and all other activities for efficient selling at the most economical
cost matching sales goals. ----------------------
----------------------
----------------------
1. A ___________ is deciding in advance the course of action for selling
----------------------
a product or products.
----------------------
3.4 MODELS OF SELLING: ENTERPRISE VS. ----------------------
TRANSACTIONAL
----------------------
Let’s talk about different types of selling models and sales processes as
----------------------
they relate to different businesses in the ‘B to B’ sector. First of all, let’s talk
about the enterprise selling model. The enterprise selling model is characterised ----------------------
by high level of complexity. Typically, decision making cycles are long, there
are multiple constituents involved in multiple locations at multiple levels of the ----------------------
organisation. This means that deploying a sales organisation in order to meet
----------------------
the needs of the enterprise selling model are complex, expensive, and require a
heavy level of investment. ----------------------
If your company is considering selling to the largest enterprises, you
----------------------
are going to need to organise your sales force around this reality and make
the necessary investments and have the long term perspective that’s required ----------------------
in order to be successful in this arena. Many companies make the mistake of
trying to target the largest enterprises when they do not truly have the resources ----------------------
necessary in order to build a sustainable and repeatable sales process that will
----------------------
allow them to penetrate large enterprise accounts and win over the long term.
Enterprise selling model requires deploying a multi-tiered sales force, including ----------------------
Notes inside sales, field sales, as well as major account personnel who are stationed
close to or can get themselves close to the various constituents throughout
---------------------- the targeted enterprise that need to be approached and developed in order to
maximise account penetration in the large enterprise account.
----------------------
In an enterprise selling model, it is a very consultative approach where
---------------------- advanced need analysis is being done throughout the organisation in order to
truly adapt and design the sales process around the account objective. Many
---------------------- companies do not have the capabilities to go this deep into the selling process
---------------------- in order to have a chance at success and they often end up frustrated and do not
achieve their sales objectives as a result despite multiple attempts to gain access
---------------------- to the enterprise.
Companies that succeed at the enterprise selling model are those that have
----------------------
truly a national, if not global reach, and have the resources deployed and targeting
---------------------- the different areas of the enterprise prospect in order to be able to maximise their
account penetration. Account coordination and sales management is extremely
---------------------- important in the enterprise selling model since the coordination of multiple
constituencies in the organisation in order to orchestrate as a sales process is
---------------------- what is required. We’ve seen many companies, particularly startups, that target
---------------------- the enterprise and have a product that is best suited for the enterprise but do
not have the staying power or the resources to fully maximise their coverage
---------------------- of their target major accounts. As a result, they run out of money before they
actually have a chance of penetrating those accounts.
----------------------
By contrast, many companies choose a transactional selling model, which
---------------------- is quite different from the enterprise model. Whereas, enterprise is multi-tiered,
multi-locational and very consultative and strategic in approach, transactional
---------------------- selling model lends itself towards commodities, products, where the buyer is
not nearly as sophisticated, the decision making cycle is not nearly as long, and
----------------------
the sales cycle, as a result, can go very, very fast. Companies that are involved in
---------------------- a transactional selling model include everything from companies that are doing
telesales and closing deals over the phone, such as shrink wrapped software
---------------------- companies, to purveyors of commodities services, where going for the close on
the first or the second call is easy.
----------------------
Transactional selling model is very good if your product is well understood
---------------------- by your target audience, already in demand, is purchased by a large percentage of
your target, and where the decision making and sales cycle and switching costs
---------------------- in order to purchase your products are relatively low. Typically, a transactional
---------------------- based selling model does not require a sophisticated sales organisation, in the
sense of its location, its mix of field and inside a major account, sales people
---------------------- - it typically lends itself towards a telesales model or a straight field sales or
a hybrid model, where there is no hand off between inside and outside sales,
---------------------- between lead generation from the telemarketing perspective and inside sales.
---------------------- So, many companies choose a transactional selling model when they are
in a very competitive market and the sales cycle are short, the average selling
---------------------- price of the product is low, and the actual sales process is simplified down to its
lowest common denominator.
----------------------

3.5 WHAT IS THE ENTERPRISE SELLING PROCESS? Notes
The Enterprise Selling Process (ESP) is a structured methodology for ----------------------

sales, sales support, and marketing teams responsible for penetrating, covering,
----------------------
and growing large accounts. During the ESP program, the sales team learns
to use new tools and techniques for leveraging sales efforts across multiple ----------------------
strategic business and service units within the target account. ESP teaches the
team how to gain insight into its customer’s business drivers, identifies new ----------------------
revenue opportunities, effectively coordinate team members, understand the
full revenue potential of the account, and develop clear strategies for penetrating ----------------------
accounts. ----------------------
What are the business benefits?
----------------------
The Enterprise Selling Process enables sales teams to:
• Prioritise and focus their efforts on the best short and long term ----------------------
opportunities based on the customer’s business needs ----------------------
• Increase their coverage and penetration of the organisation and its multiple
business units ----------------------
• Coordinate account team activities ----------------------

• Analyse, develop and leverage key executive and partner relationships ----------------------
• Create an account marketing strategy
----------------------
• Build a detailed Account Map that matches appropriate solutions to
specific customer needs and helps identify total, account-wide revenue ----------------------
potential
----------------------
• Build and implement a Comprehensive Account Plan
----------------------
3.6 TYPICAL ENTERPRISE SELLING ----------------------
It’s a familiar lament: executives at business-to-business (B2B) companies ----------------------
say that their largest customers have never been more demanding. (i) whereas
some companies are simply carving in to price pressure, others are trying to ----------------------
create and capture more value through sales approaches such as enterprise
----------------------
selling, (ii) key-account management, or solutions selling. (iii) Regardless of
the label, each involves forging highly collaborative relationships, with selected ----------------------
customers, which can yield exciting results.
----------------------
In the mid-1990s, Alcoa’s Wheel and Forged Products division began
devoting more energy and attention to developing custom products for several ----------------------
auto manufacturers. The result was more distinctive (and often proprietary)
forged aluminum wheels for vehicles such as the Special Edition Jeep Grand ----------------------
Cherokee, Ford Super Duty truck, and GMC Hummer. Eventually, Alcoa
----------------------
extended its collaboration with original-equipment manufacturers (OEMs)
beyond the development of new products, to include rollout, marketing, and ----------------------
post sales service. During the past ten years, Alcoa has expanded its share of
this market to 35 percent, from 5 percent. ----------------------
Notes About six years ago, Sonoco, a packaging supplier, intensified efforts to
help the snack food maker ‘Lance’ determine the ideal packaging for its product
---------------------- lines. One improvement involved the use of flexographic printed packaging
film in Lance’s single and multiserving Home Pack snacks for brands such as
---------------------- Toastchee and Captain’s Wafers. Efforts like these drastically reduced Lance’s
---------------------- packaging costs, and the company made Sonoco its “Supplier of the Year” in
2002. In an industry where most players were growing slowly or shrinking,
---------------------- Sonoco generated annual revenue growth of 7 percent and margin growth of 18
percent from 2001 to 2004-thanks in part to this collaboration and others like it.
----------------------
Clearly then, collaborative selling can yield tailored products (Alcoa’s
---------------------- wheels) or bundles of products and services (Sonoco’s packaging and conversion).
In other cases, collaboration has generated more elaborate, customised products
---------------------- that integrate proprietary, intellectual property or expertise to solve a customer’s
---------------------- problem. These examples also suggest, however, that intense collaboration is
a complex, time-consuming endeavour. Many would-be collaborative sellers
---------------------- fail to master that complexity. In some cases, the buyer and the supplier are not
able to identify unique sources of value. In others, suppliers do not achieve the
---------------------- necessary coordination (across business units, geographies, or functions such as
---------------------- product development, engineering, marketing, and legal affairs) that is vital to
collaboration. Some companies find moderately successful efforts so resource
---------------------- intensive that they do not yield a good return. As a result, roughly half of all
collaborative sellers enjoy only modest benefits from their efforts, and a quarter
---------------------- actually lose money in those relationships, according to a recent McKinsey
---------------------- survey of more than 200 sales executives at Fortune 1000 companies.
For the leading sellers in our survey, however, collaborative initiatives
----------------------
increased revenues and profits by more than 20 percent, on average. These
---------------------- leaders start with a rich understanding of the customer’s economics and engage
the appropriate customer personnel (from product developers to purchasing
---------------------- agents) in joint strategy sessions to uncover mutually beneficial opportunities.
They also scrutinise internal organisational issues-meticulously choosing
----------------------
collaboration managers, who often come from outside the sales department;
---------------------- thoroughly training account teams in the field; engaging senior executives
in targeted ways; and fine-tuning incentives. Finally, the leading companies
---------------------- recognise that collaborative selling is a costly business and approach it with a
hard-nosed, investment-oriented mentality by carefully selecting trial customers
----------------------
and by periodically reevaluating relationships, much as pharmaceutical
---------------------- companies stage-gate their R&D investments.
---------------------- 3.7 IDENTIFYING VALUE

---------------------- The experience of one large consumer goods company highlights the
---------------------- difficulty of identifying collaborative opportunities that are beneficial for both
parties. The company established customer councils that comprised all the
---------------------- salespeople around the world for each of several major customers. Although
the councils met regularly, data on customer volume, revenues, prices, and
---------------------- profitability were not made available to all members. Even when major

customers provided an opportunity by seeking global or regional pricing deals, Notes
the councils lacked the knowledge and customer relationships to do anything
but put out fires with price concessions. Successful collaborators avoid such ----------------------
pitfalls by thoroughly engaging the customer to comprehend its business and
learn how to make improvements. ----------------------
----------------------
3.8 UNDERSTAND THE CUSTOMER’S ECONOMICS
----------------------
Contrast the consumer goods company’s approach with that of Alcoa
or BASF. At Alcoa, teams hold weekly meetings during critical points in the ----------------------
customer’s sales cycle and develop strategies based on a deep understanding of ----------------------
its economics. Scrutinising the value chains of customers is an important starting
point. In one well-known case, BASF’s efforts to identify new sources of value ----------------------
for its automotive OEM customers ultimately led it to run their paint shops.
----------------------
Developing economic insight into specific elements of the value chain
requires detailed industry knowledge. Frequently, suppliers find that industry ----------------------
specialisation, coupled with time on the road, is the most efficient way for their
sales teams and relationship managers to gain expertise. There is no substitute ----------------------
for visiting other players in the industry, attending trade shows, and finding out ----------------------
which areas of a customer’s operation could, if improved, yield the largest and
fastest payoff. ----------------------
In a best-practice example, one consumer durable-goods manufacturer ----------------------
engages in thorough end-consumer research, including efforts to understand the
preferences and buying patterns of shoppers at its important retail customers. ----------------------
The supplier can thus collaborate with customers to conduct long-term category
planning, manage changes in the mix of products, tailor marketing campaigns, ----------------------
and improve in-store sales and service execution. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Developing economic insight into ____________ of the value chain
requires detailed industry knowledge. ----------------------
----------------------
3.9 ENGAGE THE CUSTOMER ----------------------
Armed with this knowledge, sales teams are now ready to engage with ----------------------
customer personnel. They have to perform the difficult task of generating
insights into a customer’s business that go beyond existing products-and beyond ----------------------
anything the customer would uncover on its own. Joint strategy sessions are
frequently the tricky part. Alcoa, for example, creates teams of its own and the ----------------------
customer’s personnel (including supply chain experts, operations managers, and ----------------------
R&D engineers who can validate the potential economic impact of collaborative
initiatives). The teams meet on the customer’s home turf. ----------------------
Notes In cases where the supplier and the customer are looking for company-
wide opportunities, it is important for teams to include personnel from a number
---------------------- of geographies and business units. At the extreme, customer engagement-and
the teams supporting it-will occur at the intersection of several industries at
---------------------- once. For example, in the late 1990s Sealed Air improved upon a proprietary
---------------------- vacuum-packaging process after detailed consultation with poultry processors
and grocery retailers. The new solution drove down damage rates and waste
---------------------- materials for packaged products, enabling grocers to boost profits on poultry
products by 75 percent, even when prices to the end consumer remain unchanged.
---------------------- This solution, along with other collaborative innovations, contributed to Sealed
---------------------- Air’s 24 percent increase in sales since 2000.
Some customers, touting their highly centralised decision-making
---------------------- process and ability to facilitate effective collaboration, question the need for a
---------------------- team approach. In our experience, though, a customer’s organisation is rarely
as centralised as it thinks it is, so the supplier should be explicit when choosing
---------------------- team members. To capture the full potential of a collaborative relationship, a
company might need to start by convincing a senior customer leader who deals
---------------------- with consumers and also has functional responsibilities (particularly sales,
---------------------- marketing, or product development) that a diverse team is required.
---------------------- 3.10 ORGANISING FOR SUCCESS

---------------------- Both before and after initial contact with a customer, a supplier’s internal
---------------------- organisational issues can create steep barriers to success. Business units-defined
by geography or product-focus on their own accountability and frequently have
---------------------- few processes and little patience for collaborative efforts that are good for the
whole but may harm their own income statements. The consequences range
---------------------- from inaction to the proverbial accident in the customer’s parking lot-that is,
---------------------- when salespeople from different business units of the same supplier bump into
each other on sales calls or try to pitch different products or services to the same
---------------------- customer. These actions undermine the ‘one-face’ continuity that customers
expect from collaborative relationships.
----------------------
Consider one large services company’s effort to engage a customer with
---------------------- global operations. Things went awry when the customer’s business unit leaders
retained procurement authority, thereby making it very difficult for the supplier
---------------------- to work collaboratively across business units to find opportunities. After
---------------------- investing 12 months of substantial effort, the supplier captured just 5 percent of
the potential opportunity, and the customer characterised the relationship as a
---------------------- ‘two out of ten.’
---------------------- Effective collaboration depends on a highly skilled customer relationship

manager (or collaboration manager) who can break down barriers and align
---------------------- the various players. Well-trained cross-functional teams, assistance from senior
management, and incentives that will get everyone working together are also
---------------------- vital for success.
----------------------

3.11 CHOOSE THE RIGHT RELATIONSHIP MANAGER Notes
While collaboration managers certainly need to be able to handle customers, ----------------------

they must be much more than heavy-hitting salespeople. As substantial portions
----------------------
of the supplier’s total revenues can be affected by collaboration, for example,
candidates must be strong business managers-a trait not necessarily possessed ----------------------
by some high-performing salespeople. In addition, collaboration managers
must command the respect of their own senior leaders as well as the customers. ----------------------
Potential managers should meet these important criteria: do they have personal
----------------------
networks across functions, business units, and regions that will help them
marshal resources for a customer on an ad hoc basis? Can they hold strategic ----------------------
business discussions with the relevant senior executives in the customer’s
organisation? ----------------------
According to our research, leading collaborative sellers filled twice as ----------------------
many of these roles with people from outside the sales organisation than less
effective companies did. Some companies relied heavily on external talent. In ----------------------
these cases, it is often wise to hire people to fill the gaps in knowledge about ----------------------
a customer’s industry, since such expertise is particularly difficult to develop
internally. The goal can be met by recruiting outside experts for roles that ----------------------
will allow them to build internal credibility before taking on full relationship-
management responsibilities and by phasing in the corresponding number of ----------------------
customers targeted for collaborative relationships. ----------------------
3.12 DEVELOP THE ACCOUNT TEAM ----------------------
The collaboration manager cannot succeed without a strong supporting ----------------------

cast. Members of a typical account team have deep product knowledge;
----------------------
engineering expertise; pricing skills for speedy, advantageous deal making;
negotiating and legal skills to simplify the writing of contracts across business ----------------------
units; and service experience to facilitate post sales support. Ensuring that a
team has the necessary pre and post sales expertise means pulling in a large ----------------------
number of people, often more than 10 and sometimes as many as 50.
----------------------
To be effective, leaders must be able to work well together and with
customers. Many sales managers try to define ideal collaborative processes and ----------------------
communicate them to teams, only to be disappointed by the results. By contrast,
one packaging company developed collaborative-selling skills through a ----------------------
‘forum and fieldwork’ approach. Each account team attended half-day training ----------------------
sessions, or forums, that introduced new skills (such as financial analysis or
detailed strategic planning), tools (such as an approach for calculating and ----------------------
communicating the total benefits delivered to a customer by comparing the
supplier’s offering with the customer’s next-best alternative), and processes ----------------------
(such as negotiation tactics to influence the purchaser). The forums also
----------------------
gave teams time to plan how to use these new tools and techniques with their
important customers. Following the workshops, the teams had one- to four- ----------------------
week periods of fieldwork. One team began, for example, by assembling an
integrated view that included the customer’s current competitive situation, its ----------------------
Notes total spending on categories related to the supplier’s products and services, and
a list of purchasing decision makers. Teams shared the fieldwork results at the
---------------------- next forum, an approach that promoted repetition and reinforcement, linked
the teams’ new skills with real accounts rather than hypothetical exercises, and
---------------------- created healthy peer pressure.
----------------------
----------------------

---------------------- 1.
To be effective, leaders must be able to work well together and with
customers.
----------------------
---------------------- 3.13 INVOLVE SENIOR EXECUTIVES

---------------------- Oral commitments from senior leaders are sometimes the starting point
---------------------- for focusing entire organisation on collaborative efforts. What’s more, at a
number of successful collaborative sellers, one or more senior leaders oversee
---------------------- key customer relationships.
---------------------- At Bosch, each of the top 11 executives is linked to a major OEM customer.
Alcoa maintains virtual teams for its collaborative customer relationships.
----------------------
The teams operate under the auspices of the business units’ senior leaders, who
---------------------- play an active account-management role. Furthermore, in 2003, Alcoa created
the role of chief customer officer, a position with oversight of all its business
---------------------- units.
---------------------- IBM introduced a separate group, led by a senior executive, which focuses
on important customers.
----------------------
When Jeff Immelt, the current Chairman and CEO of GE, was at GE
---------------------- Plastics, he scheduled weekly calls with each sales executive to review account
plans and deal with any problems. He also made a point of visiting one major
---------------------- customer each week. Immelt’s involvement sent a signal to customers that they
---------------------- mattered and to internal teams that collaborative efforts were important. It also
kept him closely connected with the day-to-day challenges of sales teams and
---------------------- helped remove any barriers to their progress.
---------------------- A second vital role for senior management is holding people accountable
for collaboration goals-a role that the collaboration manager may not have the
---------------------- authority to play. In particular, the senior leadership should push sales teams to
establish and meet targets for growth, balance the range of products offered, and
---------------------- ensure smooth transitions through the milestones (such as the introduction of
---------------------- a new product, service, or solution) in a customer relationship that cuts across
business units.
----------------------
----------------------

Notes
Activity 1
----------------------
What is the role of senior management in the sales process? ----------------------
----------------------
3.14 ESTABLISH INCENTIVES
----------------------
In addition, many profitable collaborations can adversely affect the balance
sheets of individual business units, so it is frequently necessary to use internal ----------------------
accounting mechanisms to compensate business units or operating companies.
----------------------
Nokia, for example, uses a detailed transfer-pricing system to ensure that
business units and individuals working towards joint customer goals receive the ----------------------
proper recognition. Systems like that of Nokia are complicated to implement
because of the potential for disagreement about fair transfer-pricing levels, ----------------------
so these crediting mechanisms are most likely to succeed when accompanied
----------------------
by measures to improve understanding and interaction between parts of an
organisation. Rotating leaders among large account teams, business units, and ----------------------
geographies helps the sales force develop an enterprise-wide perspective, for
example. Holding regular cross-team meetings highlights points of friction ----------------------
before they can cause counterproductive behaviour.
----------------------
Such efforts pay off. Our survey of sales executives showed that top-quartile
companies were one-and-a-half times more likely to view incentive systems ----------------------
as a core element of their collaborative efforts than were companies delivering ----------------------
stagnant or negative results. In fact, one in four respondents from the poorer
performers considered incentives ‘barely’ or ‘not at all’ important to the ----------------------
successful management of a collaborative sales initiative.
----------------------
Summary ----------------------
• Aligning the organisation and identifying unique sources of value require a ----------------------
lot of time, talent, and financial resources. Even if suppliers do everything
else right, they run the risk of earning poor returns on collaborative ----------------------
investments if they do not work with the right customers, measure results
----------------------
carefully, and modify their approach accordingly. Common mistakes
include paying attention to squeaky wheels rather than investing in ----------------------
relationships based on a solid understanding of relative customer value,
continuing investments when they are unlikely to be profitable, and failing ----------------------
to maintain a pipeline of collaborative initiatives.
----------------------
• Although collaborative relationships are not ideal for all large accounts,
many suppliers segment their customers and select collaborative targets ----------------------
according to the revenue each account currently generates. A better ----------------------
approach is to consider additional factors-such as potential revenues,
profitability, a customer’s willingness to partner, the importance of the ----------------------
supplier’s products or services to the customer’s business, the supplier’s
ability to serve the customer’s needs, and changes in the customer’s ----------------------
Notes circumstances (such as rapid expansion, a merger or acquisition, or a shift
in competitive dynamics)-that might create collaborative opportunities.
---------------------- It’s not unusual for half the customers at the top of a size-based ranking to
fall out of a more nuanced segmentation. Even for attractive customers,
---------------------- suppliers should husband scarce resources by clearly delineating different
---------------------- types of transactions. IBM Global Services, for example, builds tailored
offerings with selected customers while simultaneously selling standard
---------------------- products to them.
---------------------- • Once collaborative efforts are under way, it is important to track the
value created for both sides. A detailed understanding of a relationship’s
---------------------- profitability helps a supplier know how to handle customers seeking
discounts. And regular progress reviews with individual customers
----------------------
reinforce each relationship’s value and create excellent opportunities
---------------------- for suppliers to cross-sell and to expand the scope of the partnership.
The focus should be on such measures as sales and profits as well as
---------------------- on activities or intermediate outcomes-such as the number of proposals
in the pipeline or the depth of relationships with a customer’s senior
----------------------
management-that indicate whether the collaborative effort is on track.
---------------------- • The consumer durable-goods manufacturer we described earlier combines
its detailed end-consumer research with predictive, industry-wide
----------------------
economic analyses and input from retailers and wholesale distributors
---------------------- to track the impact of its efforts on each collaborative customer’s key
consumer segments. Within a year of adopting this approach and acting
---------------------- on its results, the manufacturer’s annual net profits increased by more
than 10 percent-twice the previous growth rate and significantly higher
----------------------
than the industry average.
---------------------- • A robust set of metrics also helps companies evaluate their investments
on an ongoing basis. Given the magnitude of the resources involved,
----------------------
it is important to use stage gating during the sales cycle and to review
---------------------- serious collaborations every 18 to 24 months to determine whether they
still make sense. Stage gating involves tracking the development of
---------------------- customer relationships from initial networking to one-off negotiations
to full-fledged partnerships. Each stage requires different types and
----------------------
amounts of resources, and customers should not remain at any one stage
---------------------- indefinitely. Without stage gating, collaborative selling can become very
expensive; with it, suppliers have a better sense of which relationships
---------------------- to end and when to identify new sources of value for current customers.
Collaborative efforts that are not regularly renewed eventually wither and
----------------------
die.
---------------------- • As large customers get more demanding, B2B companies need not resign
---------------------- themselves to taking a beating on price. Collaborative selling can help
companies create and capture more value-but only if they improve their
---------------------- approach to customers, the organisation, and collaborative investments.
----------------------

Keywords Notes
----------------------
• Determinant: A determining agent or factor
• Perfunctory: Lacking interest, care, or enthusiasm; indifferent or ----------------------
apathetic
----------------------
• Aggregating: Constituting or amounting to a whole; total: aggregate
sales in that market ----------------------
• Liquidity: The ability or ease with which assets can be converted into ----------------------
cash.
----------------------
• Proliferate: To increase in number or spread rapidly and often excessively
----------------------
• Aggregation: A group or mass of distinct or varied things, persons, etc.:
an aggregation of complainants. ----------------------
• Defensibility: That can be defended in argument; justifiable
----------------------
• Commodity: An article of trade or commerce, especially a product as
distinguished from a service. ----------------------
• Negotiated: To deal or bargain with another or others, as in the preparation ----------------------
of a treaty or contract or in preliminaries to a business deal.
----------------------
• Volatile: Tending or threatening to break out into open violence; explosive:
a volatile political situation. ----------------------
• Neutral: Not aligned with or supporting any side or position in a ----------------------
controversy: The arbitrator was absolutely neutral.
----------------------
• Biased: A particular tendency or inclination, especially one that prevents
unprejudiced consideration of a question; prejudice. ----------------------
• Magnitude: Size; extent; dimensions: to determine the magnitude of an
----------------------
angle
• Omnipresent: Present everywhere at the same time: the omnipresent ----------------------
God
----------------------
• Insidious: Working or spreading in a hidden and usually injurious way;
“glaucoma is an insidious disease”; “a subtle poison” ----------------------
• Humongous: Extremely large; enormous ----------------------

• Worrisome: Worrying, annoying, or disturbing; is causing worry: a ----------------------
worrisome problem
----------------------
• Countermeasure: A measure or action taken to counter or offset another
one ----------------------
• Jargon: The language, esp. the vocabulary, peculiar to a particular trade,
----------------------
profession, or group: medical jargon
• Vendors: One that sells or vends: a street vendor; a vendor of software ----------------------
products on the Web ----------------------
Notes • Litigation: The act or process of litigating: a matter that is still in
litigation; a lawsuit
----------------------
• Accurately: Free from error or defect; consistent with a standard, rule, or
---------------------- model; precise; exact
• Aspirations: A strong desire for high achievement
----------------------
• Conversely: A group of words correlative with a preceding group but
---------------------- having a significant pair of terms interchanged, as “hot in winter but cold
in summer” and “cold in winter but hot in summer.”
----------------------
• Consonance: Agreement; harmony; accord
----------------------
• Estimating: To form an approximate judgment or opinion regarding the
---------------------- worth, amount, size, weight, etc.
----------------------
----------------------
1. Explain Sales Management.
----------------------
2. What is Sales Planning?
---------------------- 3. Explain the difference between Enterprise and Transactional.
---------------------- 4. Explain Enterprise selling with a live example.
---------------------- 5. Define the process of identifying the value.
6. Define the process of engaging the customer.
----------------------
---------------------- Answers to Check your Progress

1. A sales planning is deciding in advance the course of action for selling a
----------------------
product or products.
---------------------- 1. Developing economic insight into specific elements of the value chain
requires detailed industry knowledge.
---------------------- 1. True
----------------------
----------------------
----------------------

Notes
Suggested Reading
----------------------
1. www.marketingpower.com
2. Allen, Peter. Selling: Management and Practice. ----------------------
3. Barrow, Colin. Enterprise Development: The Challenges of Starting, ----------------------
Growing and Selling.
----------------------
4. Blades, William H. Selling, the Mother of All Enterprise.
----------------------
5. Brown, Ronald. From Selling to Managing.
6. Eades. Keith M. The New Solution Selling. ----------------------
7. Gorman, Walter P. Selling: Personality, Persuasion, Strategy. ----------------------
8. Hersey, Paul. Selling: A Behavioral Science Approach. ----------------------
9.
Jones, Leroy P., Pankaj Tandon, Ingo Vogelsang. Selling Public
Enterprises: A Cost-benefit Methodology. ----------------------
10. Richardson, Linda. Stop Telling, Start Selling: How to Use Customer - ----------------------
Focused Dialogue to Close Sales.
----------------------
11. Steingold, Fred. The Complete Guide to Selling a Business.
----------------------
12. Thompson, Harvey. The Customer-Centered Enterprise: How IBM and
Other World-Class Companies. ----------------------
13.
Wright, Milburn D., Carlton A. Pederson. Selling: Principles and
----------------------
Methods.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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Segmentation
UNIT
4
Structure:
4.1 Introduction
4.2 Market Segmentation and Target Marketing
4.3 Bases for Segmentation
4.4 Seven Steps to Market Segmentation
4.5 Advantages and Disadvantages of Segmentation
4.6 Recent Developments in Segmentation
Case Study
Summary
Key Words
Suggested Reading
Segmentation 55
Notes
Objectives
----------------------
----------------------
• Explain market segmentation and consider why it is used.
----------------------
• Examine how companies segment markets.
---------------------- • Explore different targeting strategies.
---------------------- • State the role and process of positioning in segmentation strategies.
---------------------- • Discuss how marketers can achieve the most from market segmentation.
----------------------
4.1 INTRODUCTION
----------------------
Segmentation is an invaluable tool for companies seeking to increase
----------------------
market share. But many companies are not implementing effective segmentation
---------------------- strategies. Even household names can be guilty of schemes that purport to be
segmentation, but which in fact are merely data-enabled selling schemes.
----------------------
Companies know that they need to meet the customer’s wants - what they
---------------------- do not know is how to do this. Data offers some useful clues, but it cannot give
the whole picture. Squeezed on one side by maturing markets and on the other
---------------------- by merciless price-cutting, many companies struggle to compete in today’s
post mass-market arena. The result can be undifferentiated offerings that fail to
----------------------
please anyone.
---------------------- So far this issue has mainly affected consumer companies. But
segmentation is now becoming a real concern for B2B markets, as their markets
----------------------
mature as well.
---------------------- The answer for these companies is to engage in real segmentation, rather
---------------------- than data collection and guesswork.
The total market for most products, whether it is consumer, industrial
---------------------- or government, is of heterogeneous nature. That is the market may be widely
---------------------- scattered, the buyers may be numerous belonging to different classes, and
purchasing habits. Also there may be difference in the needs of these buyers. A
---------------------- marketer may be unable to serve all the customers effectively or there may be
superior competitors. In such situation what is to be done by the marketer is to
---------------------- identify the most attractive (profitable) market segment/s and to service it / them
---------------------- effectively. The crux of the modern marketing strategy is S.T.P - Segmenting,
Targeting and Positioning.
----------------------
----------------------
----------------------
----------------------

4.2 MARKET SEGMENTATION AND TARGET MARKETING Notes
In order to be a true market segment, the people or organisations in each ----------------------

segment must respond differently to variations in the marketing mix compared
----------------------
with those in other segments. This implies that for any classification scheme to
qualify as market segmentation, the segments must exhibit these behavioural ----------------------
response differences.
----------------------
In their 1978 book ‘Research for Marketing Decisions’, Paul Green and Donald
Tull set four basic criteria for market segmentation. They are follows: ----------------------
• The segments must exist in the environment (and not be a figment of the
----------------------
researcher’s imagination),
• The segments must be identifiable (repeatedly and consistently), ----------------------
• The segments must be reasonably stable over time, and ----------------------
• One must be able to efficiently reach segments (through specifically
----------------------
targeted distribution and communication initiatives).
Market Segmentation and Strategic Planning ----------------------
A market segmentation strategy requires a major commitment by ----------------------
the organisation. A firm adopts either a mass-market strategy or a market
segmentation strategy. There is no part in-between the two. ----------------------
Senior management must be involved, and a strategic decision is required ----------------------
to effectively segment a market. The firm’s marketing organisation must be able
to execute alternative marketing strategies and vary pricing, promotion, and/or ----------------------
distribution systems.
----------------------
Also, R&D must be able to execute product variations, and manufacturing
must be able to produce those variations. Finance must be able to report costs, ----------------------
profits, and margins by market segment and marketing research must be
----------------------
able to monitor and measure customer response and provide feedback to the
organisation by market segment. ----------------------
Typically, the firm will develop market segments for each product
----------------------
category and/or broad geographic market. Next it will discern its current and
proposed positions within each of those segments and select its target markets ----------------------
on the basis of the opportunities that exist in each segment.
At that point, the firm sets initial forecasts of the market demand for each ----------------------
segment. Then, the firm will typically fine-tune its marketing mix to achieve ----------------------
optimal positioning and penetration in each selected target market.
Target Marketing ----------------------
Target Marketing involves breaking a market into segments and then ----------------------
concentrating your marketing efforts on one or a few key segments. Target
marketing can be the key to a small business’s success. ----------------------
The beauty of target marketing is that it makes the promotion, pricing and ----------------------
distribution of your products and/or services easier and more cost-effective.
Target marketing provides a focus to all of your marketing activities. ----------------------
Segmentation 57
Notes So if, for instance, I open a catering business offering catering services
in the client’s home, instead of advertising with a newspaper that goes out to
---------------------- everyone, I could target my market with a direct mail campaign that went only
to particular residents.
----------------------
While market segmentation can be done in many ways, depending on
---------------------- how you want to slice up the pie, three of the most common types are:
---------------------- • Geographic segmentation -based on location such as home addresses;
Demographic segmentation -based on measurable statistics, such as age
•
----------------------
or income;
---------------------- Psychographic segmentation -based on lifestyle preferences, such as
•
---------------------- being urban dwellers or pet lovers.
If you are interested in target marketing, the first step is to do the research
---------------------- that will help you define and zero in on your target market.
----------------------
----------------------

---------------------- 1. A market segmentation strategy requires a major _________ by the
organisation.
----------------------
---------------------- 1. Target marketing can be the key to a small business’s success.
----------------------
---------------------- 4.3 BASES FOR SEGMENTATION

---------------------- In order to successfully implement a market segmentation strategy, a
business must employ market research techniques to find patterns of similarity
---------------------- among customer preferences in a market. Ideally, customer preferences will fall
---------------------- into distinct clusters based upon identifiable characteristics of the population.
This means that if customer requirements were plotted on a graph using certain
---------------------- characteristics, or segmentation bases, along the axes, the points would tend to
form clusters.
----------------------
To be pursued by a marketer, according to Alexander Hiam and Charles D.
---------------------- Schewe in ‘The Portable MBA in Marketing’, the customer segments should be:
---------------------- a) Identifiable and measurable;

b) Large enough to be profitable;
----------------------
c) Reached effectively (for example, its members must tend to view the
---------------------- same television programs, read the same publications, or shop in the same
places);
----------------------
d) Responsive to marketing; and
----------------------

e) Stable and not expected to change quickly. A company might elect to Notes
serve a single market segment or attempt to meet the needs of several
segments. ----------------------
Determining how to segment a market is one of the most important ----------------------
questions a marketer must face. Creative and effective market segmentation can
lead to the development of popular new products, but unsuccessful segmentation ----------------------
can cost a great deal of money and still not yield the desired results. There are
----------------------
three main types of segmentation bases for businesses to consider descriptive
bases, behavioural bases, and benefit bases each of which breaks down into ----------------------
numerous potential customer traits.
----------------------
Descriptive bases for market segmentation include a variety of factors
that describe the demographic and geographic situation of the customers in a ----------------------
market. They are the most commonly used segmentation bases because they are
easy to measure, and because they often serve as strong indicators of consumer ----------------------
needs and preferences. Some of the demographic variables that are used as
----------------------
descriptive bases in market segmentation might include age, gender, religion,
income, and family size, while some of the geographic variables might include ----------------------
region of the country, climate, and population of the surrounding area.
----------------------
Behavioural bases for market segmentation are generally more difficult
to measure than descriptive bases, but they are often considered to be more ----------------------
powerful determinants of consumer purchases. They include those underlying
factors that help motivate consumers to make certain buying decisions, such as ----------------------
personality, lifestyle, and social class. Behavioural bases also include factors
----------------------
that are directly related to consumer purchases of certain goods, such as their
degree of brand loyalty, the rate at which they use the product and need to ----------------------
replace it, and their readiness to buy at a particular time.
----------------------
Businesses that segment a market based on benefits, hope to identify
the primary benefit that consumers seek in buying a certain product, and then ----------------------
supply a product that provides that benefit. This segmentation approach is based
upon the idea that market segments exist primarily because consumers seek ----------------------
different benefits from products, rather than because of various other differences ----------------------
between consumers. One potential pitfall to this approach is that consumers do
not always know or cannot always identify a single benefit that influences them ----------------------
to make a purchase decision. Many marketers use a combination of bases that
seem most appropriate when segmenting a market. Using a single variable is ----------------------
undoubtedly easier, but it often turns out to be less precise. ----------------------
----------------------
Fill in the blanks.
----------------------
1. Descriptive bases for market segmentation include a variety of factors
that describe the __________ and geographic situation of the customers ----------------------
in a market.
----------------------
Segmentation 59
Notes
Activity 1
----------------------
---------------------- Why behavioural base of the market segments are difficult to measure
compared to descriptive base. Explain with examples.
----------------------
---------------------- 4.4 SEVEN STEPS TO MARKET SEGMENTATION

----------------------
Market segmentation is widely defined as being a complex process
---------------------- consisting of two main phases:
• Identification of broad, large markets
----------------------
• Segmentation of these markets in order to select the most appropriate
---------------------- target markets and develop Marketing mixes accordingly.
---------------------- Everyone within the Marketing world knows and speaks of segmentation
yet not many truly understand its underlying mechanics, thus failure is just
---------------------- around the corner. What causes this? It has been documented that most
---------------------- marketers fail the segmentation exam and start with a narrow mind and a bunch
of misconceptions such as ‘all teenagers are rebels, all elderly women buy the
---------------------- same cosmetics brands’ and so on. There are many dimensions to be considered,
and uncovering them is certainly an exercise of creativity.
----------------------
The most widely employed model of market segmentation comprises
---------------------- seven steps, each of them designed to encourage the marketer to come with a
creative approach.
----------------------
STEP 1: Identify and name the broad market
----------------------
You have to have figured out by this moment what broad market your
---------------------- business aims at. If your company is already on a market, this can be a starting
point; more options are available for a new business but resources would
---------------------- normally be a little limited.
---------------------- The biggest challenge is to find the right balance for your business: use
your experience, knowledge and common sense to estimate if the market you
---------------------- have just identified earlier is not too narrow or too broad for you.
---------------------- STEP 2: Identify and make an inventory of potential customers’ needs
---------------------- This step pushes the creativity challenge even farther, since it can be
compared to a brainstorming session.
----------------------
What you have to figure out is what needs the consumers from the broad
---------------------- market identified earlier might have. The more possible needs you can come up
with, the better.
----------------------
Got yourself stuck in this stage of segmentation? Try to put yourself into
---------------------- the shoes of your potential customers: why would they buy your product, what
could possibly trigger a buying decision? Answering these questions can help
---------------------- you list most needs of potential customers on a given product market.

STEP 3: Formulate narrower markets Notes
McCarthy and Perreault suggest forming sub-markets around what you
----------------------
would call your ‘typical customer’, then aggregate similar people into this
segment, on the condition to be able to satisfy their needs using the same ----------------------
Marketing mix. Start building a column with dimensions of the major need you
try to cover: this will make it easier for you to decide if a given person should be ----------------------
included in the first segment or you should form a new segment. Also create a
----------------------
list of people-related features, demographics included, for each narrow market
you form - a further step will ask you to name them. ----------------------
There is no exact formula on how to form narrow markets: use your
----------------------
best judgment and experience. Do not avoid asking opinions even from non-
Marketing professionals, as different people can have different opinions and ----------------------
you can usually count on at least those items most people agree on.
----------------------
STEP 4: Identify the determining dimensions
Carefully review the list resulted from the previous step. You should have ----------------------
by now a list of need dimensions for each market segment: try to identify those ----------------------
that carry a determining power.
Reviewing the needs and attitudes of those you included within each ----------------------
market segment can help you figure out the determining dimensions. ----------------------
STEP 5: Name possible segment markets
----------------------
You have identified the determining dimensions of your market segments,
now review them one by one and give them an appropriate name. ----------------------
A good way of naming these markets is to rely on the most important ----------------------
determining dimension.
----------------------
STEP 6: Evaluate the behaviour of market segments
Once you are done naming each market segment, allow time to consider ----------------------
what other aspects you know about them. It is important for a marketer to ----------------------
understand market behaviour and what triggers it. You might notice that, while
most segments have similar needs, they’re still different needs: understanding ----------------------
the difference and acting upon it is the key to achieve success using competitive
offerings. ----------------------
STEP 7: Estimate the size of each market segment ----------------------

Each segment identified, named and studied during the previous stages ----------------------
should finally be given an estimate size, even if, for lack of data, it is only a
rough estimate. ----------------------
Estimates of market segments will come in handy later, by offering a ----------------------
support for sales forecasts and help plan the Marketing mix: the more data we
can gather at this moment, the easier further planning and strategy will be. ----------------------
These were the steps to segment a market, briefly presented. If performed ----------------------
correctly and thoroughly, you should now be able to have a glimpse of how to
build Marketing mixes for each market segment. ----------------------
Segmentation 61
Notes This seven steps approach to market segmentation is very simple and
practical and works for most marketers. However, if you are curious about other
---------------------- methods and want to experiment, you should take a look at computer-aided
techniques, such as clustering and positioning.
----------------------
---------------------- 4.5 ADVANTAGES AND DISADVANTAGES OF

SEGMENTATION
----------------------
As in any business, it is unlikely that you will be able to operate in all
----------------------
segments so it is more likely that you will have to concentrate your effort and
---------------------- resources into a well-defined market segment. However, there are distinct
advantages in segmentation.
----------------------
Advantages
---------------------- The main objective of segmentation is to increase your sales (i.e.
strengthen your position in the market) and increase your profits. It helps you
----------------------
achieve this by helping you to;
---------------------- • Identify new product opportunities. It does this by helping you identify
---------------------- the needs of different market segments and developing products to satisfy
those needs.
---------------------- • Develop more efficient methods of promoting existing products by
---------------------- enabling you to:
a) Identify new or highly profitable markets or new channels of distribution.
----------------------
b) Target a particular market segment more efficiently than spreading limited
---------------------- resources over a wide area.
---------------------- c) Maintain sales but reduce expenditure on promotion and advertising.
---------------------- You must remember that a business based on too narrow a market
is vulnerable to market decline and/or competition (from new entrants or
---------------------- imports). Indeed, in addition to advantages, there are distinct disadvantages in
segmentation.
----------------------
Disadvantages
---------------------- Generally there is an increase in costs with segmentation stemming from
---------------------- increased;
• Market research - The need to better understand the needs of the various
----------------------
market segments.
---------------------- • Research and development - The need to produce different products for
the different market segments.
----------------------
• Production costs - The need for different products for different market
---------------------- segments.
---------------------- • Administrative costs - The need for separate marketing plans for the
different segments.
----------------------

• Inventory costs - The need for additional stock to cover variations in Notes
demand plus additional stock holding and control systems.
• Distribution costs - The need for different distribution channels for ----------------------
different market segments. ----------------------
• Advertising and sales costs - Separate plans have to be developed and
----------------------
implemented for each segment.
Therefore, you have to consider very carefully whether you are going to ----------------------
adopt an undifferentiated or a segmented marketing strategy.
----------------------
4.6 RECENT DEVELOPMENTS IN SEGMENTATION ----------------------
Since 1995, there have been some interesting new developments in market ----------------------
segmentation research. The following sections discuss those recent advancements
----------------------
and include:
• Multidimensional segmentation ----------------------
• Artificial neural networks ----------------------
• Latent class models ----------------------
• Fuzzy and overlapping clustering and
----------------------
• Occasion-based segmentation
----------------------
Multidimensional segmentation
There is no reason to limit the basis for segmentation to only one type of ----------------------
variable when many criteria actually determine buyers’ responses to the selling
----------------------
proposition.
A segmentation scheme based on multiple dimensions, using separate ----------------------
segmentation schemes for each one, is often more useful and more flexible for ----------------------
planning marketing strategy and executing marketing tactics.
Thus, marketers may consider different segmentations on a sample of ----------------------
buyers using different bases such as: stated needs, benefits, and amount spent in ----------------------
the category.
In the past, such segmentation schemes were deemed too confusing and ----------------------
produced too many segments for marketing managers to address effectively. ----------------------
Yet, in an era of micro-niche marketing and direct marketing tools, many
market planners now consider market segmentation schemes that support finer ----------------------
targeting efforts.
----------------------
Artificial Neural Networks (ANNs)
----------------------
Starting in the early 1990s, ANNs have been developed to address host
of analytical problems. Both the appeal and the bane of ANNs is that they do ----------------------
not require any particular underlying model formulation or data structure, as do
regression analysis, logit modeling or factor analysis. ----------------------
----------------------
Segmentation 63
Notes In general, ANNs are given a set of input variables and a set of known
outcomes, and the algorithm is asked to find the best relationship between the
---------------------- inputs and the outputs. It does this by initially forming a trial relationship on a
subset of the data, called the learning set.
----------------------
The algorithm then backs up through one or more “hidden layers” of
---------------------- input junctures, or neurons, and adjusts the weight of each input to that neuron
to maximise its contribution to accurately predicting the outcome. Results are
---------------------- validated with a third sample, the validation sample.
---------------------- There are some specialised neural networks designed to cluster cases of
data. These fall in the class of unsupervised neural network meaning that the
---------------------- outcomes are not prespecified.
---------------------- One of the best known of these clustering ANNs is the Kohonan Self-
Organising Map. All ANNs of this type require a large number of cases because
----------------------
they need a large leaning sample, a large test sample, and a large validation
---------------------- sample.
The usefulness of the clustering solution seems dependent on the initial
----------------------
selection of seeds or the shape of the transform function. Many alternative runs
---------------------- may be necessary to find an acceptable solution.
Another issue with ANNs is that they can overlearn. Determining when to
----------------------
stop an ANN from learning is a problem that has not yet been fully solved.
---------------------- Latent class models (Mixture Models)
---------------------- Basically, Latent Class Models (LCMs) enable the user to simultaneously
optimise a research function and find clusters of cases within that framework.
---------------------- In general, the model may be applied to almost any dependency model - such as
---------------------- regression, logit and discriminate.
Software is being rapidly developed to apply LCM to a variety of standard
---------------------- optimisation models.
---------------------- The problem with defining market segments using any of the dependency
methods, including LCM and CHAID, is that you are assuming the market is
----------------------
segmented based on optimising the explained variance in a single dependent
---------------------- variable. This is seldom sufficient for strategic and many tactical market
segmentation efforts. However, the methods can be very useful for better
---------------------- understanding market structures.
---------------------- Fuzzy and overlapping clustering
---------------------- Most clustering algorithms are programmed so that all cases are assigned
to one and only one cluster. The basic idea in fuzzy (or overlapping) clustering
---------------------- is to allow a single case to be assigned to more than one cluster. Currently, there
is no widely available software to handle this procedure, and there may be little
---------------------- need for it.
---------------------- Think about a situation where you ask respondents to complete a conjoint
trade-off task about their bear selection preferences in different situations - such
---------------------- as at a business social function and at a bar with a group of friends.

The conjoint attributes and levels are identical, but respondents’ resulting Notes
profile preference ratings may be different based on the situation. If you derive
importance for each attribute for each of those two occasions for the respondents, ----------------------
you will get two sets of derived importance for each respondent.
----------------------
There is no reason you cannot subject both sets of derived importance
for these respondents to a standard clustering routine. The same respondent ----------------------
may then show up in two different clusters, depending on the results from his
situational preferences. ----------------------
Occasion-based segmentation ----------------------

A particular challenge in market segmentation analysis is how to address ----------------------
segments when circumstances or occasions drive product preference and
selection. ----------------------
For example, a researcher is measuring the relative influence of a set ----------------------
of brands, product attributes, and price variations for carbonated soft drinks
purchased for immediate consumption in a variety of store settings: grocery, ----------------------
convenience, mass merchandise, delivery, and drug store.
----------------------
Respondents do a point allocation of importance of each attribute, plus
price and brand name, on influencing their selection for each store setting that ----------------------
they have experienced in the past ten days. In addition, respondents provide a
----------------------
demographic and consumption volume profile.
The researcher could execute a clustering of the point allocation data for ----------------------
each type of shopping trip, thus deriving segments on the basis of the importance ----------------------
drivers for each store type, separately.
Alternatively, the researcher could submit all the point allocation data to ----------------------
a clustering algorithm and find clusters or segments in which the importance ----------------------
drivers are similar within each cluster and different between clusters, regardless
of the occasion. The resulting clusters may or may not differentiate between ----------------------
store types.
----------------------
Either way, the researcher executed an occasion-based segmentation.
----------------------
Speculations on the future of market segmentation research
It seems that the future for market segmentation research is rather rosy ----------------------
from the demand side. Market segmentation has taken on an increasingly
----------------------
important role in business strategy development. Thus, senior management
is demanding more segmentation research as a critical input to the strategic ----------------------
planning process.
----------------------
Our ability to accumulate and manage massive amounts of data on
customers and potential customers, aligned with the availability of many ----------------------
more targeted communication capabilities, ensure that there will be increasing
demand for much more and much finer identification of target markets in most ----------------------
product and service categories. The massive use of the Internet only opens up ----------------------
greater possibilities for target marketing.
----------------------
Segmentation 65
Notes There are a few downsides. The need for isolating and defining ever-
smaller target markets will require ever-larger research sample sizes and a
---------------------- commensurate increase in the costs. Samples must be pristine and projectable
to the larger population. For a while, this will preclude using the Internet as a
---------------------- respondent recruiting method for segmentation research.
---------------------- This same demand for finer targeting will force more researchers into
the complexities of multidimensional and occasion-based segmentation. These
---------------------- procedures require more time for analysis and reporting, improved methods for
---------------------- delivering and managing results, and the need for leveraging database reporting
capabilities.
---------------------- The ANNs and LCMs will continue to supplant many traditional
---------------------- segmentation algorithms. These require increased methodological and statistical
training for their effective use.
----------------------
The anticipated changes indicate that the implementation of a segmentation
---------------------- strategy will get much more complex for both marketers and researchers.
----------------------
Activity 2
----------------------
Summarise the important, recent development in market segmentation in
----------------------
250 words.
----------------------
----------------------
Case Study
----------------------
Introduction
----------------------
Decision-makers within organisations need to look into the future.
---------------------- As they do so, their thinking should focus on their customers. These should
include existing customers and potential customers who have so far not taken
---------------------- up products from that organisation. In an age when credit is more widely
available than ever, this case study focuses on a new product launched by
----------------------
Experian, a global information solutions company which runs one of the UK’s
---------------------- leading credit reference agencies. Experian traditionally deals with business-to
-business customers. This case study illustrates how Experian has developed a
---------------------- new product called Credit Expert for consumers.
---------------------- Experian operates in more than 60 countries. It has over 20 years experience
in providing financial, statistical and marketing information to businesses and
---------------------- consumers. Building partnerships with companies is Experian’s core business.
For example, when banks, credit card companies and other financial services
----------------------
organisations lend money, they need information they can rely on. Lending
---------------------- money involves an element of risk. Experian’s information helps them with the
decisions they have to take.
----------------------
----------------------

As a credit reference agency (CRA), Experian enables different lenders, Notes
such as banks, to share information about their customers’ credit accounts. The
lender can then use this information to help it to decide whether somebody ----------------------
can afford to repay any borrowings. It looks at how much credit the customer
----------------------
already has. It also looks at how they are managing this. Lenders pay a fee to
the CRA each time they search its records. Consumers give permission for their ----------------------
credit report information to be looked at when they apply for credit and for
their account information to be stored with a CRA. People have a legal right to ----------------------
see the information about them held by a CRA. Experian charges consumers
----------------------
£2, the statutory fee set by the Consumer Credit Act, to provide a copy of the
information held on a credit report (sometimes called a credit file). People ----------------------
receiving formal debt counselling receive their credit report free.
----------------------
Diversification
As organisations develop their businesses, they face a range of choices ----------------------
and opportunities. One way of representing these choices is through a matrix ----------------------
developed by Igor Ansoff in 1965.
Product ----------------------
Market Present New ----------------------
Present Market Penetration Product Development
----------------------
New Market Development Diversification
----------------------
By relating product opportunities to markets, this mix identifies four ----------------------
broad alternative marketing strategies open to Experian:
a) Market penetration -This involves selling more of existing products to ----------------------
existing markets. This increases the organisation’s market share. Experian ----------------------
is the largest credit reference agency in the UK market and in this field the
company has two main competitors. ----------------------
b) Product development -This means developing new products for existing ----------------------
markets. Experian is a customer-focused organisation. Its customers are
businesses. Knowledge of individuals and markets enables Experian to ----------------------
build and develop a wide range of products relevant to its customers.
----------------------
c) Market development -This strategy takes existing products and finds new
markets for them. Experian uses market research to target and develop its ----------------------
markets. Operating in more than 60 countries, Experian used this strategy
----------------------
to become a global leader in the information products market.
d) Diversification -This involves moving away from core activities and ----------------------
developing new products for new markets. Diversification stands apart
----------------------
from the other strategies. It involves the greatest risk of all strategies. It
requires new skills, new techniques and different ways of operating. In a ----------------------
world where credit is a part of modern living, Experian diversified with
a new product Credit Expert, launched in 2003. This decision recognised ----------------------
that many consumers wanted to be more in control of their credit status,
----------------------
Segmentation 67
Notes to be able to monitor their credit report at any time and protect themselves
against identity fraud.
----------------------
The Market
---------------------- Credit for young people often starts when they take out a student loan.
Credit, such as personal loans, credit cards or hire purchase agreements, can
----------------------
help smooth out the peaks and troughs of your income. It can help you buy
---------------------- expensive items, such as a car or kitchen equipment, which you would otherwise
have to save for. As people settle down they may want to purchase a property.
---------------------- A mortgage is a type of credit that enables them to do this. It is important that
consumers manage their finances properly. They do not want a late payment,
----------------------
identity fraud or clerical error to damage their financial status. This might lead
---------------------- them to being refused credit in the future.
Credit Expert has enabled Experian to target a new market with a new
----------------------
product. Consumers have always been able to apply for their statutory £2 credit
---------------------- report by post by writing to the CRA. More recently, they have been able to
apply online or by phone and receive this statutory report in the post. But by
---------------------- using Credit Expert consumers can access their credit report online, once they
have passed strict authentication and security checks. Consumers are wise to
----------------------
monitor their credit history regularly, particularly before they apply for credit.
---------------------- They can ensure that the information held about them is accurate and up-to-date
and can check that they have not been targeted by an identity fraudster.
----------------------
For the first time, Credit Expert enables consumers to monitor their
---------------------- creditworthiness online by giving them access to their real-time credit report.
They can look at this as often as they like. Looking at their credit report enables a
---------------------- consumer to know what a financial institution will see when it does a credit check
---------------------- in response to an application for credit. Credit Expert also helps its members to
understand how a prospective lender is likely to view the information on their
---------------------- credit reports.
---------------------- Identity fraud is a serious problem in the UK. This may involve somebody
applying for credit in another person’s name. The consumer magazine has
---------------------- revealed that more than one in four people had been affected by identity fraud
or knew somebody who had been. Credit Expert sends its members a text or
---------------------- e-mail, or both, every time there is a significant change to the information on
---------------------- that individual’s credit report. This enables a consumer to verify that a record of
a credit check relates to an application they have made for credit. They can also
---------------------- check that any credit accounts opened belong to them and have not been opened
by a fraudster using their name and address. Credit Expert members can use a
---------------------- free phone number to get help and advice about the information on their credit
---------------------- report. They get immediate help from Experian’s free Victims of Fraud service
if they find they have been the subject of identity fraud.
----------------------
Market segmentation
---------------------- Customers have different needs and wants, likes and dislikes. For example,
not every person likes the same motor car or has the same taste in clothes. There
----------------------

are many different types of consumers with different types of needs. Experian Notes
aims to treat all consumers as individuals. Market segmentation helps to turn
marketing into a science. It does this by separating a market into parts called ----------------------
segments. Each segment contains groups of customers who are likely to respond
in a particular way to marketing activities. Market segmentation involves three ----------------------
elements. These are as follows: ----------------------
a) Segmentation, in which the market is divided into segments.
----------------------
b) Targeting, where an organisation identifies specific segments and provides
products and services relevant to those segments. ----------------------
c) Positioning, where the strategy uses customers’ views to define the ----------------------
location of a product relative to other products in the market.
----------------------
The marketing team at Experian wanted to identify the nature,
characteristics and type of consumer who would be interested in Credit Expert. ----------------------
Markets are segmented in a variety of ways. Experian used its knowledge of
consumers who had applied for their statutory credit reports in the past to help ----------------------
segmentation. It built up a profile of the consumer it wanted to target. This took ----------------------
into account people’s ages, where they lived, their gender and socioeconomic
grouping. Experian wanted to attract people with certain characteristics, such as ----------------------
people who were Internet users and Credit users keen to manage their financial
affairs well. ----------------------
These were people who might read the financial pages in daily or Sunday ----------------------
newspapers or visit personal finance websites. This profiling helped marketers
at Experian to identify which groups they would then target with information ----------------------
about the new Credit Expert service. Experian might be a new name to many ----------------------
individuals in consumer markets. Credit Expert was a new UK brand. It was
important to develop an image that would be appropriate for the product that ----------------------
was being offered. Having a profile of the most likely customer also helped
Experian to develop a promotional campaign that would position the product in ----------------------
the minds of its potential customers. ----------------------
Marketing mix
----------------------
Experian undertook its market research and identified the segments
containing those potential customers that it wanted to target. Next, it developed ----------------------
its marketing strategy. Marketing strategies are developed using the marketing
----------------------
mix. Organisations need to create a successful mix of:
• the right product (or service) ----------------------
• sold at the right price ----------------------
• at the right place ----------------------
• using the most suitable form of promotion
----------------------
----------------------
----------------------
Segmentation 69
Notes
Pro
---------------------- ct Place mo
tion
Produ
----------------------
Price
----------------------
----------------------
---------------------- The Credit Expert service enables members to check online that their
credit report is accurate and up to date. It enables them to see their credit history
---------------------- online as often as they want. The Credit Expert alert service helps them to
identify whether somebody has been asking for credit using their name and
---------------------- address, which enables them to spot identity fraud. If there is a problem,
---------------------- consumers get free phone advice from credit reference specialists. Members
can also order a credit score based on their Experian credit report, which gives
---------------------- them an idea of how a lender would view the information if they were to apply
for credit.
----------------------
Price
---------------------- As with most financial services, there is a charge. Before making a
---------------------- decision to use Credit Expert, consumers can take up a free trial for a 30-day
period. During this time, they have to pay £4.99 to see a credit score. If they
---------------------- are happy with the service, they can use it to help manage their credit history
for £5.99 per month. If they do not think the service is for them, they have to
---------------------- remember to cancel their membership at the end of the 30-day free trial. Credit
---------------------- Expert’s unique selling points (USP) are that it allows consumers to see their
credit reports online and automatically alerts them to important changes to the
---------------------- information held about them. This helps consumers understand what makes
them creditworthy and can help them to manage their credit commitments.
----------------------
Place
----------------------
Credit Expert developed because of the growth in e-commerce,
---------------------- communications technology. Its ‘place’ or channel by which it reaches its users
is the electronic medium of the Internet. Experian developed Credit Expert as
---------------------- an e-commerce product to be available online for consumers. There is also a
free phone help-line. Once you have been verified as a member and have online
----------------------
access to your credit report, you may query any of the information on your
---------------------- credit report by e-mail or phone. The Credit Expert website also includes advice
and tools to help members look after their credit history and avoid identity
---------------------- fraud.
---------------------- Promotion
---------------------- There are two main categories of promotion:

a. Above the line
----------------------
b. Below the line
----------------------

Above-the-line promotion includes the traditional forms of advertising Notes
such as radio and television. Below-the-line promotion carries a one-off cost.
Examples include special offers and exhibitions. Experian has developed a ----------------------
range of different promotional strategies. Each of these was designed to meet
its business objectives. ----------------------
Until recently, Experian worked mainly in the business-to-business (B2B) ----------------------

market. Its expertise was in personal selling. To succeed in the business-to-
----------------------
consumer (B2C) market, Experian had to use a different promotional mix.
Over the last few years, Experian has become increasingly well known ----------------------
to consumers, thanks to its consumer education programme, which was
----------------------
established in 1996. The programme uses various tools and channels to explain
to people what work Experian does, how its credit reference agency operates, ----------------------
what information is held on a credit report and how consumers can see, and if
necessary, amend that information. It provides free advice guides for consumers ----------------------
and sponsors events like the Young Consumers of the Year competition, working
----------------------
with partners like Citizens Advice and Trading Standards. The consumer
education programme also uses the media (television, radio, newspapers, ----------------------
magazines and the internet) to provide free information and advice about credit
and debt to consumers. It takes an exhibition stand to many conferences and ----------------------
events like the Ideal Home Show and the BBC Good Homes Show.
----------------------
When Experian launched its Credit Expert brand in the UK, it had to build
on this awareness in order to sell a product to consumers. Credit Expert used a ----------------------
public relations agency to help advertise the new online credit report with press
----------------------
releases and a television advertising campaign. Experian is the official sponsor,
with magazine Credit Today, of Credit Awareness Week 2007, which aims to ----------------------
help consumers understand those credit issues that might confuse them.
----------------------
In order to help people understand the issues surrounding identity fraud,
Experian sponsored Bennett Arron, a comedian. His identity was stolen and ----------------------
used by a fraudster. He now uses a stand-up routine to tell people just what
being a victim of this fraud feels like and how a monitoring service like Credit ----------------------
Expert can help protect you from the effects of this crime. ----------------------
Conclusion
----------------------
A good understanding of the use of modern technology provided Experian
with the opportunity to innovate. Experian diversified by building on its statutory ----------------------
credit report service to develop Credit Expert, giving consumers online access
to information that they had previously only been able to access on paper. In a ----------------------
world where there is an increasing dependence upon credit, Experian created its ----------------------
Credit Expert brand. This has provided consumers with help in understanding
and managing their credit history effectively and safely and helped them guard ----------------------
against identity fraud.
----------------------
----------------------
----------------------
Segmentation 71
Notes Summary
---------------------- • Market segmentation is a powerful and well-developed marketing tool.
A properly segmented market can improve marketing, distribution, and
----------------------
manufacturing efficiency and generate additional profits and/or market
---------------------- share.
---------------------- • The basis selected for segmenting a market is key. The creative application
of alternative bases for segmentation can often provide a strategic
---------------------- advantage to the innovative firm.
---------------------- • A strategy of market segmentation must be supported at the very top of

the organisation and must permeate the organisation.
---------------------- • Market segmentation research, especially baseline segmentation research,
---------------------- must be carefully planned and executed, using the highest professional
research standards. A mis-segmented market is often worse than making
---------------------- the mass-market assumption.
----------------------
Keywords
----------------------
• Demographic: Relating to the dynamic balance of a population especially
---------------------- with regard to density and capacity for expansion or decline
---------------------- • Psychographic: A graphic representation or chart of the personality traits
of an individual
----------------------
• Pursued: To strive to gain or accomplish
---------------------- • Identity fraud: The criminal use of a stolen identity to obtain goods or
services by deception
----------------------
• Creditworthiness: A lender’s judgment on your capability to pay back
---------------------- your debts and the likelihood of you doing so.
---------------------- • Market segmentation: A process of separating a total market into parts
so that different strategies can be used for different sets of customers
----------------------
• Socio-economic grouping: A form of segmentation where a market is
---------------------- divided by the purchasing power of individuals
• Brand: A name, symbol or design used to identify a specific product and
----------------------
to differentiate it from its competitors
---------------------- • Promotional campaign: A mix of strategies used to inform, develop and
sell to a customer base
----------------------
• Unique selling points: Specific benefits of a product or service that
---------------------- competitors do not or cannot offer
---------------------- • Above the line: Direct expenditure on advertising, such as for a TV
advertisement.
----------------------
• Below the line: Indirect expenditure on promotion, such as through free
---------------------- gifts, PR or competitions

• Personal selling: A salesperson liaising with a company to sell and Notes
provide products and services
----------------------
• Business-to-consumer (B2C): Transactions between business and
consumers ----------------------
• Promotional mix: A range of different communication methods used to
----------------------
target and meet the needs of different segments of consumers
• Public relations: Activities involved in communicating with different ----------------------
stakeholders such as customers, the public and the media
----------------------
• Sponsor: A person or organisation that funds an activity
----------------------
1. What are the bases of market segmentation? ----------------------

2. Enumerate the advantages of segmentation. ----------------------
3. What is a target market? ----------------------
4. Use an example to describe what is meant by market segmentation.
----------------------
5.
Explain the difference between business-to-business markets and
business-to- consumer markets. ----------------------
6. What is the purpose of public relations? ----------------------
7. Explain and then evaluate some of the problems and issues associated
----------------------
with a business strategy such as diversification.
----------------------
----------------------
Fill in the blanks.
----------------------
1.
A market segmentation strategy requires a major commitment by the
organisation. ----------------------
State True or False ----------------------
1. True
----------------------
----------------------
Fill in the blanks.
1. Descriptive bases for market segmentation include a variety of factors that ----------------------
describe the demographic and geographic situation of the customers in a
----------------------
market.
----------------------
----------------------
----------------------
Segmentation 73
Notes
Suggested Reading
----------------------
1. http://www.thetimes100.co.uk
---------------------- 2. http://www.tutor2u.net
---------------------- 3. Drucker, Peter F. The Practice of Management.
---------------------- 4. Green, Paul and Donald Tull. Research for Marketing Decisions.
5. Hiam, Alexander and Charles D. Schewe. The Portable MBA in Marketing.
----------------------
6. Kotler, Philip. Marketing Management.
----------------------
7. Kurtz and Boone. Marketing.
---------------------- 8. McCarthy & Perreault Jr. Basic Marketing.
---------------------- 9. Raish, Warren D. The e Marketplace - Strategy for success.
---------------------- 10. Reis and others. Positioning.

11. Stanton, William J. Fundamentals of Marketing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Targeting and Sales Planning
UNIT
5
Structure:
5.1 Introduction
5.2 Target Market
5.3 Finding Target Market
5.4 Sales Planning
Case Study
Summary
Key Words
Suggested Reading
Targeting and Sales Planning 75

Notes
Objectives
----------------------
----------------------
• State target and target marketing
----------------------
• Explain the process of identifying the target market
---------------------- • Explain sales planning
---------------------- • Explain the process of sales planning
----------------------
5.1 INTRODUCTION
----------------------
---------------------- Before we study Targeting, we must have a clear idea of the terms: Target
Market, Market Targeting and Target Marketing.
---------------------- Target Market
---------------------- A target market is a group of customers at whom the organisation specially
intends to aim its marketing efforts.
----------------------
Market Targeting
----------------------
This is a decision regarding the market segment/s to be served. After
---------------------- segmentation of the market, the firm evaluates the various segments and decides
which one or how many should be served.
----------------------
Target Marketing
---------------------- Here the seller distinguishes the major market segments; targets one or
---------------------- more of these segments and develops products and marketing programs tailored
to each select segment,
---------------------- Having segmented the market the marketer has to fix the target market. As
---------------------- explained earlier, market targeting means evaluating the segments and deciding
how many or which one to be served. For example a firm supplying ready wear
---------------------- items may form segments of the market children, youth, adults, and the old. In
each segment, sub segments also can be formed, say male and female. Next
---------------------- the firm has to select (target) – one, a few, or all. The firm can adopt following
---------------------- strategies for their target market:
• Single Segment Concentration
----------------------
• Selective Specialisation
----------------------
• Product Specialisation
---------------------- • Market Specialisation
---------------------- • Full Market Coverage
----------------------
----------------------

5.2 TARGET MARKET Notes
Effectively identifying the potential customer base helps to drive overall ----------------------
marketing and sales strategies that will include within other sections of the
----------------------
business plan.
The target market section of the business plan must clearly identify the ----------------------
current and prospective buyers of the Company’s products and/or services.
----------------------
Company’s goal in preparing the target market section is to clearly understand
who the customers are and how the company’s products/services directly meet ----------------------
the needs of the market place. Properly identifying the potential customer base
also helps to drive overall marketing and sales strategies. ----------------------
Although the product or service may meet the needs of a large constituency ----------------------
of potential customers, the goal is to define the customer base as specifically as
possible - both quantitatively and qualitatively. ----------------------
Size ----------------------
How large is the target market? Are there 1,000 business buyers? 10 ----------------------
million potential consumers ready to purchase the product? Or a small handful
of very large target customers? ----------------------
Demographics ----------------------
The demographic traits of the customers often vary based on whether the
----------------------
company focused on serving the consumer or business markets:
• Consumer - Income, Occupation, Gender, Single/Married, Ethnic Group, ----------------------
Education ----------------------
• Business - Industry, Product/Service, Years in Business, Revenue,
Employee size, Private/Public ----------------------
Geographic ----------------------
Where are the customers located? While technology has made location ----------------------
less of an issue for many companies, it does not mean you should overlook the
importance of defining the geographic location of the customers. Clarifying ----------------------
these issues also helps to ensure that the marketing and sales strategies/budgets
----------------------
properly match the goals to capture market share.
Other Characteristics ----------------------
What are some of the more subjective traits that define the customers? ----------------------
This might include things such as current buying motivations, perceived
shortcomings of other solutions in the market, and trends/purchasing shifts ----------------------
likely to occur within your target market.
----------------------
Naturally, the more you understand your customers, the better your
chances of success. Many times the best approach to answer the target market ----------------------
question: ‘Who is our customer?’ Conduct simple surveys or focus on groups.
----------------------
If feasible, work with a reputable market research firm to guide you through the
process. ----------------------

Notes At the very least, use the Internet and industry groups to locate market
research studies and statistics for the business plan. These resources can range
---------------------- from free information available on websites to expensive professional market
research studies prepared by experts in the field.
----------------------
Performing primary research enables you to gather and document the
---------------------- quantitative and qualitative information needed to prepare a solid target market
section for the business plan.
----------------------
---------------------- Activity 1
----------------------
How does target marketing help an organisation? Detail a live example
---------------------- from your experience to supplement the same.
----------------------
5.3 FINDING TARGET MARKET
----------------------
---------------------- “Who are your customers? Who will buy your product?” We are often
surprised that otherwise savvy business people either have no idea who will buy
---------------------- from them, or they assume that ‘everyone’ will.
---------------------- Assumptions like this can lead to wrong decisions, wrong pricing, wrong
marketing strategy and ultimately, business failure.
---------------------- The most successful businesses understand that only a limited number of
---------------------- people will buy their product or service. The task then becomes determining, as
closely as possible, exactly who those people are, and ‘targeting’ the business’s
---------------------- marketing efforts and money towards them.
---------------------- You, too, can build a better, stronger business, by identifying and serving
a particular customer group – your target market.
----------------------
One of the first things that needs to done is to refine the product or service
---------------------- so that they are NOT trying to be ‘all things to all people.’ Become a specialist!
For example, in an eco-tourism company, they made some specific
----------------------
decisions early in their market planning.
---------------------- As a charter boat business, they knew that there were plenty of fishing
---------------------- charter operators in the area, and ‘party boats’ as well. So they decided that they
would offer sightseeing or special event charters, and that they would not allow
---------------------- alcohol on board, or fishing rods. Yes, this decision eliminated a percentage of
the market – but it also gave them a ‘niche’ that they could capitalise on, and
---------------------- expanded their market in a way that other charter operators could not take
---------------------- advantage of.
Next, you need to understand that people purchase products or services
---------------------- for three basic reasons:
----------------------
----------------------

• To satisfy basic needs Notes
• To solve problems
----------------------
• To make themselves feel good
----------------------
You will need to determine which of those categories of your product or
service is the solution to the problems and be prepared to market it accordingly. ----------------------
The product or service may fit more than one category, too – the charter ----------------------
business primarily targets folks who just want to feel good – spending a day out
on the water, relaxing and being waited on. But it also targets people who have ----------------------
visitors coming from out of town, or even overseas, because they represent a
solution to the problem of “What will we do while our company is here? How ----------------------
can we entertain them, or show them our area?” ----------------------
The next step in creating an effective marketing strategy is to zero in on
the target market by using Market Segmentation. ----------------------
First of all, is the product international or national in scope? Or is it more ----------------------

likely that it will sell primarily in their own region or community? In the case of
the charter business, their primary market is actually national or international ----------------------
– tourists who come to that area from all over the world. Their secondary ----------------------
market is local – people who have a special event to celebrate, a company
meeting or retreat to plan, or company coming from out of town. ----------------------
Let’s say that the primary market is local or regional, and that you live in a ----------------------
community with a population of 25,000 people. The first thing you will need to
do is research the ‘demographics’ of your community, and divide it into market ----------------------
segments:
----------------------
• Age: children, teens, young, middle, elderly
----------------------
• Gender: male, female
• Education: high school, college, university ----------------------
• Income: low, medium, high ----------------------

• Marital status: single, married, divorced ----------------------
• Ethnic and/or religious background
----------------------
• Family life cycle: newly married, married for 10 – 20 years, with or
without children. ----------------------
This information should be available to you through your local ----------------------
municipality, panchayat or Chamber of Commerce – and the more detail you
can get, the better. ----------------------
Next, you need to segment the market as much as possible using ----------------------
‘psychographics’ as your guide:
----------------------
• Lifestyle: conservative, exciting, trendy, economical
----------------------
• Social class: lower, middle, upper
• Opinion: easily led or opinionated ----------------------

Notes • Activities and interests: sports, physical fitness, shopping, books
• Attitudes and beliefs: environmentalist, security conscious
----------------------
If it’s a B2B company, then you’ll also need to consider the types of
---------------------- industries available to you, and their number of employees, annual sales volume,
location, and company stability.
----------------------
In addition, you might want to find out how they purchase: seasonally,
---------------------- locally, only in volume, who makes the decisions? It is important to note that
---------------------- businesses, unlike individuals, buy products or services for three reasons only:
to increase revenue, to maintain the status quo, or to decrease expenses. If you
---------------------- fill one or more of these corporate needs, you may have found a target market.
---------------------- By now a picture emerging of who you think your ‘ideal’ customer is …
or who you want it to be. Depending on the nature of the business, you might
---------------------- even be able to write a description of your customer. “My target customer is
a middle-class woman in her 30s or 40s who is married and has children, and
---------------------- is environmentally conscious and physically fit.” Based on the numbers you
---------------------- uncovered in your research, above, you may even know, for example, that there
are approximately 9000 of those potential customers in your area! It may well
---------------------- be that 3000 of them are already loyal to a competitor, but that still leaves 6000
who are not, or who have not yet purchased the product from anyone. Do the
---------------------- research!
---------------------- Lot of times prospective customers don’t know about your company, or
cannot tell the difference between your company and others. It is your job,
---------------------- once you know who your best customers are, to ‘target’ the group that you have
---------------------- identified – even if you have competition.
In addition, you may decide, using the example above that you would also
----------------------
like to extend your target market to include women from 50 – 60 years of age.
---------------------- If you go back to the basic reasons why people purchase goods or services, and
can find ways to target your efforts to that age group, you may be successful in
---------------------- capturing a bigger share of the market!
---------------------- On the other hand, what if you ‘specialised’ your product or service and
then researched your target market, only to discover that there are probably less
---------------------- than 75 people who will buy from you?
---------------------- First of all, if those 75 are corporate customers who will spend hundreds
on your product or service annually, then you have nothing to fear. But if those
---------------------- 75 are only going to spend Rs.500 every decade on your product or service –
then you need to go ‘back to the drawing board’ of planning your business and
----------------------
perhaps determining a wider target market – but at least you are armed with all
---------------------- the information you need to start again, or go in a different direction.
----------------------
----------------------
----------------------

Notes
----------------------
1. The most successful businesses understand that only a limited number of
----------------------
people will buy their product or service.
----------------------
5.4 SALES PLANNING
----------------------
Most salespeople love to be active - out in their territories, seeing people,
----------------------
solving problems, putting deals together. This activity orientation is one of the
necessary characteristics of a sales personality. A day sitting behind a desk is ----------------------
their idea of purgatory.
----------------------
Unfortunately, this activity orientation is both a strength and weakness.
Much of a salesperson’s ability to produce results finds its genesis in the energy ----------------------
generated by this activity orientation.
----------------------
But it can be a major obstacle. Far too often, salespeople are guilty of
going about their jobs directed by the credo of “Ready, shoot... aim.” The luxury ----------------------
of this kind of unfocused activity is a casualty of the Information Age. In order
to be effective, salespeople must be focused and thoughtful about everything ----------------------
they do. Activity without forethought and planning is a needless waste of time
and energy. ----------------------
The most important part of the job to think about is the time they spend ----------------------
in front of their prospects and customers. Of all the different parts of their job,
there is nothing more important to think about... nothing more important to ----------------------
plan... than that. ----------------------
For most salespeople, if they were to make a list of everything they do
in the course of a day, and then consider each of the items on the list, they’d ----------------------
likely discover that almost everything they do can be done cheaper or better by ----------------------
someone else within their company. Someone else can call for appointments
cheaper or better than the salesperson. Someone else can more easily check on ----------------------
back orders. Someone else can fill out a price quote, write a letter, or deliver a
sample, cheaper or better than most salespeople. In fact, it’s likely that the only ----------------------
thing a salesperson can do that no one else in the company can do in a cheaper
----------------------
or better way is to interact with the customers. It’s the face-to-face interaction
with customers that defines the value they typically bring to the company. If it ----------------------
were not for that, your company would have little use for salespeople.
----------------------
So, the face-to-face interaction with the customer is the core value salespeople
bring to the company. Yet, most studies indicate that the average outside ----------------------
salesperson only spends about 25 - 30 percent of his/her working week actually
face-to-face with the customer. ----------------------
In the light of that, doesn’t it make sense to spend some time planning and ----------------------
preparing to make that 25 - 30 percent of the week the highest quality you can
possibly make it? Of course, it does. ----------------------

Notes Planning Principles...
Mastery of this practice is built upon several powerful principles. Here’s the
---------------------- first:
---------------------- Good decisions require good information.
---------------------- It’s the Information Age, remember. It means that, if you’re going to be
an effective professional salesperson, you must collect, store, and use good
---------------------- information. You can’t make effective plans if the information on which you
build those plans is faulty or sketchy.
----------------------
If you were going to build a home, for example, you would want to know
---------------------- about the nature of the ground on which the home was to be built. You’d need
to have a good idea about what kind of weather conditions the home would
----------------------
be enduring, what the building codes were, what materials were available and
---------------------- what they cost, and what kind of skilled workmen were required. The list could
go on and on. The point is that you would not be able to build a home very
---------------------- effectively if you did not have good information on which to base those plans.
---------------------- The same principles apply to building a home as well as delivering effective
sales performance. In both cases, good planning requires good information. It
---------------------- may be that your company provides you all the information you need. But, it
---------------------- is more likely that they don’t. If you are going to work with good information,
you must be the one who collects that information. That means that you must
---------------------- create systems to collect, store and use the information that will be most helpful
to you. Since our world is constantly producing new information, the system
---------------------- you create isn’t something you do once and forget. Rather, it must be a dynamic
---------------------- system that is constantly processing, storing and using new information.
The Information-Collecting Process...
----------------------
Creating and maintaining your system is a matter of following several specific
---------------------- steps. Here’s the process:
---------------------- • Create a list of the categories of information you would like to have.
• Working with one category at a time, brainstorm a list of all the pieces of
---------------------- information you would like to have within that category.
---------------------- • Develop a system and some tools to help you collect that information.
• Store it efficiently
----------------------
• Use it regularly
---------------------- Step One
---------------------- Start by listing the kinds of information you think will be most useful to you.
---------------------- Think about your job and determine what kinds of information you’d like
to have to help you deal effectively with your customers. Here is a partial list
---------------------- that would fit most salespeople:
---------------------- • Information about your customers and prospects
• Information about your competitors
----------------------
• Information about the products, programs and services you sell
You may have a number of other categories, but this is a basic list with Notes
which you can begin.
Step Two ----------------------
Once you have categorised the kind of information you’d like, you can ----------------------
then think about what information would be ideal to have in each category.
----------------------
Start at the top and work down. Look at customers and prospects first.
What, ideally, would you like to know about them? Some typical pieces of ----------------------
information would include information about the account’s total volume of
----------------------
the kind of products you sell, the dates of contracts that are coming up, the
people from whom they are currently buying, and so forth. All of that seems ----------------------
pretty basic. However, most salespeople have no systematic way of collecting
and storing that information. So, while you may occasionally ask a certain ----------------------
customer for parts of it, you probably are not asking every customer for all the
----------------------
information. You are probably not collecting it, storing it, and referring to it in
a systematic, disciplined way. ----------------------
Do you think your competitors know exactly how much potential each of
----------------------
their accounts has? Do you think they know other pieces of useful information,
like, for example, how many pieces of production equipment each customer ----------------------
has, and the manufacturer and year of purchase of each? Probably not. If you
collect good quantitative marketing information, you’ll be better equipped to ----------------------
make strategic sales decisions and create effective plans. For example, you’ll
----------------------
know exactly who to talk to when the new piece of equipment from ABC
manufacturer is finally introduced. You’ll also know who is really ripe for some ----------------------
new cost-saving product that is coming, or the new program your company is
putting together. ----------------------
You may currently be doing a so-so job of collecting information. It is like ----------------------
golf. Anyone can hit a golf ball. But few can do it well. Anyone can get some
information but few salespeople do it well. ----------------------
Step Three ----------------------

Develop a system and some tools. ----------------------
The single most effective tool is an account profile form. It is an incredibly
----------------------
effective tool that generates and organises some of the most powerful processes.
Account Profile Form ----------------------
An account profile form is a form full of questions, or more precisely, ----------------------
spaces for the answers to questions. The questions are all about each of your
accounts. The form is the document on which you store that useful information. ----------------------
It can exist in a couple of different forms - paper or electronic. If you’re using ----------------------
contact-management software on a laptop computer or PDA, then the account
profile form can be several screens for each account. If you’re not computerised, ----------------------
then it needs to be created on paper. Regardless of the media, the principles and
processes are the same. ----------------------
----------------------

Notes A well-designed, systematically executed account profile form can be one
of your most powerful tools for acquiring a competitive edge. Here’s why first,
---------------------- it provides you a way to collect quantitative information that will allow you to
know your customers more thoroughly than your competition. All those pieces of
---------------------- information that you said were potentially important to you and can be collected,
---------------------- stored in the blanks on the account profile form. Create a one-page form with
blanks in it for each of the quantitative pieces of information you want.
---------------------- In addition to the quantitative information about the business, you
---------------------- need another version of the form for each of the key individuals within those
accounts. That’s called a personal profile, and it is your mechanism to collect
---------------------- personal information about the key decision makers. You apply the same
concept and principles to the task of collecting personal information about the
---------------------- key decision-makers within your accounts. You may end up with one document
---------------------- for the company and 10 to 15 personal profiles for all the key people within that
account.
---------------------- Now, imagine getting ready for the next sales call on that customer and
---------------------- reviewing the things that he likes to talk about, refreshing your memory on the
name of his spouse, and the names and schools of each of the kids. As you plan
---------------------- your presentation, you review the primary buying motivation for each of those
key people. Do you think you will be better prepared to have an enjoyable,
---------------------- relationship-building conversation with that customer than your competitor
---------------------- will? Of course, you will. Do you think you’ll increase your likelihood of
delivering a powerful and persuasive presentation? Of course, you will.
----------------------
Finally, the form allows you to store important information in some place other
---------------------- than in your head. The problem with keeping information just in your head
is that it isn’t always readily accessible. When you want to have a relaxed
---------------------- conversation with one of your customers about his interests, you can’t always
remember that he loves cricket and was the opening batsman in his college
----------------------
cricket team. However, if you have that information stored on a form, you can
---------------------- review it just before you go in to see your customer, and put it uppermost in
your mind.
----------------------
To some degree, every good salesperson implements these concepts.
---------------------- The difference between the run-of-the-mill salesperson and the exceptional
salesperson is the degree to which the committed salesperson disciplines
---------------------- himself to stick to a systematic approach. Most salespeople do it as they think
of it, but do not keep the information systematically. Masters of the planning
----------------------
understand the need to discipline themselves, and thus do a more thorough job
---------------------- of collecting information.
Step Four
----------------------
Store it efficiently.
----------------------
You may have done a great job of collecting information, but if you have
---------------------- stored it on old matchbook covers, coffee-stained post-its, and in the back of old
business cards, somewhere in the backseat of your car, it is probably not going
---------------------- to do you much good.

Your computer can be the super tool which allows you to efficiently store Notes
the information. If not, you are going to need to create a set of files (yes, manila
folders!) in which you can store your information. ----------------------
Step Five ----------------------
Use it regularly.
----------------------
Before every sales call, review the information you have stored. That
review will help you make good decisions about each aspect of the sales call. ----------------------
Likewise, review the information as you create your annual goals and sales
----------------------
plans, when you create account strategies, and when you organise and plan your
territories. ----------------------
As you can tell, an account profile form is a master tool that holds all of this
----------------------
together.
----------------------

1. Good decisions require good information. ----------------------
1.
_______________ is a form full of questions, or more precisely, spaces
for the answers to questions. ----------------------
----------------------
Activity 2 ----------------------
----------------------
Summarise sales planning in your own words with examples.
----------------------
Case Study ----------------------
The Company ----------------------

OfficeMax is a leader in B2B and retail office products, including office ----------------------
supplies, paper, technology products/services and furniture. Their commitment
to customer service and innovation makes them a leader in the office products ----------------------
marketplace. With more than $8 billion in annual revenue, OfficeMax employs
more than 40,000 associates and operates almost 1,000 superstores. They offer ----------------------
25,000 products, and provide a range of business services –meeting the needs ----------------------
of large, medium and small businesses, as well as individual consumers. Their
sales channels are linked through direct sales, catalogs and the Internet. ----------------------
The challenge
----------------------
OfficeMax wanted to address their sales regions by defining their customer
base and identifying the number of representatives needed per region. With this ----------------------
information, they could develop appropriate-sized territories, assign the proper
number of representatives and create target marketing strategies. ----------------------

Notes OfficeMax had a number of opportunities to focus on including:
• Updating sales regions
----------------------
• Conducting a territory analysis
----------------------
• Creating and implementing targeted marketing campaigns
---------------------- • Preventing declining retention rates
---------------------- To achieve these objectives, OfficeMax needed to conduct territory
analysis for its retail and B2B divisions by examining targeted marketing efforts
---------------------- and product mix by trade area. Further, they wanted to analyse retail trade areas
for rural, suburban and urban stores, identifying both the competition and the
----------------------
population density for each area.
---------------------- The Case
---------------------- OfficeMax updated its sales regions using data to define its customer
base and identify the number of representatives needed by region. With this
---------------------- information, they could develop appropriately sized territories, assign the
proper number of representatives and effectively prioritise markets and targeted
----------------------
marketing strategies.
---------------------- To conduct territory analysis for its retail and B2B divisions, OfficeMax
---------------------- looked at changing targeted marketing efforts and the product mix by trade
area. Further, OfficeMax analysed its retail trade areas for rural, suburban and
---------------------- urban stores, identifying both the competition and the population density for
each area.
----------------------
Creating targeted marketing campaigns was essential in delivering the
---------------------- right product to the right customers at the right time. With focused marketing
campaigns, OfficeMax reduced costs by more effectively responding to
---------------------- customer needs. The cost savings from more targeted approaches could then
---------------------- be re-invested into alternate communication vehicles such as email and web
advertising. OfficeMax developed the following process for its campaigns:
----------------------
• Pre-campaign analysis, including customer data analysis
---------------------- • Audience selection
---------------------- • Campaign execution
• Campaign results
----------------------
• Knowledge sharing/recommendations
---------------------- OfficeMax marketers were able to group variables and look at predictor
variables (including SIC, number of employees, life-time value segments, past
----------------------
purchase history and campaign response). They then graphed the expected
---------------------- campaign response rate and compared it with the actual response.
---------------------- OfficeMax’s segmentation analysis included evaluating segments to

determine which segments each store was likely to attract. With mapping to
---------------------- show where OfficeMax, Office Depot and Staples stores were located, they
easily identified the concentration of stores in an area and a need for custom
---------------------- segmentation to:

• Provide the right experience based on customer traits Notes
• Adequately contact customers to encourage sales
----------------------
• Provide direction to the sales representatives
----------------------
• Call on a specific group of customers based on segmentation rules
• Avoid customer fatigue Specifically, segmentation data helped OfficeMax ----------------------
analyse such factors as: ----------------------
• Average order size
----------------------
• Sales
----------------------
• Business type
• Survey responses ----------------------
• Type of purchase ----------------------

• Number of employees ----------------------
• Channel preference
----------------------
• Customer tenure
----------------------
• Recency of purchases
• Frequency of purchases ----------------------
Using these factors, OfficeMax then conducted a segmentation analysis ----------------------

to uncover six distinct segments and develop targeted marketing programs and
sales activities to attract and retain each segment. One such program involved ----------------------
low-cost acquisition touches (e.g. mail, postcards, etc.), a reactivation team/ ----------------------
phone marketing strategy and strategies for sales to win customers back.
----------------------
The results
With a comprehensive segmentation analysis, OfficeMax created a 360o ----------------------
view of the customer, looking at transactional data, demographic data and
----------------------
customer preference data. As a result, retention rates increased by five percent,
with representatives backing the program and gaining compensation increases. ----------------------
Summary ----------------------
----------------------
• We have learnt in this unit that Targeting and Sales Planning are the
very important part of the business process. The bigger the prospect ----------------------
organisation or potential sale, the more planning and preparation is
required. Major accounts need extensive researching before any serious ----------------------
approach is made to begin dialogue with an influencer or decision-maker.
----------------------
This is to enable the sales person to decide on the best initial approach
or opening proposition. Implicit in this is deciding what is likely to be ----------------------
the strongest perceived organisational benefit that could accrue from the
product or service in question, as perceived by the person to be approached ----------------------
(different people have different personal and organisational views and
----------------------
priorities). Generally, it is best to concentrate on one strong organisational

Notes benefit. A benefit-loaded ‘catch-all’ approach does not work, because it
is impossible to make a strong impact while promoting lots of different
---------------------- points - people respond most to a single relevant point of interest.
---------------------- • These days it is easier to research and plan for a sales call than it used
to be, because of the wealth of information available in company
---------------------- brochures, websites and from the organisation’s own staff, notably
in customer service, press relations, and from the relative openness of
----------------------
most organisations. Trade journals and trade associations are other
---------------------- useful information sources for building up a picture. Depending on the
particular product or service, different people in the prospect organisation
---------------------- will potentially be able to provide company-specific information about
important matters such as contract review dates, purchasing procedures
----------------------
and authority, even sometimes very useful details of attitudes, politics, the
---------------------- styles of the key people, and their priorities.
• With a sensitive approach it is often possible to obtain the trust and co-
----------------------
operation of somebody in the prospect organisation, so as to provide this
---------------------- information, particularly if the discussion is positioned as non-threatening,
empathic and of some strategic potential for the prospect. The rules of
---------------------- AIDA apply even to this information gathering element alone.
---------------------- • It’s important to strike the right balance between researching prior to
the first appointment, and researching during the first appointment. The
---------------------- sales person should take advantage of all information that is obtainable
easily and leave the rest to be filled in at the first meeting -as a rule,
----------------------
prospects respect and respond well to a well-prepared approach because
---------------------- it shows professionalism, and allows a relevant and focused discussion.
Conversely, a prospect responds poorly to a ‘blind’ approach because
---------------------- it suggests a lack of care and it usually produces a vague, ill-informed
discussion, which wastes time.
----------------------
• A good technique for planning and research is to design a checklist of
---------------------- items to be researched for new prospects. This template will be different
---------------------- for each sales organisation and product and may be sector, but once
designed serves as a really useful tool, both to gather the right data and to
---------------------- provide the discipline for it to actually be done.
----------------------
Keywords
----------------------
• Adopt: Choose and follow; as of theories, ideas, policies, strategies or
---------------------- plans
---------------------- • Segment: Any of the parts into which something can be divided: segments
of the community; a segment of a television program.
----------------------
• Revenue: Yield from property or investment; income
---------------------- • Strategies: A plan of action resulting from strategy or intended to
---------------------- accomplish a specific goal.

• Traits: A distinguishing feature, as of a person’s character or a genetically Notes
determined characteristic or condition.
----------------------
• Territories: An area for which a person is responsible as a representative
or agent. ----------------------
• Orientation: An introduction, as to guide one in adjusting to new
----------------------
surroundings, employment, activity, or the like: New employees receive
two days of orientation ----------------------
----------------------
----------------------
1. Describe the target market approach.
----------------------
2. Describe demographic/psychographic profile of the market.
3. Describe the following characteristics of targeted customers: ----------------------
a. Needs/benefits sought by market ----------------------
b. Product usage ----------------------
c. Product positioning
----------------------
4. How does target market view product in relation to competitor’s products?
----------------------
5. What is Sales Planning?
6. What are the steps to follow to create and maintain sales system? ----------------------
7. Create an Account Profile Form. ----------------------
----------------------
----------------------
1. True ----------------------
----------------------
1. True
----------------------
Fill in the blanks.
1.
An account profile form is a form full of questions, or more precisely, spaces ----------------------
for the answers to questions.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Suggested Reading
----------------------
1. Cohen, Eric. “How to Target Smarter.” Target Marketing. May 1998.
---------------------- 2. Durden, Jonathan. “Questioning the Term ‘Targeting’ is Fundamental.”
Marketing.
----------------------
3. Field, Anne. Precision Marketing.
----------------------
4. Green, Gloria, and Jeffrey Williams. Marketing: Mastering Your Small
---------------------- Business.
---------------------- 5. Kahle, Dave. Take Your Sales Performance Up a Notch.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Relationship Marketing and CRM
UNIT
6
Structure:
6.1 Introduction
6.2 Customer Commitment and Loyalty
6.3 Are Loyal Customers more Profitable
6.4 What is Loyalty?
6.5 Foundations of Relationship Marketing
6.6 Relationship Marketing in Practice
Case Study
Summary
Key Words
Suggested Reading
Relationship Marketing and CRM 91

Notes
Objectives
----------------------
----------------------
• Explain the similarities and differences between transactional and
---------------------- customer relationship marketing.
---------------------- • Analyse the key disciplines and variables that contribute to customer
relationship management.
----------------------
• Select, apply and evaluate various techniques to generate customer
---------------------- loyalty.
---------------------- • Develop strategies to retain and build relationships with customers.
----------------------
6.1 INTRODUCTION
----------------------
Marketers have seen both dramatic, revolutionary and a steady evolutionary
---------------------- change over the past decade. Transformations in technology, the political and
legal environment, the economy, customer expectations, and competitive forces
---------------------- have made the art of marketing more complex and challenging than ever.
---------------------- Today’s successful marketer must master a slew of new technologies-
such as the Internet, CRM software and data mining solutions, to name a few-
----------------------
while overseeing a dramatic shift from mass marketing to more personalised,
---------------------- targeted marketing. He or she must collect, retain segment information in ways
never imagined just a few years back-and do so without running afoul of myriad
---------------------- new legislative privacy initiatives. Today’s marketer must demonstrate positive
results despite increasing customer sophistication and flat to slightly increasing
----------------------
marketing budgets.
---------------------- Marketers who see this rapidly changing landscape as a threat are likely
to struggle in the increasingly complex marketing environment of today and
----------------------
tomorrow. Conversely, marketers who see these changes as ideal opportunities
---------------------- to embrace the concept of Relationship Marketing are likely to reap the ample
rewards of strong, profitable and long-lasting customer relationships.
----------------------
For today’s savvy marketers, Relationship Marketing is hardly a new concept.
---------------------- The smart marketer is already focused on understanding the customer’s needs
and building a marketing strategy around those needs. But what is new is that
---------------------- best practices have evolved, and relationship marketing can now be seen as a
distinct process. This white paper explores one of the three stages of relationship
----------------------
marketing-nurture-and helps businesses define the process of generating more
---------------------- qualified leads resulting in more closed sales through a clear set of principles,
tactics and related metrics for attracting new customers.
----------------------
Marketing is one of the final functional areas within an organisation to
---------------------- begin following a strict, formal process. Accounting, supply chain management,
human resource management, sales and even services have evolved as business
---------------------- processes, with corresponding, logical workflows. Today, marketing-the activity

that was once thought of as a ‘right brain’ creative exercise-is rapidly evolving Notes
into a repeatable series of steps dependent on data and analytics.
----------------------
Although many companies have already identified marketing as a process,
most have only begun to map the relationship ‘marketing process’ at merely the ----------------------
campaign level. Few companies have taken on the challenge of mapping the
process at the enterprise marketing level-and fewer still have implemented it. ----------------------
----------------------
6.2 CUSTOMER COMMITMENT AND LOYALTY
----------------------
The objective of many marketing strategies in the last 10 years has been
building the customer’s commitment to a brand or a dealer. This has taken three ----------------------
forms:
----------------------
• Creating customer satisfaction - delivering superior quality products and
services (Gale and Chapman). ----------------------
•
Building brand equity - the sum of the intangible assets of a brand. Factors ----------------------
that contribute to this are namely name awareness, perceived quality, brand
loyalty, the associations consumers have towards the brand, trademarks, ----------------------
packaging, and marketing channel presence.
----------------------
• Creating and maintaining relationships.
----------------------
Success with any of these strategies will result in high levels of repeat
purchase, insulation from price increases and improved responsiveness to ----------------------
marketing communications by customers.
----------------------
There has been an evolution of marketing thought and activity over this
last decade. Initially, the quality movement placed customer satisfaction as the ----------------------
ultimate goal of marketing programs. However, as satisfied customers were
shown to defect to other brands or providers at relatively high rates, strategists ----------------------
looked to creating a greater commitment with the customer. Two ways to ----------------------
achieve this were to build brand equity (primarily for consumer products) and
to build relationships (primarily for industrial products). Brand equity used ----------------------
mass media advertising, corporate citizenship and public events sponsorship to
build a brand image. Relationship marketing sought to build interdependence ----------------------
between partners and relied on one-to-one communications, historically ----------------------
delivered through the sales force. With the growth of marketing databases and
the Internet, the ability to reach customers individually became a viable strategy ----------------------
for a wide range of firms including consumer product companies.
----------------------
The growth in relationship marketing was fueled by the writings of
management consultants and taking inspiration from mass customisation ----------------------
manufacturing technologies and applying them to marketing communications;
it encouraged a one-to-one focus on ‘share of customer’ rather than the ----------------------
mass marketer’s ‘share of market.’ This was based on the marketer’s ability ----------------------
to communicate a unique message to the customers based on the company’s
knowledge of their interests. They claimed that this one-to-one interaction with ----------------------
customers would lead to improved lifetime value.
----------------------

Notes It has further developed the importance of building customer commitment
and focused on the cost of customer defection and set the stage for the problem
---------------------- by claiming “many major corporations now lose and have to replace half their
customers in five years”. Using examples from financial service companies,
---------------------- advertising agencies, and manufacturing firms, it is claimed that even small
---------------------- improvements in customer retention can have as much as double company
profits. This is because:
---------------------- • It costs less to serve long-term customers.
---------------------- • Loyal customers will pay a price premium.
---------------------- Loyal customers will generate word-of-mouth referrals to other
•
prospective customers.
----------------------
However, given the failure of many information technology investments
---------------------- to achieve the expected benefits, concerns about relationship marketing strategy
are emerging. The section that follows addresses the questions of whether loyal
---------------------- customers are more profitable and under what conditions a loyalty strategy is
appropriate.
----------------------
---------------------- Activity 1
----------------------
What are the three major marketing strategies organisations have evolved in
---------------------- building the customer commitment towards a brand? Explain with examples.
----------------------
---------------------- 6.3 ARE LOYAL CUSTOMERS MORE PROFITABLE
---------------------- Recent research has empirically investigated the premise that loyal
customers are actually more profitable. Researchers tested the claims that loyal
---------------------- customers were less costly to serve, were usually willing to pay more for brand
choices than non-loyal customers, and acted as word-of-mouth marketers for
---------------------- the company. In their five-year study of the costs of doing business with key
---------------------- customers, they measured direct product costs, advertising and sales force
expenses, and service and organisational expenses in serving annual cohorts of
---------------------- customers in four businesses. Loyal customers were defined as those who made
regular purchases for at least 2 years. They found that the correlation between
---------------------- profitability and loyalty was weak to moderate:
---------------------- The facilitating effect of loyalty on achieving the marketing outcomes
of higher market share and premium pricing was confirmed in another recent
----------------------
study. Another group of researchers measured consumers’ attitudes towards
---------------------- 107 brands in 41 different product categories. They differentiated between a
consumer’s purchase loyalty (“I will buy this brand again”) and attitudinal
---------------------- loyalty (“I am committed to this brand”). These attitudes were averaged over the
survey responses to develop brand level data (that is, the brand was the unit of
----------------------
observation). These observations were merged with data collected from brand
---------------------- and product managers regarding the current market share of the brand, share of

voice, relative price and perceived differentiation among competing brands. The Notes
results showed that purchase loyalty was positively related to market share but
not relative price of brand. That is, brands that had higher ratings on statements ----------------------
such as “I will buy this brand again” had higher market shares but were not the
premium price brand in the market. Conversely, attitudinal loyalty was related ----------------------
to relative price but not market share. That is, brands that had higher ratings on ----------------------
statements such as “I am committed to this brand” were able to charge higher
prices than those brands that received lower ratings on attitudinal loyalty. ----------------------
This higher consumer commitment, however, was not related to differences
in market share. The study confirms that higher levels of loyalty are correlated ----------------------
with positive marketing outcomes but that different definitions of loyalty had ----------------------
selected effects on either market share or price premiums.
----------------------
Creating customer commitment can be effective in achieving business
goals. Moreover, consumer commitment cannot be defined by repurchase ----------------------
behaviour alone. Rather, the consumer’s attitude towards the brand or firm must
be known in order to understand consumer repurchase behaviour. This leads ----------------------
to the second concern that has been raised in implementing loyalty strategies:
what are the different types of loyalty and in what situations are they likely to ----------------------
occur. ----------------------
Activity 2 ----------------------
----------------------
According to you, are loyal customers an asset or a liability to an organisation?
Explain with an example from real life. ----------------------
----------------------
6.4 WHAT IS LOYALTY? ----------------------
Knowing the buying motivations of customers has been an important part ----------------------
of understanding customer loyalty and brand switching behavior. Brand loyalty
has three components: commitment, preference and repeat purchase. Let us see ----------------------
the four levels of loyalty based on these components:
----------------------
Cognitive: One brand is preferable based on superior brand attributes.
•
----------------------
Affective: Liking towards brand has developed over the course of multiple
•
purchase situations that were satisfying. ----------------------
Conative: Affective stage with the express intention to re-buy.
• ----------------------
Action: Conative stage plus the active desire to overcome situational
•
influences and marketing efforts that may have the potential to cause ----------------------
switching behavior. ----------------------
On reaching the action phase, the customer possesses a deep commitment
----------------------
to repurchase but also is active in blocking the influence of alternative brands.
Action level loyalty will be created when consumers intentionally immerse ----------------------
themselves in a social system that rewards brand patronage. Examples include
fan clubs, alumni associations, and lifestyle products such as costly motor ----------------------

Notes vehicles. Achieving consumer loyalty via immersed self-identity, though, may
prove to be the rarest form of loyalty. Let see the requirements for this state to
---------------------- occur:
---------------------- (i) The product must be perceived as superior by a large segment of the firm’s
customers in order to be profitable.
---------------------- (ii) The product must be subject to adoration (or focused commitment).
---------------------- (iii) The product must have the ability to be embedded in a social network.
---------------------- (iv) The firm must be willing to expend resources to create the village.
For many consumer product categories, achieving this emotional
----------------------
commitment by customer is unattainable. There should be different loyalty
---------------------- strategies for different industries. Empirical work to demonstrate this was
presented by two McKinsey researchers, Stephanie Coyles and Tim Gokey.
---------------------- Using data from a two-year study on 1200 households regarding the purchase
of 16 types of products and services, they defined three loyalty segments:
----------------------
•
Emotive loyalists were the most loyal. They feel their current alternative is
---------------------- the best for them and rarely reassess their purchases. This group often spends
more money than those consumers who deliberate over purchases.
----------------------
• Inertial loyalists are uninvolved with the product, or experience high
---------------------- switching costs, and this leads to inaction and repeat purchase based on
inertia.
----------------------
• Deliberative loyalists maintain their spending levels for brands because
---------------------- they feel it is superior. They have selected the brand through a rational
process such as reviewing the price and performance of the various
---------------------- options. They often reassess their purchases in light of new information
and alternatives to find the new, better alternative.
----------------------
• A fourth group of consumer that valued variety was found for industries
---------------------- such as fashion and package goods. Though beyond the scope of this
paper, packaging printing applications may play the primary role in the
----------------------
marketing communication mix of these industries.
---------------------- The deliberative loyalist group is the largest, representing about 40 percent
of the sample in the McKinsey study. However, the proportion of people in each
----------------------
segment varied widely by product category. The highest proportion of emotive
---------------------- loyalists was found for soft drinks (40%) and laundry soap (30%) products.
The highest proportion of deliberative loyalists was found for apparel (69%),
---------------------- groceries (56%), and auto insurance (53%). For some product categories, such
as credit cards, there were relatively similar proportions of consumers in each
---------------------- category. For example, 34 percent of credit card customers were classified as
---------------------- deliberative, 21 percent as inertial and 22 percent as emotive.
Coyles and Gokey concluded that these loyalty patterns are influenced by five
---------------------- structural factors within an industry:
---------------------- • How often purchases are made
---------------------- • The frequency of other kinds of interactions such as service calls

• The emotional or financial importance of a purchase Notes
• The degree of differentiation among competitor’s offerings
----------------------
• Ease of switching
----------------------
They concluded that repurchase behaviour is determined by a number of
factors that are unique to different industries. One loyalty strategy should not fit ----------------------
all situations.
----------------------
The loyalty marketing strategy recommended should vary by industry.
Research from both academic and consulting worlds conclude that “emotional ----------------------
loyalty,” the pinnacle of loyalty where the customer resists the influence
of other brand offers, is not a realistic goal for many marketers. Moreover, ----------------------
achieving attribute superiority required for a deliberative loyalty strategy is ----------------------
difficult to pursue for product categories where there is little differentiation
among brands. For businesses where there is not a ‘village’ or where there is ----------------------
little differentiation among brand attributes, creating an environment with high
switching costs to create inertial loyalty may be the only viable strategy to ----------------------
create customer commitment. Inertial loyalty plays a major role in relationship ----------------------
marketing strategy.
----------------------
1. The loyalty marketing strategy recommended should vary by industry. ----------------------
----------------------
6.5 FOUNDATIONS OF RELATIONSHIP MARKETING ----------------------
The current conceptualisation of relationship marketing migrated from ----------------------

organisational behaviour and industrial marketing where interdependence
between firms has been the foundation of successful business-to-business ----------------------
alliances. Morgan and Hunt define relationship marketing as all marketing ----------------------
activities directed towards establishing, developing, and maintaining successful
relational exchanges. In their model, commitment and trust are the key mediating ----------------------
variables because they encourage exchange partners to preserve relationship
investments, resist attractive short-term alternatives, and maintain the belief ----------------------
that partners will not act opportunistically. ----------------------
Morgan and Hunt describe 10 discrete forms of relationships, and almost
all (8 out of the 10) were typical of the relationships that firms have with their ----------------------
suppliers, strategic partners, employees, and among functional units within a ----------------------
firm. Only two relationships described by Morgan and Hunt involve customers or
clients - the relationship between service providers such as advertising agencies ----------------------
and their clients and the long-term relationships between service firms and their
ultimate customers. Both of these assume a certain level of interdependence and ----------------------
history of interaction. ----------------------

Notes Is relationship marketing only viable within these contexts?
There are three types of relationships: business marketing relationships
---------------------- (BMR); interpersonal commercial relationships (ICR); and business-to-customer
---------------------- relationships (B to C). Business marketing relationships are those similar to
the ones described by Morgan and Hunt where the relationships are typified
---------------------- by long-term, close, and intense interactions between relatively symmetric (in
terms of power) partners. These relationships have had the longest history of
---------------------- study by marketers, which has resulted in a rich and well-developed theory to
---------------------- describe them. Factors relate to the quality of relationship interactions and their
definitions are presented in Table 6.1.
---------------------- Table 6.1: Interpersonal Commercial Relationship Factors
---------------------- Business Marketing Relationship Definition
Factors
----------------------
Commitment Implicit or explicit pledge of relational
---------------------- continuity between exchange partners;
adoption of a long-term orientation towards
---------------------- the relationship – a willingness to make short-
term sacrifices to realise long term benefits
----------------------
Trust One party’s belief that its needs will be fulfilled
---------------------- in the future by the actions undertaken by the
other party.
---------------------- Contingent on presence of uncertainty.
---------------------- Power Ability of one party to get another party to
undertake an activity that the other party
---------------------- would not normally do.
---------------------- Control (part of power) Outcome of power and results when a party
is successful in modifying its partner’s
---------------------- behaviour.
Balance of Power (part of power) Balance = symmetric power
----------------------
Imbalance = hierarchical; one party has
---------------------- dictatorial abilities over the other
Interdependence Mutual state of dependence
----------------------
Communication Formal and informal sharing of meaningful
---------------------- and timely information between firms.
---------------------- Co-operation Similar or complementary coordinated actions

taken by firms to achieve mutual outcomes.
---------------------- Idiosyncratic Sunk costs that would not be recoverable in
the event of
----------------------
Investments a termination.
---------------------- Conflict Resolution Functionality of dispute resolution stimulates
---------------------- more creative and effective partnerships.
----------------------

The second type of relationship is the interpersonal commercial Notes
relationships (ICR): the interactions between a service firm and the final
customer. These include business-to -business relationships (such as those ----------------------
between an advertising agency and its clients) and retail transactions between
a sales agent and a customer. The service quality literature has studied these ----------------------
latter relationships and built theory around them (Berry and Parasuraman’s ----------------------
Marketing Services). For the former, such as ICRs between attorneys and their
clients or advertising agencies and their clients, the interactions occur between ----------------------
two relatively symmetrical partners, close and long term in nature, and may
also include a social component. The outcomes of the quality of relationship ----------------------
interactions are satisfaction, profitability, and positive evaluations of service ----------------------
provider, intentions to generate referrals, and the ability to compromise or
bargain fairly. The factors related to the quality of ICR relationship interactions ----------------------
are presented in Table 6.2.
----------------------
Table 6.2: Factors related to Quality of ICR Relationship Interactions
----------------------
Interpersonal Commercial Definition
Relationship Factors ----------------------
Communication Exchange of information ----------------------
Similarities of Shared Similarities in preferences of apparent
personality or ----------------------
Belief System demographic factors; similarities in goals and ----------------------
beliefs, social closeness.
----------------------
Competence and Personal Capability of front line service providers such as
Factors service providers’ friendliness; same gender and ----------------------
physical attractiveness of provider.
----------------------
Absence of Conflict Ability to resolve disputes.
----------------------
The third relationship is the business-to-customer relationships (B to C).
These are defined as largely technology-driven interactions between a business ----------------------
and an individual customer. There is very sparse scientific research on these
relationships. They conclude that what we have learned from the BMR literature ----------------------
has limited application to the B to C world because the concepts of trust and ----------------------
cooperation become meaningful if and only if there is interdependence between
the exchange partners. The lack of interdependence has been the focus of the ----------------------
criticism of relationship marketing practice.
----------------------
6.6 RELATIONSHIP MARKETING IN PRACTICE ----------------------
There is a critical perspective on relationship marketing practice. The ----------------------
question is - the actual amount of interactivity between a customer and a
commercial firm. It warns that the premature death of customer relationship ----------------------
management (CRM) is likely because, in exploiting the ability to communicate
----------------------
one-to-one with a customer, the majority of the firm-generated communication
with customers is often one-way from the business to the customer. With a ----------------------

Notes few notable and well-publicised exceptions such as Amazon.com and Cisco
Systems, there is rarely any evidence of interaction. That is, even if a consumer
---------------------- does communicate with the business, this information rarely impacts the nature
of the future communications from that business.
----------------------
The solution to reducing this conflict is to understand the relationship
---------------------- expectations from the customer’s point of view. To achieve this, few researchers
developed a model of CRM from the consumer’s perspective building on the
---------------------- social and marriage models of relationships. It presents six factors that define
the relationships that customers can hold with brands. These are intimacy,
---------------------- commitment, partner quality, attachment, interdependence and love. It argues
that business strategists should recast their conceptions of the relationship
----------------------
from a revenue generating and cost saving device (the goals of the firm) into a
---------------------- vehicle to create meaning for the customer with the brand. The relationship is
the facilitator, the means to an end, and not the end-goal itself for the customer.
----------------------
The notion of a consumer having a relationship with a brand (rather than
---------------------- with a person or group of people) is the key component in the brand equity
construct mentioned in the first chapter of this monograph. These brand
---------------------- relationships are based on the degree of personal identification the consumer
has with the brand and involve two dimensions of attitudinal strength and a
---------------------- sense of community.
---------------------- But equating relationships between a customer and a commercial firm
to brand equity moves us far from the foundations of relationship marketing.
---------------------- Moreover, the notion of a consumer’s relationship with a brand as a pseudo-
relationship - there is no possibility of interdependence or interaction. According
----------------------
to a recent theory, the personal identification of a consumer with a brand is a
---------------------- separate construct from a customer’s relationship with a business. In the book
‘Driving Customer Equity,’ by Rust, Zeithaml and Lemon, the three constructs
---------------------- of brand equity, customer satisfaction and customer relationships with firms are
used to define a new construct of customer equity. Customer equity includes:
----------------------
i. Value equity: The customer’s objective assessment of the utility of a brand.
---------------------- This assessment is driven by the product’s quality, price and convenience.
---------------------- ii. Brand equity: Customer’s subjective and intangible assessment of the
brand built through image and meaning. This assessment is influenced
---------------------- by brand awareness, consumer’s attitude toward the brand, and the firm’s
corporate citizenship.
----------------------
iii. Retention equity: The tendency of the customer to ‘stick with’ a brand
---------------------- above and beyond the objective and subjective assessments.
According to Rust, Zeithaml, and Lemon, there are five drivers of retention
----------------------
equity. These are as follows:
---------------------- iv. Loyalty programmes
---------------------- v. Special recognition programs
vi. Affinity programs
----------------------
vii. Community programs
---------------------- viii. Knowledge-building programs

To achieve the goal of understanding the customer’s view of the Notes
commercial relationship, marketers should understand the customer’s attitudes
towards these programs. The next unit gives an exploratory study on the ----------------------
relationship of marketing tactics from the consumer’s point of view.
----------------------
----------------------
1. The relationship is the facilitator, the means to an end, and not the ----------------------
end-goal itself for the customer. ----------------------
----------------------
Activity 3
----------------------
Explain in your own words with examples the five drivers of retention ----------------------
equity.
----------------------
6.7 CUSTOMER RETENTION ----------------------
Even with the best customer retention strategies in place, it is inevitable ----------------------
that eventually you will lose a customer. Customers leave for many reasons.
----------------------
They may switch to a competitor or simply no longer need the product or service
you offer. They may leave because your product or service did not live up to ----------------------
their expectations. The loss could also come from your own conscious decision
if you found that serving a customer was no longer profitable. Surprisingly, ----------------------
however, nearly 70% of customers leave for ‘no special reason’ - there was
simply not enough loyalty in the relationship to keep the customer using your ----------------------
products or services. ----------------------
Like most companies, the extent of your win-back initiatives may solely
be directed towards large, profitable customers whose loss is especially painful. ----------------------
However, with the average attrition rate for companies between 20-40%, ----------------------
neglecting to include formal win-back strategies in the marketing plan means
companies are not just saying good-bye to customers and the associated revenue ----------------------
and market share; they are also losing the goodwill and knowledge needed to
improve their products and services for future success. ----------------------
Executing marketing strategies to attract new customers and to grow the ----------------------
value of existing customers are important components of a marketing plan and
have a definite impact on the success of a business. However, identifying at risk ----------------------
customers or lost customers and implementing win-back marketing initiatives
----------------------
can also have a dramatic impact on the bottom line. In fact, a 10% reduction in
lost customers can increase revenue as much as 85%. Here’s why: ----------------------
Acquiring a new customer is more costly than keeping a current customer.
----------------------
While statistics may vary, there is a clear consensus that it is more expensive
to acquire new customers than it is to grow and cultivate the value of existing ----------------------

Notes customers. Prospect marketing tactics alone is an expensive way to grow your
business and existing customer retention strategies are not always effective. By
---------------------- reengaging customers through win-back strategies, you can maximise the return
on the investments you’ve already made earlier in the customer life cycle.
----------------------
Customers become more profitable over time.
----------------------
Each year that a customer stays with you, the more valuable that customer
---------------------- becomes. Over time, you continually gain the same base profit year to year, but
you also gain from less obvious cost savings or revenue driving benefits such as
---------------------- customer referrals, price premiums, increased purchases, and greater efficiency
in selling or servicing that customer.
----------------------
You’re more likely to win-back a lost customer than attract a new one.
----------------------
You are two to three times more likely to sell to an inactive or lost customer
---------------------- than you are to a new prospect. The benefits of winning-back a lost customer go
beyond revenue gains-by reselling to lost customers, you also regain goodwill
---------------------- and minimise the negative word of mouth typically associated with defected
---------------------- customers.
While many companies do not understand the financial impact of losing
---------------------- customers as outlined above, there are two additional reasons why companies
---------------------- do not make win-back strategies a priority in their marketing processes.
First, companies often believe that lost customers are dead opportunities.
---------------------- Without taking the time to understand why a customer was lost, companies
simply assume that the reason is beyond their control and that it is therefore
---------------------- impossible to attract the customer’s business again. However, as mentioned
---------------------- in the introduction, most customers (up to 70%) have no special reason for
leaving, and many may be willing to return if simply asked for their business
---------------------- again. Second, companies do not make win-back initiatives a priority because
of pride. Winback initiatives require listening to customers’ feedback, which at
---------------------- times is not pleasant. It may also mean having to admit being wrong. But by
---------------------- putting pride aside, companies can benefit from listening to lost customers-even
if they do not win the customer back-by taking advantage of the opportunity to
---------------------- gain specific knowledge which can help to improve their products or services
and keep their existing customers satisfied.
----------------------
A few companies learned quickly that attracting all customers back was
---------------------- not the best use of their resources and applied many of the following principles
in their win-back initiatives:
----------------------
Identify At-Risk and Lost Customers Early: It is proven that the earlier
---------------------- you detect lack of use, missed purchase opportunities or dissatisfaction, the
better chance you have at re-engaging and retaining the customer or restoring
----------------------
satisfaction. A large percentage of lost customers never even started using the
---------------------- product or service in the first place. Therefore, preventive measures such as
satisfaction and usage surveys should be deployed with, our shortly after, the
---------------------- initial purchase.
----------------------

Evaluate Customer Value: Your win-back strategies should not target all lost Notes
customers-especially those you may have strategically chosen to stop service
to in the first place. Since you have the purchase history for past customers, ----------------------
separate out those that were highly profitable to serve or those with high loyalty
----------------------
based on recency, frequency, and total monetary value (RFM), and let your
competitors have those that were not profitable. ----------------------
Understand Motivations for Defection: In addition to understanding a
----------------------
customer’s value, take time to understand what the customer’s motivations
were for leaving. Not only will this help you to improve your products and ----------------------
services, it will also help you to determine if you should continue pursuing their
business. While some of the reasons customers defect are in fact things you ----------------------
cannot address, much can be gained by tackling those issues you can address.
----------------------
Track the Competition: As stated earlier, some customers may switch to a
competitor’s product or service. Understanding the competitive landscape and ----------------------
the reasons why your customers selected the competition, will improve your
----------------------
ability to compete in the marketplace. As well, having this information can help
you to target lost customers with competitor specific messaging in the future. ----------------------
Improve on the Attributes Most Valued by Customers: Once you have collected ----------------------
information from customers on their motivations for defection, the next step is
to apply that knowledge to your business. The most successful companies are ----------------------
better than their competition at understanding what customer’s value. To be
the most successful company, focus on making improvements to the attributes ----------------------
identified as problem areas by your lost customers. You may find that the ----------------------
attributes valued by customers are not necessarily those most valued by you-
and may actually be things that are intangible such as perceived brand quality. ----------------------
If Losing a Customer is Inevitable, Part on a Good Note: There certainly ----------------------
may be instances in which you determine that you cannot compete with a
competitive option or meet the expectations presented by the customer. While ----------------------
you never want to lose a customer and may be frustrated or feel betrayed that
they have selected a competitive service, remember to be positive and keep the ----------------------
door open for future business. Customers who leave for reasons such as price or ----------------------
perceived quality may find that the competitor really is not a better fit, and may
eventually reengage with your company. In addition, it is likely that their needs ----------------------
will change in the future and that they will be in the market for a new product
or service further down the road. The bottom line is that keeping a professional ----------------------
relationship with lost customers increases the probability that they will seek ----------------------
your product or services in the future.
----------------------
Stay in Touch: Once you have parted amicably with a customer, continue
to communicate with them on a regular basis, even if they have selected a ----------------------
competitive product. Through communications such as electronic newsletters
or occasional targeted campaigns, you will retain brand awareness and continue ----------------------
to educate the lost or inactive customer on product enhancements or new service
----------------------
offerings. Again, it is possible that in the future they will have a need for your
product or service. ----------------------

Notes Ask for Another Chance: Simply asking for another chance to service a lost
or inactive customer may be enough to reengage the customer. Their reason for
---------------------- leaving may be as simple as forgetting about you. If you know they left because
of a mistake your company made, admit to your mistake when asking for another
---------------------- chance. If they were a loyal customer in the past, they may be happy to return.
---------------------- Provide a Peace Offering… But Make it Sticky: Offers such as discounts,
complimentary products or services or other extras might be necessary to win
----------------------
a customer back-especially if the competition is providing incentives as well.
---------------------- However, be sure to provide incentives to customers that will also provide
benefits back to your company. Using a loss-leader offer is only valuable if the
---------------------- customer sticks with your products or services for the long run. Stickiness can
be accomplished by creating parameters around the offer that lock a customer
----------------------
into using your product or service for a specified timeframe or number of orders.
---------------------- For example, instead of offering a 50% discount of the first order, offer a 10%
discount of all purchases for the next year, or offer the discount only if they lock
---------------------- into a multiyear contract.
----------------------
----------------------

1. Win-back initiatives require which at times is not pleasant.
----------------------
----------------------
---------------------- Activity 4
----------------------
What are the principles used by the organisations to win back the lost
---------------------- customers? Give a real life example for each.
----------------------
---------------------- Case Study

---------------------- Introduction
---------------------- In February 2004, Microsoft UK launched Advisor, an extranet targeted
at business and technical decision makers in the mid-market.
----------------------
A number of theories were floated around as to why ‘Call Me’ was not
---------------------- getting the usage we anticipated. Someone had the bright idea of asking the
customers.
----------------------
The end product was the result of over a year of research, planning,
---------------------- design, development and pilot testing.
---------------------- It was one of the most intensive and thorough design processes we have
been involved in. We learned a great deal along the way about how to create an
---------------------- offering that really meets customer needs.

Background Notes
In late 2002, the Microsoft UK online customer relationship marketing
----------------------
team was briefed by the mid-market audience marketing group. They shared
the results of research undertaken to understand how our customer engagement ----------------------
model was meeting the needs of the customer.
----------------------
In short, the brief indicated that there was a lot of room for improvement,
especially in the online space. The research showed that having an online ----------------------
relationship with Microsoft was a top-three priority for our mid-market
customers. Critically, the way Microsoft engages its customers and the quality ----------------------
of its products were the major drivers of customer satisfaction.
----------------------
The evidence pointed to a simple solution-develop our online offering
to complement our offline offerings as part of an improved CRM program to ----------------------
improve customer satisfaction levels.
----------------------
At this stage, we were tempted to go ahead and make a number of ‘obvious’
assumptions about what an online offering should consist of. This was where ----------------------
discipline and clear process had to kick in. Assumptions are dangerous things. ----------------------
Process
----------------------
We agreed on a plan and a process we would work with, putting a particular
focus on: ----------------------
• Understanding what our customers needed from us and how we could ----------------------
meet those needs online.
----------------------
• Developing a value proposition and testing it with the target audience.
• Making design decisions based on continuous customer feedback. ----------------------
• Incorporating a pilot phase to understand in depth how and if the offering ----------------------
was meeting customer needs.
----------------------
The internal customer agreed that we should take time to develop a great
product. Rushing this type of project due to internally created deadlines was not ----------------------
going to achieve the customer’s strategic objectives.
----------------------
So, off to work we went.
----------------------
Research
A research project was commissioned to determine specifically what ----------------------
this online offering should comprise. There were a number of high-level
----------------------
requirements that emerged. Customers stated the following needs:
• Provide a personalised experience: “Treat me as if you know who I am (in ----------------------
the context of the company I work for) and account for what Microsoft ----------------------
products we’ve already bought and installed, which products we’re
thinking of buying, which vertical segment we’re in and our attitude ----------------------
toward IT.”
----------------------
• Provide a relevant experience: “Make it easy for me to access all
information and services I need to do business with Microsoft.” ----------------------

Notes • Provide a proactive experience: “Tell me when there is something you’re
doing that is relevant to me.”
----------------------
• Provide an educational experience: “Show me how your products can
---------------------- make our company better, how to get the most out of your products, why
IT matters and what the Microsoft product roadmap looks like in detail.”
----------------------
• Provide a supportive experience: “Make it easy for us to contact you
---------------------- about our specific needs and put us in touch with the right partners at the
right time.”
----------------------
Design
---------------------- With our Web agency, AKQA, we analysed the feedback.
---------------------- Initially, the brief to the agency was to develop ideas based on the feedback
and our objectives. They came back to us with strong concepts, including
---------------------- proposed names (we tested many and customers told us that Advisor was the
---------------------- most meaningful), information architectures, screenshots, design, layouts and a
portfolio of potential services and content we could provide.
---------------------- We then set up focus groups and tested ideas with the target audience.
---------------------- It was great to learn there were some clear killer applications emerging from
within the various services we proposed. The ‘Call Me’ feature and the ability
---------------------- to manage company profile details were popular. We had some surprises too:
Some services we had assumed would be valuable were rejected as low priority
---------------------- or gimmicky. Saved searches, personalised bookmarks and forums were
---------------------- dropped like rocks.
We also learned that interactive services, as opposed to volumes of
----------------------
flat content, were what the customers were really after. This was a valuable
---------------------- feedback. We had been heading in a content-heavy direction and our customers
pulled us back and steered us towards a more function-focused path.
----------------------
This stage of the process was key to getting Advisor right. It drove our
---------------------- priorities and gave us confidence that what we were developing was something
our customers really needed and wanted, not just what we assumed they needed.
----------------------
Technical
---------------------- The requirements were driven by our customers. These in turn provided
---------------------- us with the initial input for our functional requirements. We worked with the
agency to flesh these out in detail and understand the various internal systems
---------------------- and Web services we needed to expose and integrate.
---------------------- We developed new cases, analysed business processes, requested

information from the various internal systems and Web services owners and
---------------------- conducted planning sessions with development teams where we interacted with
those systems.
----------------------
The agency led the way in developing the technical architecture and
---------------------- system design and developing proofs of concept, verifying with technical
stakeholders throughout. It was apparent from the beginning that Advisor was
----------------------
going to be a technically complex project to deliver, so to ensure we stayed on

track we leveraged the Microsoft Solutions Framework (a flexible and scalable Notes
framework to plan, build, and deploy business-driven technology solutions).
----------------------
UI and Usability
One of the really exciting challenges of Advisor’s development was ----------------------
the need to create a user interface that would provide customers with all the
----------------------
services (applications) and content they would need in a single, cohesive and
usable environment and to create a compelling online customer experience that ----------------------
was a pleasure to use. In short, the interface needed to enable, not hinder.
----------------------
Many of the UI components were already defined for us through Microsoft
Network Project, an XML-based presentation framework used on Microsoft. ----------------------
com. MNP aims to provide consistent experience by defining standard design
and presentation elements across our sites through a common, managed code ----------------------
base.
----------------------
Leveraging MNP meant we could focus on the development of the
Advisor experience and avoid reinventing wheels. ----------------------
Key to the success of the UI design process was the investment made in ----------------------
usability testing. We partnered with a usability specialist agency (Bunnyfoot) to
conduct two testing sessions with the target audience. ----------------------
In the first session, we provided screenshots and label names for ----------------------
navigation. The design team gained valuable feedback, especially around label
naming and IA. At this stage, the issue of terminology was raised and addressed. ----------------------
‘Microsoftisms,’ terms that were unlikely to mean anything to anyone except ----------------------
those working at Microsoft (like ‘integrated collaboration’ and ‘close the delta’)
were dropped for plain English. ----------------------
We had to rename all six top-level sections. For example, we changed ----------------------
‘Reality’ to ‘Industry Success Stories’ and ‘Equip’ to ‘Events and Training.’
Secondary and Tertiary labels did better, but still required rethinking. We ----------------------
tweaked and retested, and moved on in the development phase.
----------------------
The purpose of the second session was to test a working site prior to pilot
launch. Again, we picked up on a set of issues, mainly to do with navigation ----------------------
and workflow, which we prioritised according to severity, and retested where
----------------------
significant changes were necessary.
During this session, customers made a number of great suggestions, ----------------------
some of which were easy to implement and made a big difference. One was ----------------------
the observation that when a link was clicked to another site outside of Advisor
the user felt lost, and suggested we open up a new browser-even if it was a link ----------------------
to another Microsoft site. We had considered this at an earlier stage but were
concerned that this broke one of our “consistent usage principles.” Practically ----------------------
every customer mentioned this point, so we gave them what they wanted. ----------------------
Pilot Phase
----------------------
We piloted the site with over 200 customers, allowing us to learn about
all the areas we needed to focus on prior to the full launch. We wanted to fully ----------------------

Notes test a range of dependencies and operational processes, including recruitment
processes, marketing communications, back-end offline support, service level
---------------------- agreements, issue escalation and resolution and so on. It’s a good thing we
did-we had already done a great deal of work in this regard, but realised we
---------------------- needed to re-engineer some other offline process if we were to go into full
---------------------- launch without causing mayhem. This period allowed us to test these processes
under real-world conditions.
----------------------
Many Web agencies consider this type of testing and preparation to
---------------------- be someone else’s job-and yes, to a great extent it is-but if the Web agency
is responsible for delivering its own part, it needs to be acutely aware of all
---------------------- dependencies and risks and make sure the client knows and acts accordingly.
The agency team did a great job in this regard, and in my opinion, this is where
----------------------
agencies stand out from the crowd (assuming creative and technical excellence).
---------------------- An example of the value we derived from pilot phase was learning about
the way one of the services offered within Advisor was being used (or not being
----------------------
used, as the case may be). The service in question was “Call Me,” a feature that
---------------------- let customers request a call at a specific date and time from the customer service
team.
----------------------
It was simply not achieving the level of use we expected. This confused
---------------------- and concerned us as the earlier research had shown “Call Me” to be a popular
feature that resonated well with customers. Additionally, the usability studies
---------------------- did not highlight any discoverability issues with the feature-in fact, a number of
the tasks we tested were planned specifically to ensure that “Call Me” was easy
----------------------
to find and use. There was no evidence of a problem at that stage.
---------------------- A number of theories were floated around as to why “Call Me” was not
---------------------- getting the usage we anticipated. Someone had the bright idea of asking the
customers. The answer came back loud and clear-customers were not quite sure
---------------------- what constituted a reasonable reason to request a call. They knew that “Call
Me” was not intended to replace existing support contracts (this was made clear
---------------------- in the copy) and were concerned about wasting our time with trivial queries.
---------------------- When we dug further, these ‘trivial queries’ turned out to be exactly the kind
of queries “Call Me” was designed to pass on to our customer services team.
---------------------- Many of the queries were actually the beginnings of decision-making processes
about purchasing our products.
----------------------
The insights we gained around “Call Me” allowed us to re-evaluate our
---------------------- marketing of this specific service within our communications at the pilot stage,
saving us money later on. The results showed we had cracked the problem-we
---------------------- experienced a 250% increase in the use of “Call Me” in the first week and the
---------------------- new levels were sustained after that.
The Results
----------------------
The pilot, launched in August 2003, also aimed to help us understand how
---------------------- the site was meeting its original objective of providing an online experience that
would meet customer needs as part of an overall CRM program and therefore
----------------------
lift customer satisfaction.

All said, the pilot did very well. We carried out pre and post-use surveys with Notes
the control group and the results were overwhelmingly positive, giving us
the confidence to launch in the UK in February 2004. Early signs were very ----------------------
encouraging.
----------------------
Our work was closely tracked and supported by teams in Redmond, advisor
rolling out in Germany and France later this year and globally after that. ----------------------
The lessons we learned during Advisor’s development are now used across ----------------------
teams and built upon by other projects. These lessons in user-centred design
and our general approach can be applied to online projects large and small; in ----------------------
particular, that it is more important to get it right than deliver early.
----------------------
Summary ----------------------
• A relationship does not come in a single size. Relationships mean ----------------------

different things to different customers. The buyer of a box of detergent
----------------------
will value different aspects of their relationship with Procter and Gamble
than will a buyer of a car from Maruti. Relationships need to be formally ----------------------
understood and the process needs to be effectively managed for a supplier
and a customer to continuously derive mutual value from the relationship. ----------------------
This then is what Relationship Marketing is about: the ongoing process of
----------------------
creating and sharing value with the customers that the company chooses
to serve. Relationship Marketing recognises the importance of learning ----------------------
with customers to create the value each wants; although that does not
necessarily mean that the value created for individual customers must be ----------------------
unique. Of course, in some cases, customers do want unique value, but in
----------------------
others, that may not be feasible, affordable or even required.
• If relationships are the key assets of the enterprise, then all its efforts should ----------------------
be geared to building them. While all businesses have sought to build
----------------------
relationships with their customers, many have viewed the development
and maintenance of the relationship as strictly the territory of sales, with ----------------------
the associated processes being owned by sales. But the relationship neither
starts nor ends with sales. Relationships are the business of the whole ----------------------
company and must involve the entire enterprise. The goal of the company
----------------------
and its leaders, then, should be to enhance the value of its relationships.
This value will come from enduring relationships not just with customers, ----------------------
but with all those who together contribute to the continuity of the customer
relationship. ----------------------
• This means that everyone from suppliers, to employees, customers and ----------------------
others, including retailers and other members of the distribution channels,
investors and the board of directors, need to be forged into a chain of ----------------------
relationships that will add ever increasing value to the end-customer
----------------------
relationship. The relationship the company forms with end-customers
will be only as strong as the weakest link in the chain; all are needed to ----------------------
maintain and deepen the relationship with the end-customer. Therefore,
relationships need to be forged and nurtured with every one of those who ----------------------

Notes contribute to the customer relationship. Relationship Marketing seeks to
create and share new value with each of these individual stakeholders,
---------------------- as each one wishes to relate to the company over the long term in a
partnership where many interests are common and aligned.
----------------------
• Relationship Marketing affects virtually every person, technology and
---------------------- process in the enterprise. It is not about isolated concepts such as database
marketing, predictive modeling, data warehousing, one-to-one marketing,
----------------------
relationship selling, mass customisation, customer intimacy or bonding,
---------------------- although each of these and others may have important roles as components
of the overall concept of Relationship Marketing. Relationship Marketing
---------------------- seeks to align the enterprise with the expectations of certain customers
and to deliver the value these customers continuously want.
----------------------
• A meaningful relationship starts, as in a more private way, when supplier
---------------------- and customer see that it is in their interests to get together for the long
term. This means a supplier needs to take stock of the customers it serves
----------------------
and decide which ones will receive special and continuing attention.
---------------------- Which customers are the most profitable now? Which can be made more
profitable? Which are very important to the company’s future? Which
---------------------- customers should be fired? Which customers want a relationship with us
and which customers want to buy on price alone? Relationship Marketing
----------------------
requires that organisations consider issues such as these and choose the
---------------------- customers on which it will focus, develop meaningful insight and predict
the behaviours of chosen customers, formulate strategies for individual
---------------------- customer relationships and build the abilities within the company to
deliver the value customers want. Companies asking themselves these
----------------------
questions may find that they have more work within the company to
---------------------- assess customers’ profitability, strategic value and perceptions of the
company and its competitors. Some companies may need to build better
---------------------- databases about their customers. Others may need to focus many areas of
their companies on the customer relationship, in part by organising their
----------------------
companies with relationships in mind, and in part by integrating people,
---------------------- process, technology and knowledge systems to bring about a deepening
of customer bonding.
----------------------
• It is management’s role to define and shape the basis for the end-customer
---------------------- relationship and to align all aspects of the enterprise with the customer. It is
also the purpose of management to recognise and address the importance
---------------------- of the relationships that contribute to the end-customer relationship. For
the end-customer relationship to endure, management may often need to
----------------------
rethink aspects about the company’s internal and external relationships.
---------------------- For example, are salespeople compensated to be hunters or farmers? Are
call centre personnel rewarded for the number of calls they process or
---------------------- the satisfaction of the caller? Does marketing focus on developing new
products or on the current and future profitability of its customers? Do
----------------------
investors include patient capitalists who favour growing the business or
---------------------- capricious venture capitalists with an inclination to pillage?

Keywords Notes
----------------------
• Evolution: A gradual process in which something changes into a different
and usually more complex or better form ----------------------
• Empirically: Guided by practical experience and not theory, especially
----------------------
in medicine
• Conversely: Opposite or contrary in direction, action, sequence, etc.; ----------------------
turned around
----------------------
• Cognitive: Of or pertaining to the mental processes of perception,
memory, judgment, and reasoning, as contrasted with emotional and ----------------------
volitional processes ----------------------
• Affective: Influenced by or resulting from the emotions
----------------------
• Conative: The aspect of mental processes or behavior directed toward
action or change and including impulse, desire, volition, and striving. ----------------------
• Emotive: Characterised by, expressing, or exciting emotion: an emotive ----------------------
trial lawyer; the emotive issue of gun control
----------------------
• Inertial: Inertness, especially with regard to effort, motion, action, and
the like; inactivity; sluggishness ----------------------
• Attribute: Something attributed as belonging to a person, thing, group,
----------------------
etc.; a quality, character, characteristic, or property: Sensitivity is one of
his attributes. ----------------------
• Symmetrical: Characterised by or exhibiting symmetry; well- ----------------------
proportioned, as a body or whole; regular in form or arrangement of
corresponding parts ----------------------
• Sparse: Thinly scattered or distributed: a sparse population ----------------------
• Perspective: A mental view or outlook: “It is useful occasionally to look
----------------------
at the past to gain a perspective on the present”
• Intimacy: Close or warm friendship; “the absence of fences created a ----------------------
mysterious intimacy in which no one knew privacy”
----------------------
• Conceptions: Something conceived in the mind; a concept, plan, design,
idea, or thought. ----------------------
• Retention: The holding by the body of what normally belongs in it, such ----------------------
as food in the stomach
----------------------
• Affinity: A natural attraction, liking, or feeling of kinship
• Acquiring: To gain possession of: acquire 100 shares of stock. ----------------------
• Recency: Of late occurrence, appearance, or origin; lately happening, ----------------------

done, made, etc
----------------------
----------------------

Notes
----------------------
1. How is relationship marketing changing the way marketers look at
---------------------- customers?
2. What is the correlation in Customer satisfaction and retention -?
----------------------
3. How can understanding customer value lead to successful marketing?
----------------------
4. Can you offer suggestions for improving customer retention in retail
---------------------- shops?
----------------------
----------------------
Check your progress 1
---------------------- 1. True
----------------------
1. True
----------------------
---------------------- 1. Win-back initiatives require listening to customers’ feedback, which at times
is not pleasant.
----------------------
---------------------- Suggested Reading

---------------------- 1. www.destinationcrm.com
---------------------- 2. www.mckinseyquarterly.com
---------------------- 3. Aaker, David A. Managing Brand Equity.

4. Barnett, Alex. Microsoft B2B Site Case Study. Capitalising on the Value
---------------------- of a Brand Name.
---------------------- 5. Berry, L., and A. Parasuraman. Marketing Services.
---------------------- 6. Chaudhuri, A., and M. Holbrook. The Chain of Effects from Brand Trust
and Brand Affect to Brand Performance.
----------------------
7. Coyles, S. and T. C. Gokey. Customer Retention Is Not Enough.
---------------------- 8. Fournier, S. Delivering on the Relationship in CRM.
---------------------- 9. Fournier, Susan, Susan Dobsha, and David Glen Mick. Preventing the
Premature Death of Relationship Marketing.
----------------------
10. Gale, B.T., and R.W. Chapman. Managing Customer Value: Creating
---------------------- Quality and Service That Customers Can See.

11. Joachim, David. CRM Tools Improve Access, Usability. Notes
12.
Jacoby, J., and R. Chestnut. Brand Loyalty: Measurement and
----------------------
Management.
13. Keller, K. Building Customer - Based Brand Equity. ----------------------
14. Milne, G., and A. Rohm. Consumer Privacy and Name Removal across ----------------------
Direct Marketing.
----------------------
15. Morgan, R., and S. Hunt. The Commitment-Trust Theory of Relationship
Marketing. ----------------------
16. Oliver, R. L. Whence Consumer Loyalty. ----------------------
17. Patrick Marketing Group. Key Business and Marketing Trends Survey
Analysis. ----------------------
18. Reichheld, Frederick F. The Loyalty Effect. Boston. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
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Product Differentiation of Business Products
UNIT
7
Structure:
7.1 Introduction
7.2 Basis of Differentiation
7.3 Competitive Advantage
7.4 The Value of Product Differentiation
7.5 The Surprising Secret of Successful Differentiation
Summary
Key Words
Suggested Reading
Product Differentiation of Business Products 115

Notes
Objectives
----------------------
----------------------
• Explain Product Differentiation.
----------------------
• State the basis of Product Differentiation.
---------------------- • Assess how to neutralise threats and exploit the opportunity.
----------------------
7.1 INTRODUCTION
----------------------
Product differentiation is the process of distinguishing the differences of a
---------------------- product or offering from others, to make it more attractive to a particular target
---------------------- market. This involves differentiating it from competitors’ products as well as
one’s own product offerings.
---------------------- Differentiation is a source of competitive advantage. Although research
---------------------- in a niche market may result in changing your product in order to improve
differentiation, the changes themselves are not differentiation. Marketing or
---------------------- product differentiation is the process of describing the differences between
products or services, or the resulting list of differences. This is done in order
---------------------- to demonstrate the unique aspects of your product and create a sense of value.
Marketing textbooks are firm on the point that any differentiation must be
----------------------
valued by buyers. The term unique selling proposition refers to advertising to
---------------------- communicate a product’s differentiation.
The brand differences are usually minor; they can be merely a difference
----------------------
in packaging or an advertising theme. The physical product need not change,
---------------------- but it could. Differentiation is due to buyers perceiving a difference; hence
causes of differentiation may be functional aspects of the product or service,
---------------------- how it is distributed and marketed, or who buys it. The major sources of product
differentiation are as follows.
----------------------
• Differences in quality which are usually accompanied by differences in
---------------------- price
---------------------- • Differences in functional features or design
• Ignorance of buyers regarding the essential characteristics and qualities
---------------------- of goods they are purchasing
---------------------- • Sales promotion activities of sellers and, in particular, advertising
---------------------- • Differences in availability (e.g. timing and location)
The objective of differentiation is to develop a position that potential
----------------------
customers see as unique.
---------------------- Differentiation primarily impacts performance through reducing directness
of competition: As the product becomes more different, categorisation becomes
----------------------
more difficult and hence draws fewer comparisons with its competition.
---------------------- A successful product differentiation strategy will move your product from

competing based primarily on price to competing on non-price factors (such as Notes
product characteristics, distribution strategy, or promotional variables).
Most people would say that the implication of differentiation is the ----------------------
possibility of charging a price premium; however, this is a gross simplification. ----------------------
If customers value the firm’s offer, they will be less sensitive to aspects of
competing offers; price may not be one of these aspects. Differentiation makes ----------------------
customers in a given segment have a lower sensitivity to other features (non-
price) of the product. ----------------------
----------------------
7.2 BASIS OF DIFFERENTIATION
----------------------
Product differentiation is a competitive business strategy whereby firms
attempt to gain a competitive advantage by increasing the perceived value ----------------------
of their products and services relative to the perceived value of other firm’s ----------------------
products and services.
Products sold by two different firms may be exactly the same, but if ----------------------
customers believe the first is more valuable than the second, then the first product ----------------------
has a differentiation advantage. The existence of product differentiation, in the
end, is always a matter of customer perception but firms can take a variety of ----------------------
actions to influence these perceptions.
----------------------
Objective is to incorporate differentiating features that will cause buyers
to prefer the company’s product/service over the brands of rivals. A firm ----------------------
pursuing such a strategy thus focuses on higher revenues/margins for achieving
enhanced economic performance. ----------------------
The challenge is to find ways to differentiate ones that CREATE VALUE ----------------------
for buyers and that are NOT EASILY COPIED or MATCHED by rivals.
----------------------
Anything a company can do to create value for buyers represents a
potential basis for differentiation. ----------------------
Following are the basis in which a company can differentiate their product: ----------------------
Product features: A way in which firms can attempt to influence customer
----------------------
perceptions is to modify the objective properties of the products or services
they sell. ----------------------
Linkage between functions: The way to differentiate products is through ----------------------
linking different functions within the firm. For example, in linking the sales and
service function. ----------------------
Timing: Introducing a product at the right time can help create product ----------------------
differentiation. The issue is to be the first mover to introduce a new product
before all other firms. First moving is an important determinant of perceived ----------------------
differences in the quality of education.
----------------------
Location / convenience: The physical location of a firm can also be a source of
product differentiation. If a firm is located close to customers, or in a location ----------------------
that is easy for customers to get to, it may have a product differentiation
advantage compared to the other firms. ----------------------

Notes Product mix: The mix of products or services sold by a firm can be a source of
product differentiation.
---------------------- Links with other firms: Another basis of product differentiation is linkages
---------------------- between one firm’s products and the products or services of other firms. For
example, links between credit card companies with car rental firms or Insurance
---------------------- companies.
---------------------- Reputation: One of the most powerful bases of product differentiation is the
reputation of a firm and of its products. Reputation is often very difficult to
---------------------- develop. However, once developed, it tends to last a long time, even if the
basis for a firm’s reputation no longer exists. In the end, the ability of a firm to
----------------------
develop, maintain and improve its reputation depends on customer experiences
---------------------- with that firm’s products and services.
Product customisation: Products are differentiated in the extent to which they
----------------------
are customised for particular customer applications.
---------------------- Distribution channels: Products have been differentiated on the basis of
alternative distribution channels. For example, Coca-Cola distributes its drinks
----------------------
through a network of independent and company-owned bottlers. Coca-Cola
---------------------- manufactures key ingredients for its soft drinks and ships these ingredients to
local bottlers, who add carbonated water, package the drinks in cans or bottles,
---------------------- and distribute the final product to soft-drink outlets in a given geographic area.
---------------------- Service and support: Products have been differentiated by the level of service
and support associated with them. For example, some firms have not developed
---------------------- their own service and support and rely on a network of independent service and
---------------------- support operations.

----------------------
----------------------
1. Anything a company can do to create value for buyers represents a
---------------------- potential basis for differentiation.
----------------------
---------------------- Activity 1
---------------------- Explain different bases for product differentiation with live examples.
----------------------
7.3 COMPETITIVE ADVANTAGE
----------------------
---------------------- A competitive advantage is an advantage over competitors gained

by offering consumers’ greater value, either by means of lower prices or by
---------------------- providing greater benefits and service that justifies higher prices.
----------------------

Competitive Strategies Notes
Four ‘generic’ business strategies that could be adopted in order to gain
competitive advantage. The four strategies relate to the extent to which the ----------------------
scope of business activities are narrow versus broad and the extent to which a ----------------------
business seeks to differentiate its products.
The four strategies are summarised in the figure below: ----------------------
The differentiation and cost leadership strategies seek competitive ----------------------
advantage in a broad range of market or industry segments. By contrast, the
differentiation focus and cost focus strategies are adopted in a narrow market or ----------------------
industry.
----------------------
Strategy - Differentiation
----------------------
This strategy involves selecting one or more criteria used by buyers in a
market - and then positioning the business uniquely to meet those criteria. This ----------------------
strategy is usually associated with charging a premium price for the product
- often to reflect the higher production costs and extra value-added features ----------------------
provided for the consumer. Differentiation is about charging a premium price that
----------------------
more than covers the additional production costs, and about giving customers
clear reasons to prefer the product over other, less differentiated products. ----------------------
Strategy - Cost Leadership
----------------------
With this strategy, the objective is to become the lowest-cost producer in
the industry. Many (perhaps all) market segments in the industry are supplied ----------------------
with the emphasis placed minimising costs. If the achieved selling price can at
least equal (or near) the average for the market, then the lowest-cost producer ----------------------
will (in theory) enjoy the best profits. This strategy is usually associated ----------------------
with large-scale businesses offering “standard” products with relatively little
differentiation that are perfectly acceptable to the majority of customers. ----------------------
Occasionally, a low-cost leader will also discount its product to maximise sales,
particularly if it has a significant cost advantage over the competition and, in ----------------------
doing so, it can further increase its market share.
----------------------
Strategy - Differentiation Focus
----------------------
In the differentiation focus strategy, a business aims to differentiate within
just one or a small number of target market segments. The special customer ----------------------
needs of the segment mean that there are opportunities to provide products
that are clearly different from competitors who may be targeting a broader ----------------------
group of customers. The important issue for any business adopting this strategy
is to ensure that customers really do have different needs and wants-in other ----------------------
words that there is a valid basis for differentiation - and that existing competitor ----------------------
products are not meeting those needs and wants.
Strategy - Cost Focus ----------------------
Here a business seeks a lower-cost advantage in just a small number of ----------------------
market segments. The product will be basic - perhaps a similar product to the
higher-priced and featured market leader, but acceptable to sufficient consumers. ----------------------
Such products are often called “me-too’s”.
----------------------

Notes
Activity 2
----------------------
---------------------- What are the different business strategies that could be adopted in order to
gain competitive advantage? Explain each, sighting a real life example.
----------------------
---------------------- 7.4 THE VALUE OF PRODUCT DIFFERENTIATION

---------------------- Neutralising Threats
---------------------- The ability of a firm to market a differentiated product, and obtain
above-normal economic profits, depends on that product either neutralising
---------------------- threats or exploiting opportunities (External Environmental Analysis). The
ability of a firm to maintain its competitive advantage depends, in turn, on the
----------------------
rareness and imitability of its organisational strengths and weaknesses (Internal
---------------------- Environmental Analysis).
---------------------- External Environmental Threats

Entry
----------------------
----------------------
Industry
Buyers Rivalry
----------------------
---------------------- Focal
---------------------- Firm
----------------------
Suppliers Threat Substitutes
----------------------
---------------------- External Environmental: A successful differentiation strategy creates

---------------------- lines of defense against the five competitive forces identified by Porter: rival
competitors, buyers, suppliers, potential entrants, substitutes.
----------------------
Threats of potential entrants: For example, product differentiation helps
---------------------- reduce the threat of new entry by forcing potential entrants to an industry to
absorb not only the standard costs of beginning business but also the additional
---------------------- costs associated with overcoming incumbent firms’ product differentiation
---------------------- advantages.
Threat of rivalry: Product differentiation reduces the threat of rivalry,
----------------------
because each firm in an industry attempts to carve out its own unique product
---------------------- niche. Rivalry is not reduced to zero, for these products still compete with one
another for a common set of customers, but it is somewhat attenuated, because
---------------------- the customers’ (each firm) seek are different.
----------------------

Threat of substitutes: Product differentiation also helps firms reduce Notes
the threat of substitutes by making a firm’s current products appear more
attractive than substitute products. For example, fresh food can be thought of as ----------------------
a substitute for frozen processed foods.
----------------------
Threat of suppliers: Product differentiation can also reduce the threat
of suppliers. Powerful suppliers can raise the prices of the products or services ----------------------
they provide. Often, these increased supply costs must be passed on to a firm’s
----------------------
customers in the form of higher prices.
A firm without a highly differentiated product may find it difficult to pass ----------------------
its increased costs on to customers, since these customers will have numerous
----------------------
other ways to purchase similar products or services from a firm’s competitors.
However, a firm with a highly differentiated product may have loyal ----------------------
customers or customers who are unable to purchase similar products or services ----------------------
from other firms. These types of customers are more likely to accept increased
prices due to a firm passing on increased costs caused by a powerful supplier. ----------------------
Thus, a powerful supplier may be able to raise its prices, but these increases
often do not reduce the profitability of a firm selling a highly differentiated ----------------------
product. ----------------------
Of course, the ability of a firm selling a highly differentiated product to be
somewhat immune from powerful suppliers may actually encourage suppliers ----------------------
to exercise their power. Since firms can pass increased costs on to customers, ----------------------
suppliers may decide to increase costs. At some point, even the most loyal
customers of the most differentiated products or services may find a firm’s ----------------------
prices too high. These price barriers suggest a limit to a firm’s ability to raise
prices. Any increase in supply costs once these barriers are reached results in ----------------------
reduced economic profits for a firm. ----------------------
However, at these price and supply-cost levels, a firm may find it possible
to obtain substitute supplies, or other firms may have entered into the supply ----------------------
market. The existence of substitute supplies or more suppliers both attenuates ----------------------
the power of suppliers and enables a firm selling a differentiated product to
maintain positive economic profits. ----------------------
Threat of buyers - Finally, product differentiation can reduce the threat ----------------------
of buyers. When a firm sells a highly differentiated product, it enjoys a quasi-
monopoly in that segment of the market. Buyers interested in purchasing this ----------------------
particular product must buy it from a particular firm. Any potential buyer power
----------------------
is reduced by the ability of a firm to withhold highly valued products or services
from a buyer. ----------------------
External Environmental Opportunities
----------------------
Product differentiation can also help a firm take advantage of environmental
opportunities. ----------------------
Fragmented industries: In fragmented industries, firms with highly ----------------------
differentiated products or services may be able to use this product position to
help consolidate the industry. ----------------------

Notes Emerging industries: By being a first mover in these industries, firms
can gain product differentiation advantages based on perceived technological
---------------------- leadership, preemption of strategically valuable assets, and buyer loyalty due to
high switching costs.
----------------------
Mature industries: In mature industries, product differentiation efforts
---------------------- often switch from attempts to introduce radically new technologies to product
refinement as a basis of product differentiation.
----------------------
Declining industries: Product differentiation can also be an important
---------------------- strategic option in a declining industry. Product differentiating firms may be able
to become leaders in this kind of industry (based on their reputation, on unique
----------------------
product attributes, or on some other product differentiation basis). Alternatively,
---------------------- highly differentiated firms may be able to discover a viable market niche that
will enable them to survive despite the overall decline in the market.
----------------------
Global industry: Finally, the decision to implement a product
---------------------- differentiation strategy can have a significant impact on how a firm acts in a
global industry. In general, product differentiation requires a firm to be in close
---------------------- contact with its customers, to understand their idiosyncratic needs and how
those needs can be addressed in a firm’s products or services.
----------------------
Global strategies, where business functions are located in ways that
---------------------- minimise functional costs, may make it relatively difficult for a firm to
differentiate its products or services in ways that are needed by different local
----------------------
markets. A multinational strategy, where different market segments throughout
---------------------- the world are serviced by quasi-independent operating divisions, may enable a
firm to differentiate its products in ways that respond to local market needs.
----------------------
Internal Environmental Threats
---------------------- Rareness of product differentiation
---------------------- The concept of product differentiation generally assumes that the number
of firms that have been able to differentiate their products in a particular way is,
----------------------
at some point of time, less than the number of firms needed to generate perfect
---------------------- competition dynamics.
Highly differentiated firms can charge a price for their product that is
----------------------
greater than average total cost.
---------------------- The rareness of a product differentiation strategy depends on the ability of
individual firms to be creative. Highly creative firms will be able to discover or
----------------------
create new ways to differentiate their products or services. These kinds of firms
---------------------- will always be one step ahead of the competition.
---------------------- Imitability of product differentiation

Valuable and rare bases of product differentiation must be costly to imitate
---------------------- or duplicate if they are to be sources of sustained competitive advantage.
----------------------
----------------------

Notes
----------------------
1. Product differentiation can also help a firm take advantage of
----------------------
environmental opportunities.
----------------------
Activity 3 ----------------------
----------------------
What are the differences between external and internal environmental
threats? Explain the same in your own words. ----------------------
----------------------
7.5 THE SURPRISING SECRET OF SUCCESSFUL
DIFFERENTIATION ----------------------
A successful differentiation has two defining characteristics: (1) It is not ----------------------

imitated by your competitors, even though it brings you unmistakable success ----------------------
with consumers.
----------------------
It may sound impossible, but it’s not quite so. It is about to reveal to
you the unexpectedly simple and wonderful secret of successful differentiation. ----------------------
Here it is: Do not look for it around the core benefits of your product category;
rather, think “off-core differentiation.” ----------------------
‘Core benefits’ are the benefits that the consumer already expects to receive ----------------------
from a product like yours. This is the list of what is important to the consumer.
‘Core benefits’ are more than the essential product benefits. The core benefits of ----------------------
today’s cellular phones include much more than the possibility of conducting a
----------------------
conversation while you’re in motion. Everything that the consumer has already
come to expect from products in your category is included in the core benefits. ----------------------
These are the benefits that all of your competitors offer, because they constitute
the essence of the product and it is impossible to compete in the market without ----------------------
them.
----------------------
That is precisely why if you really invest your efforts and are truly brilliant
and innovative and make a major breakthrough in improving core benefits-do ----------------------
you know what will happen? They’ll imitate you at warp speed. That’s what
----------------------
will happen. You must understand that in that case, your competitors cannot
allow themselves not to imitate you. You’d do exactly the same thing. ----------------------
Many companies have learned this the hard way: ----------------------
• Starbucks thought that its coffee shops would be cozier and look more
like a neighbourhood hangout if all their chairs were not all identical and ----------------------
if they had easy chairs and sofas. What a great idea! Today, you will find ----------------------
it in almost every coffee shop in the world.
----------------------

Notes • Colgate Palmolive combined all of the known beneficial characteristics
of toothpaste and created Total. The innovation caught on completely. I
---------------------- would dare to say that there is not even one manufacturer in the world
who has not imitated the idea, first and foremost Crest from P&G.
----------------------
• Volvo created its brand around a central core benefit: safety. It did
---------------------- everything humanly possible! Invested limitlessly! And succeeded-
especially in convincing their competitors that it is very important to invest
---------------------- in safety. Today, no one will tell you that safety is Volvo’s differentiation.
---------------------- We could go on and on, but I think you have already got the message. So
what should you do?
----------------------
To create a differentiation that will not be imitated, you have to think
---------------------- beyond the core benefits that are (already or even just in potential) considered
important in your market. It works time after time. The companies that have
----------------------
succeeded in maintaining their differentiation over the years and were not
---------------------- imitated even though they were making tremendous profits are those that
innovated in qualities beyond the core benefits of their market.
----------------------
A Naked Differentiation
---------------------- In Canada, there is a news company that according to no lesser authority
than Time magazine “offers the best international coverage this side of the
----------------------
BBC.” The company is called Naked News, and it broadcasts upbeat news
---------------------- and current events, programs to more than 172 nations daily on the Internet
and reaches a potential weekly television audience of 34 million in the United
---------------------- States and many more million viewers in the UK, Australia, and several other
countries around the world. Naked News is also available as video on demand
----------------------
in over 1.4 million hotel rooms in North America, the Caribbean, and Europe.
---------------------- The Naked News content is available daily to wireless mobile phones and
handheld devices. Naked News digital products are cable- and satellite-ready,
---------------------- and available for licensing in English, Spanish, and French distribution.
---------------------- Most of what the managers and other workers in this news company do is
exactly what their colleagues in any other news company in the world do. But
---------------------- Naked News has a little something that it does differently, and that is the reason
---------------------- that some viewers prefer to watch them (and to pay a premium price!). Tagged
“The channel with nothing to hide,” Naked News’s attractive anchor persons
---------------------- (well, mainly young women) cover politics, business, sport, and entertainment-
all naked.
----------------------
Its differentiation has no connection to the core benefits of a news
---------------------- company. What it is doing in order to make itself distinct seems strange, even
shameful and irrelevant to its competitors. So, the chances that someone will
---------------------- imitate the Naked News are small.
---------------------- Now, think about Apple. At the beginning, its differentiation was the
operating system with a user-friendly interface. That is very important to the
---------------------- customer! As computer users were increasingly regular folks and not computer
---------------------- pros, that user friendliness became an important core benefit. Could Microsoft

afford not to imitate it? Of course not! Over the past few years, Apple has Notes
changed its approach. Now, its differentiation is based on sophisticated design,
an approach that views the computer as a part of the well-designed office, while ----------------------
the Powerbook and the iPod are showpieces. Is anyone in a rush to imitate them?
Not really. In general, computers have become less ugly, but no significant ----------------------
competitor sees its computers as an opportunity for designers to go wild in the ----------------------
way that Apple did.
What are they waiting for? ----------------------
Virgin Atlantic is one of the best examples. As an airline company (in the ----------------------
usual sense of the term) it’s not any better than any of the other companies. It
does not have better planes or more comfortable seats. It’s not on time more ----------------------
often, doesn’t fly faster, doesn’t serve better food or offer a better timetable ----------------------
of flights than British Airways, for example. But it is a company that almost
always does some things differently. But note, none of these belong to the core ----------------------
benefits of the ‘airline company’ category.
----------------------
The result: Although Virgin Atlantic has been successful for several years
and has taken a good chunk of the market and its competitors’ clients, British ----------------------
Airways is not imitating it. Why? Because Virgin Airlines seems ridiculous.
----------------------
(Remember: It does not do things that are critical for the consumer!)
Swatch decided to treat the watch face and band as a design area. What ----------------------
does this have to do with the core benefit of a watch? Exactly! So no one has
----------------------
imitated them.
What about The Body Shop? There is no place for another drugstore chain ----------------------
that actively fights against animal experiments, for the environment, and for the
----------------------
needy wherever they are. No one even thinks about imitating them.
You may say that only a few companies have become leaders by means of ----------------------
an off-core differentiation. True. In fact, most companies never become leaders, ----------------------
nor need they. However, if you are in a competitive market and are trying to
make a living, then an off-core strategy is the best chance you have to give a ----------------------
group of consumers a good reason to devotedly prefer you and even create a
private monopoly for you. ----------------------
The Mob and the Mobile ----------------------

Sometimes an off-core differentiation can become eventually a core ----------------------
benefit. This happened to Nokia. It happens when the differentiation is not
really off-core but is actually based on a deep insight into the direction that the ----------------------
market is going and into consumers’ future needs.
----------------------
Early in the 1990’s, while Motorola was busy developing better-and-
better mobile phones, Nokia predicted that mobile phones were going to ----------------------
become an apparel item, a fashion statement. It did not seem like a core
----------------------
benefit of the category back then. Totally not connected to what a mobile
phone is supposed to do. But, when the technology of most mobile phone ----------------------
manufacturers became similar, they began to compete over design and
Nokia has lost its differentiation. ----------------------

Notes
----------------------

1.
____________ are the benefits that the consumer already expects to receive
----------------------
from a product.
----------------------
---------------------- Summary
---------------------- • Companies everywhere are struggling to differentiate their offerings. They
dream of establishing an unassailable market position for their solutions,
---------------------- a position that will enable them to capture a lion’s share of the customer’s
---------------------- mind and wallet.
• But, to their frustration, no matter how enticingly and expertly their
----------------------
portraits of the solutions are painted, to customers their solutions and
---------------------- their competitor’s solutions usually end up looking amazingly alike.
Painstakingly executed solution differentiation strategies end up becoming
---------------------- one-way tickets to the Value Gap and painful dry-run, no-sale scenarios.
---------------------- • Twenty years ago, Theodore Levitt declared: “The search for meaningful
distinction is a central part of the marketing effort. If marketing is
---------------------- about anything, it is about achieving customer-getting distinction by
differentiating what you do and how you operate. All else is derivative of
----------------------
that and only that.”
---------------------- • Sellers en masse have subscribed to Levitt’s view. They first focused
---------------------- on the most obvious element of his distinction formula and attempted
to differentiate based on the “what you do” part of the equation. They
---------------------- developed and marketed longer and even more esoteric lists of solution
features. They also created ever more complex bundles of products and
---------------------- services.
---------------------- • This focus on solution benefits was legitimate, but two things occurred
that eventually rendered it ineffective.
----------------------
• First, the competition quickly imitated the features that proved popular
---------------------- with customers and the distinction between solutions disappeared.
---------------------- • Second, a race to add features ensued, and soon feature-based distinctions
exceeded customer requirements and saturation points. When customers
---------------------- cannot use or recognise benefits, differentiation schemes that depend on
them become meaningless.
----------------------
----------------------
----------------------
----------------------

Notes
Keywords
----------------------
• Perception: Insight, intuition, or knowledge gained by perceiving
• Determinant: Having the power or quality of deciding; “the crucial ----------------------
experiment”; “cast the deciding vote”; “the determinative (or determinant) ----------------------
battle”
• Reputation: A favourable and publicly recognised name or standing for ----------------------
merit, achievement, reliability, etc.: to build up a reputation ----------------------
• Generic: Any product, as a type of food, drug, or cosmetic commonly
marketed under a brand name that is sold in a package without a brand ----------------------
• Imitability: Capable or worthy of being imitated: She has many good, ----------------------
imitable qualities Substitutes: One that takes the place of another; a
----------------------
replacement: “Fantasies are more than substitutes for unpleasant reality”
• Fragmented: Existing or functioning as though broken into separate ----------------------
parts; disorganised; disunified: a fragmented personality; a fragmented
----------------------
society.
• Emerging: To come forth into view or notice, as from concealment or ----------------------
obscurity: a ghost emerging from the grave; a ship emerging from the fog
----------------------
• Preemption: The act or right of claiming or purchasing before or in
preference to others. ----------------------
----------------------
----------------------
1. Define product differentiation.
----------------------
2. Describe basis of product differentiation.
----------------------
3.
Describe how product differentiation is ultimately limited only by
managerial creativity. ----------------------
4.
Describe how product differentiation can be used to neutralise ----------------------
environmental threats and exploit environmental opportunities.
5. Discuss whether or not it is possible for a firm to implement cost leadership ----------------------
and product differentiation strategies simultaneously, and why or why ----------------------
not.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Answers to Check your Progress
---------------------- 1. True
----------------------
----------------------
1. True
---------------------- 1.
Core benefits are the benefits that the consumer already expects to receive
from a product.
----------------------

---------------------- 1. Anderson, Simon P., Andre dePalma, Jacques-Francois Thisse. Discrete
Choice Theory of Product Differentiation.
----------------------
2. Beath, John, Yannis Katsoulacos. The Economic Theory of Product
---------------------- Differentiation.
---------------------- 3. Gabszewicz, Jean-Jaskold. Strategic Interaction and Markets.

4. Levitt, Theodore. The Marketing Imagination.
----------------------
5. Lynn, Cary, Cooper, Chris Argyris. The Concise Blackwell Encyclopedia
---------------------- of Management.
---------------------- 6. Slywotsky, Adrian J. Value Migration.
7. Thull, jeff. Mastering the Complex Sale.
----------------------
8. Vousden, Neil. The Economics of Trade Protection.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Pricing
UNIT
8
Structure:
8.1 Introduction
8.2 Setting the Price
8.3 Pricing Strategies and Policies
8.4 Consumer and Industrial Products
8.5 Reactions to Price Changes
8.6 Price versus Non-price Competition
Case Study
Summary
Key Words
Suggested Reading
Pricing 129
Notes
Objectives
----------------------
----------------------
• Explain different pricing objectives.
----------------------
• State different pricing models.
---------------------- • Overview how different factors influence price determination.
---------------------- • Discuss different methods of pricing a product.
----------------------
8.1 INTRODUCTION
----------------------
One of the most important and critical areas in marketing management
---------------------- is pricing the product. It is the second ‘P’ in the marketing mix. Decisions
on Pricing have a considerable effect in marketing. A wrong pricing decision
----------------------
can nullify the effect of all the right decisions relating to product, physical
---------------------- distribution and promotion. Decisions relating to price reflect many things; how
consumers perceive the products, who are the buyers, the profitability of the firm,
---------------------- the marketers’ competitive position and its share of the market. Consequently,
price has considerable effect on the marketers’ revenue and profit.
----------------------
Price is one of the most important elements in the marketing mix. It is the
---------------------- only element in the marketing-mix that produces revenue; all other elements
represent costs. Hence, companies will have to give utmost importance to
----------------------
pricing and handle it very carefully. “The most common mistakes are: prices
---------------------- are too cost oriented; price is not revised often enough to capitalise on market
changes; price is set independently of the rest of the marketing-mix rather than
---------------------- as an intrinsic element of market - positioning strategy; and price is not varied
enough for different product items and market segments.”
----------------------
In this context, it is advisable to know the meaning of price. It is common
---------------------- knowledge that utility, value and price are related concepts in economics. The
want-satisfying power of a product or service is called utility. It is the satisfaction
----------------------
a consumer receives from a product. Value is the quantitative measure of the
---------------------- worth of a product to attract other products in exchange. Value in exchange is
the worth of a commodity in terms of its capacity to be exchanged for another
---------------------- commodity. Since we do not have a barter system, we use money as a common
denominator of value. As a result, we use the term ‘price’ to describe money
----------------------
value of a product. Price is value expressed in terms of money. It may be noted
---------------------- that price connotes different names – rent, tuition fee, fare, rate, interest, toll,
premium, honorarium, salary, wage, commission etc. All these indicate what
---------------------- consumer pays for getting a product or a service.
----------------------
8.2 SETTING THE PRICE
----------------------
Setting the price of a product is not an easy task. It is affected by a number
---------------------- of factors. These are shown in the Figure 8.1 given below:

Pricing assumes much importance when a firm has to set a price for the Notes
first time. This problem arises when a firm develops a new product or its regular
product is marketed through a new channel or in a new geographical area. It has ----------------------
to set the price whenever new contract works are taken up. It may be noted that ----------------------
price is only one factor in marketing, not necessarily the most important one.
The importance of price factor varies with the type of the product. But, normally, ----------------------
buyers are willing to pay more if they get more satisfaction; conversely, a low-
priced product need not sell more. Again a high price error can be rectified ----------------------
later, but low price is an error which cannot be easily corrected. Hence, a firm ----------------------
has to consider a host of factors while setting the price. Let us summarise the
various factors affecting price and discuss them under two divisions: (i) Pricing ----------------------
Objectives, and (ii) Factors Influencing price determination.
----------------------
----------------------
rs De ----------------------
ye ma
Bu nd
CONS ----------------------
L ID
R NA ER
T
E Costs A ----------------------
Eco dition
Con
IN
----------------------
IO
nom s
Differe
Ob
N
Supplier
ic
jec
Produc on
----------------------
tiv
es
ntiati
Pricing
t
Decisions
----------------------
M
ark
eti
ng tion
al ----------------------
M rg nisa rs
ix O to
Fac
----------------------
Co
m
pe
t
tit
en ----------------------
io
m
ern
n
v
Go
Eth ----------------------
Cons ical
idera
tion
----------------------
----------------------
Fig. 8.1: Model of the Factors affecting Pricing Decisions ----------------------
a. Pricing Objectives
----------------------
Before analysing other factors which influence the setting of prices,
the management should decide the pricing objectives. The Pricing objectives ----------------------
should be in consonance with over all objectives of the company. The main
----------------------
pricing objectives may be categorised into:
●● Profit Objective ----------------------
●● Sales Objective ----------------------
●● Competitive Objective
----------------------
●● Product quality Leadership
Pricing 131
Notes Profit Objective: Profit generation is given maximum consideration under
this objective. This is achieved through profit maximisation and target return on
---------------------- investment. Making maximum profit has become the pricing objective of many
companies. But excessive profits may attract competitors. Under target return
---------------------- on investment, the firm seeks to get a certain percentage of its investment as
---------------------- income. Firms set a percentage markup on sales and the markup should be large
enough to cover anticipated costs plus a desired profit. But under conditions of
---------------------- over-capacity, severe competition or shifting consumer wants, profit become
less important and survival become the problem. So companies may adopt
---------------------- pricing methods just to survive in the industry.
---------------------- Sales Objective: The sales objectives may be to increase sales volume or
to maintain or increase the firm’s market share. If the goal is to increase sales
---------------------- volume, companies try to increase sales volume over a period of time. They may
---------------------- anticipate a given percentage increase in sales from year to year assuming that
higher volume of sales would lead to lower unit costs and yield higher profits.
---------------------- The sales volume may be increased by offering discounts, aggressive selling
or setting low prices. Very often to achieve maximum sales growth, in a price
---------------------- sensitive market, price is set low. This would lead to maximum sales and profits.
---------------------- In the case of increasing sales return, companies find that they have to
shoulder more responsibilities and problems. By ‘maintaining sales’, they just
---------------------- avoid problems. Another goal may be growth and maintenance of market share.
---------------------- Here, the company’s present market share is assessed and steps are taken to
increase its market share.
---------------------- Competitive Objective: Many firms consider price as a means to meet or
---------------------- prevent competition. In many industries, there is a ‘price leader’ and the price
set by the leader is followed by others. ‘Follow the leader,’ pricing is adopted
---------------------- by them. The aim is to stabilise prices and to prevent price wars. Sometimes,
marketers set low prices for the products to discourage competitors from
---------------------- entering the market. Again an entirely new product may be offered at a high
---------------------- price, so as not to attract more competitors.
Product quality Leadership: The objective of the company may be to
----------------------
create an image like it is a manufacture of high-quality products and it may
---------------------- want to be a leader in such products. To be compatible with this image, a high
price is set for the company’s products. The price set is expected to cover the
---------------------- high product quality and research and development cost. In the market of steel
Almirah, Godrej creates an image for its product quality by pricing it rather high.
----------------------
b. Factors Influencing Price Determination
----------------------
After determining the objectives, the next and crucial thing is the
---------------------- determination of the base price of a product or service. The problem assumes
much importance, especially in the case of new product, when compared to
---------------------- the existing product. In the latter case, the problem is not that much difficult,
because the market may decide the price or variations in prices. Several factors
----------------------
have to be taken into consideration in deciding the price. They are as follows:
----------------------

●● Determining demand Notes
●● Competitive reactions
----------------------
●● Skimming pricing or penetration pricing
----------------------
●● Influence of other parts of marketing mix – the product, distribution
channel and promotion ----------------------
●● Estimating costs ----------------------
●● Other factors such as economic conditions, governmental controls, ethical
considerations, etc. ----------------------
Determining demand ----------------------

One of the most important factors in pricing a product is to estimate ----------------------
the total demand for the product. The usual method is to find out the relation
between the price charged and the demand for the product. This is represented ----------------------
in the demand schedule. The demand schedule will show the demand for the
----------------------
product in units at different prices. The demand schedule will show an inverse
relationship between demand and price, that is, the higher the price, the lower ----------------------
the demand and vice-versa.
----------------------
Marketers make attempt to determine the demand for the product. A
monopolist does not face any problem in estimating demand. The demand ----------------------
arising from different price is shown by the demand schedule. In practice,
very often monopoly conditions do not prevail; the marketer has to face the ----------------------
competition. Two ways are suggested to estimate the demand. The first is to
----------------------
assume that the competitors’ price remains the constant, irrespective of the
price charged by the company. The second assumption is that for each price ----------------------
the company chooses, the competitors charge a different price. Here, we will
discuss these two assumptions. ----------------------
Varying prices are required to measure the demand schedule. The ----------------------
marketer must study the influence of other factors affecting demand to vary,
e.g. advertising expenses may be increased, on the one side, and then the price ----------------------
may be reduced, on the other. One may not know how much demand is created ----------------------
due to the increased advertising or reduced prices.
Marketers should know changes in demand when prices change. If the ----------------------
demand does not change with a small change in price, the demand is said to be ----------------------
inelastic. The demand is said to be elastic when demand changes considerably
and the price increases. The price-elasticity of the demand is given by the ----------------------
formula:
----------------------
% change in quality demand Price elasticity of demand = % change in
price ----------------------
Example: the demand falls by 20% when the price increases by 4%, price ----------------------
elasticity of the demand is -5, which indicates that there is an inverse relation
between price and demand. If demand increases by 5%, accompanied by 5% ----------------------
increase in demand, then elasticity is -1. Here the marketer’s total revenue
----------------------
Pricing 133
Notes remains the same. On the other hand, if demand decreases by 2% and price
increases by 4% then elasticity is ½. Hence, the less the elasticity of the demand,
---------------------- the more it pays for the seller to raise the price.
---------------------- Demand is inelastic when (a) there are few substitutes and competitors, (b)
consumers are not readily aware of price increase, (c) consumers are reluctant
---------------------- to change their habits and search for lower prices, (d) consumers believe that,
the higher the prices, it results in improved quality, inflation, etc.
----------------------
In condition of inelastic demand; marketers try to lower their prices. More
---------------------- revenue is obtained by lower prices. But, this policy can be adopted only so
long as production costs and additional sales do not increase disproportionately.
----------------------
Competitive Reactions
----------------------
Next task is to analyse competition in the market. The determination
---------------------- of the bases price is influenced by present and potential competition. A new
product remains distinctive only for a short period, until competition arrives.
---------------------- The chances of potential competition are more when it is easier to enter the field
---------------------- and the scope of profit is more.
Usually, the market forces of demand and supply determines the base for
---------------------- pricing. The competitors’ prices help the firm in setting its price. The company
---------------------- should study the competitors’ prices and the consumers’ reactions towards
each competitor’s offer. This information can be used for determine prices. For
---------------------- example, if the company’s product is comparable to major competitors’, then
it has to fix a price close to the rivals or it may lose sales and inferior product
---------------------- cannot be charged in this way. On the other hand, for a superior product, it
---------------------- can charge a price higher than the competitors’. This indicates that there exists
competitive interdependence, i.e. any change in the price front of one firm
---------------------- will automatically elicit reactions from its competitors’. In other words, prices
should be tailored to meet the various types of competitive posters.
----------------------
Skimming or Penetration Pricing
---------------------- Price Sell at high price before
reducing to next price
---------------------- Initial Skimming
level are repeat
Price
----------------------
Second Price
----------------------
---------------------- Final Price
----------------------
Quantity
----------------------
---------------------- Fig. 8.2: Skimming Pricing Illustration

In case of an entirely new product management, it has two options in
---------------------- price fixing: charge a high price or low price. Charging high price is referred
---------------------- to as skimming pricing and low price as penetration pricing. The market tries

to maximise profits during a short period, under the skimming pricing. He Notes
anticipates competition. So, before competitors enter the market he tries to make
as much profit as possible. In penetration pricing, the marketer tries to penetrate ----------------------
into an already established market controlled by a group of companies. Low
----------------------
pricing strategy is adopted and he tries to capture a share of the market.
Influence of other parts of Marketing Mix ----------------------
The other parts of marketing mix the product, distribution channels, and ----------------------
promotion also influence the pricing of the product. Price is much influenced,
depending on whether a product is new, old or an established one. In case ----------------------
of new products, high prices (skimming) or low prices (Penetration) may be
adopted. But if the product is modification of an existing one, but marketed by ----------------------
another manufacturer either of the above methods or price comparable to the ----------------------
one marketed by the competitor may be adopted. Price will vary depending on
the length of the channel. A long channel means more expenses and therefore ----------------------
high prices will be charged for the product. A short channel reduces many types
of expenses and there is a scope for lower prices. Promotional methods used ----------------------
by the manufacturer and the middle man are other factors affecting prices. ----------------------
The expenses to be incurred for promoting the product have to be taken into
consideration. ----------------------
Estimating Costs ----------------------
Costs play an important role in marketing decisions. The costs are usually
divided into two categories fixed and variable. Fixed costs remain constant, ----------------------
i.e. they do not vary with production or sales volume. Variable cost per unit is ----------------------
constant but it varies with production. For any given level of production, total
cost consists of the sum of fixed and variable costs. The aim of the management ----------------------
is to fix a price that will cover the total costs for any given level of production.
----------------------
Other Factors
The economic conditions prevailing in the country exert much influence on ----------------------
price fixing. Usually prices are raised during inflation because of costs. During ----------------------
the periods of depression, prices are reduced as survival becomes a problem.
Ethical consideration mean that the company may sell certain products not with ----------------------
the aim of making profits, but as a public welfare measure e.g. prices of certain
life saving drugs or vaccines may cover only the costs of production. ----------------------
In a country like India where government seeks to regulate and plan ----------------------
economic activity, a major consideration in pricing is the government policy.
The impact of government policy on price may be direct or indirect; may be ----------------------
short-term or long-term in its consequences. In developed countries also, the ----------------------
state restricts the freedom of pricing to safeguard the interest of the consumer
and to prevent monopoly practices. ----------------------
A modern marketing manager often finds himself unable to decide ----------------------
the price policy and strategy without reference to the policy and regulations
of government. It may also be necessary for him to anticipate changes in ----------------------
government’s policies and programmes, e.g. Service tax, VAT etc.
----------------------
Pricing 135
Notes
Activity 1
----------------------
---------------------- 1. Explain value and price with examples.

2. What are the different pricing objectives? Explain each with a live
----------------------
example.
---------------------- 3. Explain in your own words the different factors that influence the
pricing strategies. Give an example for each factor.
----------------------
----------------------
8.3 PRICING STRATEGIES AND POLICIES
----------------------
The pricing objectives are attained through price policies and strategies.
---------------------- Price policies are general guidelines to future decision making when a given
situation arises. “The pricing decision management makes to fit the changing
---------------------- competitive situations encountered by specific products as its pricing strategies.
---------------------- Thus, price policies are general and long-run, while pricing strategies are
specific and short-run. Setting the price itself is a key element in the foundation
---------------------- of price strategy and, as the competitive situation changes with different stages
in the products life cycle, the relative freedom management has in setting prices,
---------------------- also changes”. The pricing strategy / method selected by the marketer should
---------------------- be capable of attaining the pricing objective e.g. penetration pricing strategy
has the objective of capturing mass market and weans away consumers from
---------------------- the competitors market. The various pricing strategies / methods are as follows:
---------------------- ●● Cost-based pricing
---------------------- ●● Demand/market based pricing

●● Perceived-vale pricing
----------------------
●● Contact pricing / seal bid pricing
----------------------
●● Price discounts
---------------------- ●● Geographic pricing strategies
---------------------- ●● Unit pricing
---------------------- ●● Price lining

●● Price leading or Going rate pricing
----------------------
●● Loss leader pricing
----------------------
●● Discriminatory or differential pricing
---------------------- ●● Psychological pricing
---------------------- ●● Leasing
----------------------
----------------------

Cost-based Pricing Notes
Fixing the price of the products on the basis of cost is known as cost
base pricing. It is the most frequently used pricing strategy of many firms. The ----------------------
important types of cost-based pricing are (a) Cost-plus/markup pricing (b) ----------------------
Break-even pricing and (c) Target returning pricing.
----------------------
Cost-plus pricing
Cost-plus, also referred to as full-cost pricing, is one of the common methods of ----------------------
pricing. This involves three steps:
----------------------
1. A sales forecast is made,
----------------------
2. Total unit costs are estimated based on the sales forecast,
3. To the estimated cost a percentage mark-up is added as profit. Interpreted ----------------------
in another way, cost-plus pricing is setting the price of a unit of product ----------------------
equal to the unit’s total cost plus desired profit on the unit.
----------------------
Even though cost-plus pricing is very simple and frequently applied
pricing methods it is subject to serious criticism. “It neglects the influence of ----------------------
competition and demand; it is based on full cost rather than appropriate marginal
cost, and it involves circular reasoning because price, which influences sales, ----------------------
depends upon full cost, which in turn is partly determined by the level of
----------------------
sales”. The marketing forces of competition and demand exert much influence
on price determination. Hence, no pricing method can ignore the influence of ----------------------
competition and demand to fix a profitable price. As the price is based on full
cost, the impact of fixed expenses owing to changes in volume of sales cannot ----------------------
be studied and given effect to in pricing. It may be noted that total cost per unit
----------------------
will vary when the volume of production or sales changes.
Break-even Point ----------------------
This is an improved cost-oriented method of pricing and is also referred ----------------------
to as “target profit pricing”. Here the price is fixed in such a way that it would
bring in the desired amount of profit. The distinguishing features of this method ----------------------
are: (a) Instead of full cost or total cost, marginal cost of sales is taken into
----------------------
consideration and (b) contribution is added, instead of mark-up, to the marginal
cost to arrive at the price. ----------------------
Target returning price ----------------------
The price may be fixed as to yield the target rate of return on investment.
For example, rate may be ten or fifteen percent on investment. The formula for ----------------------
calculating target return price is given as: ----------------------
Desired Return X Invested Capital
Target Return Price = Unit Cost + ----------------------
Unit Sales
----------------------
The anticipated total sales revenues should exceed total costs so as to
provide the desired rate of return on the total investment. ----------------------
----------------------
Pricing 137
Notes Demand/Market Based Pricing
a. Skimming pricing: This method is adopted in the case of entirely new
---------------------- products. The price is set very high and aims at high profits in the
---------------------- introductory stage. The firm may be interested in recurring research and
development expenditure before a competitor enters the market or to
---------------------- make as much profit as possible within a short period. He may reduce the
price when there is competition or to attract other market segments.
----------------------
b. Penetration pricing: Prices are kept low so as to capture mass market
---------------------- and to wean away consumers from the competitors market. This method
is successful if the consumers are price sensitive and the product has a
---------------------- highly elastic market.
---------------------- Perceived Value Pricing
In this method, price is based on the perceived value of the product. By
----------------------
perceived value, marketer not only makes aware but also establishes in the
---------------------- buyer’s minds the benefits of different competitive offers. The marketer sees
how buyers perceive the value and not his cost as the basis for pricing. The firms
---------------------- use the non-productive external variables in the marketing mix, to establish
perceived value in the minds of the buyer. The perceived value is captured by
----------------------
the pricing method.
---------------------- A company using the perceived value pricing will have to guard against
one danger, i.e. if it charges a price higher than the ‘buyer-recognised value’, its
----------------------
sales would suffer in relation to what sales could have been. On the other hand,
---------------------- over pricing will result in reduced sale. Again, under pricing may mean more
sales, but less revenue when compared to what it would have been, if perceived
---------------------- value level pricing had been adopted.
---------------------- Contract Pricing
This also referred to as ‘Seal Bid pricing’. Several firms bid for the same
----------------------
job. Hence, more consideration is given to competitors’ pricing rather than to
---------------------- the firm’s costs. If it wants to win the contract it has to set a price lower than
other firms. At the same time, it cannot fix a price at a very low level, because
---------------------- pricing below cost would result in loss. Conversely, if a higher price is set, there
is less chance of winning the contract.
----------------------
Price Discounts
---------------------- Price discounts are deduction from a list price. Various types of discounts are:
---------------------- a. Quantity Discounts: A quantity discount is a reduction in price to customers
who buy in large quantities. This enables, customer to buy from a seller
---------------------- rather than from several sellers.
---------------------- b. Cash Discounts: A cash discount is a deduction in price allot to customers
for prompt payments. It reduces credit collection costs and bad debts and
---------------------- improves firms’ liquidity.
---------------------- c. Promotional Discounts: For performing such as selling, storing,
transportation etc. functional discounts also known as trade discounts are
---------------------- allowed to wholesalers, dealers etc.

d. Seasonal Discounts: Seasonal discounts are offered to encourage customers Notes
to make purchase during off-season.
----------------------
Geographic Pricing Strategies
In the case of a marketer whose customers are spread throughout the ----------------------
country, a question is whether he should charge higher price to distant customers
----------------------
to include higher freight charges or he should charge uniform prices to all
customers, irrespective of locations. Three methods are used. They are as follows: ----------------------
F.O.B. Pricing: In the case of Industrial products, very often the customer ----------------------
is required to pay the freight charges. This is called F.O.B. (Free On Board)
pricing. Seller is not paying any of the freight charges; the price fixed by the ----------------------
seller includes cost of goods plus expenses only up to loading the cargo on
board the ship ----------------------
Uniform Delivered Pricing: In the uniform delivered pricing which is ----------------------

opposite of F.O.B. pricing, the marketer charges the same price to all customers
regardless of the location. This method is used in pricing consumer products. ----------------------
The advantage is that it can be administered easily and the company can have ----------------------
a national price.
----------------------
Zone Delivered Pricing: In zone delivered pricing, the seller’s market is
divided into different zones and uniform price is fixed in each zone. ----------------------
Unit Pricing
----------------------
Unit pricing shows price per unit of standard measure (Weight or volume),
allowing consumers to compare prices among competing products. ----------------------
Price Lining ----------------------

Practice of pricing merchandise with in price ranges determined by market ----------------------
is known as Price lining. This is popular in readymade dress materials. A retailer
may sell different types of shirt to suite the requirements of different group of ----------------------
consumers. For example, one type for mass market and another for middle class
----------------------
and another for upper class. This is highly convenient to the customer because it
simplifies his buying decisions, or it allows him to narrow the decision - making ----------------------
process. The customer can decide how much money to spend for a shirt and
then chose from that price range. ----------------------
Price leading or going rate pricing ----------------------
Price leading or going rate pricing is popular in industries such as cement ----------------------
steel, paper, fertiliser etc. Firms’ price is largely based on competitors’ prices,
while the cost and demand do not merit much consideration. The firms charge ----------------------
more or less the same price charge by the competitor. As the firm can sell the
entire output at the going rate, it need not charge less. Firms usually charge the ----------------------
same price; price competition is avoided and price leadership emerges, with the ----------------------
smaller firms adopting the policy of “follow the leader”. Whenever the market
leader changes the price, the followers – smaller firms – also change the price, ----------------------
irrespective of the change in their cost and demand. Generally, price leaders
have the major market share. ----------------------
Pricing 139
Notes Loss Leader Pricing
This method is adopted by retailers. Retailers cut the prices of certain items
----------------------
to attract customers to the store. The items whose pieces are cut are called ‘loss
---------------------- leaders’. These items should have good brand image with heavy advertisement
backing and purchased frequently. The idea is that customer would be attracted
---------------------- to the retail store to purchase loss leaders and while purchasing would look
around and purchase other types of merchandise. In other words, “a loss leader
----------------------
is sold below cost in order to stimulate its sales and as well sale other products”.
---------------------- For example, you buy a portable TV from your suppliers at Rs.16000 and
the additional costs of selling the TV add up to Rs. 4000, totaling a break-even
----------------------
selling price of Rs. 20,000. You sell the TV for a reduced price of Rs.18,900
---------------------- therefore making a loss of Rs.1100 for each one sold. But to the customers,
they will see this price as a bargain due to other shops selling the TV at say Rs.
---------------------- 23,000. Fig. 8.3 below illustrates this more clearly:
}
---------------------- No profit +
15% Profit = Rs. 3000 Rs. 1100 Loss
---------------------- from cost
Cost = Rs. 4000
Rs. 2900 = Cost
----------------------
----------------------
----------------------
Price from Rs. 16000 = Price
---------------------- Supplier = Rs. 16000 from
Supplier
----------------------
----------------------
---------------------- Normal Price = Rs. 23000 Rs. 18900 = Loss Leader Price
---------------------- Fig. 8.3: Loss Leader Pricing

---------------------- Discriminatory Pricing or Differential Pricing
---------------------- “Discriminatory pricing describes the situation where the company sells
a product or service at two or more prices that do not reflect a proportional
---------------------- difference in costs.” The different types of discriminatory pricing are as follows:
---------------------- ●● Customer-basis pricing: The same product or services are offered to

different groups of customers at different prices.
----------------------
●● Product-form pricing: The same product is offered with slight
---------------------- modifications at different prices. The additional feature may cost a very
small amount, but the price charged for the product with this additional
---------------------- feature will be very high.
---------------------- ●● Location pricing: Different locations are charged different rates, even
though the cost of offering service at each location is the same.
----------------------

●● Time pricing: Prices vary according to the season, day and even by the Notes
hour.
----------------------
●● Image pricing: Image differences are highlighted. The same product is
then priced at two different levels on the basis of image differences. ----------------------
Psychological Pricing ----------------------
The term psychological pricing suggests that some non-economic or
----------------------
psychological factors enter into the determination of prices. Apart from price,
consumers purchase products on the basis of superior quality, image etc. Two ----------------------
types of psychological pricing are:
----------------------
a. Prestige Pricing: Some marketers try to present an image of quality
by attaching a high price to their products. Prestige pricing is above ----------------------
competitive levels. It is successfully applied in the case of ego-sensitive
----------------------
products such as automobiles, watches, television etc.
b. Odd Pricing: Another technique applied in psychological pricing is to ----------------------
set price at odd amounts. This is successfully applied by Bata. Instead of ----------------------
pricing the show at Rs.1000 it is priced at Rs.999.95 the consumer sees
the price within 100’s and not in thousands. ----------------------
Leasing ----------------------
Leasing has become a form of pricing now. It is completely different from
----------------------
another type of pricing. The user of the product (the lessee) is not purchasing the
product outright and does not down it, but he uses the product. This arrangement ----------------------
is considered advantageous to both sellers and buyers. Leasing, in the initial
stages, was confined to highly technical and costly industrial equipment, such as ----------------------
computers, photocopiers etc., but now it has spread to too many other products ----------------------
also. In the normal purchase, a consumer uses the product over its entire life.
But in leasing, its use or functions are rented out to him for a specified period ----------------------
of time. The seller (the lessor) might have spent huge amounts for research and
----------------------
development and naturally the buyer may not be able to afford high selling
prices for the product. So the buyer takes the product on rent for a specified ----------------------
period at an agreed fee. The lessor usually fixes the fee at a high rate and the
total revenue that would be more than the selling price, had the product been ----------------------
sold. Another advantage is that leasing agreement binds the lessee to the lessor. ----------------------
The lessee has to obtain many ancillary items from the lessor.
----------------------
The lessee derives so many advantages from leasing. The main advantage
is that the lessee can use the product without investing capital. Hence, money is ----------------------
not blocked up and it can be used for other purposes. Another advantage is that
if due to technological break¬through, another improved product comes into ----------------------
the market, he can take the new equipment under leasing arrangement. In India, ----------------------
leasing is slowly emerging as a big-business.
----------------------
----------------------
Pricing 141
Notes
----------------------

1. Setting the price itself is a key element in the foundation of price
----------------------
strategy.
---------------------- 2. Price leading or going rate pricing is popular in industries such as
cement steel, paper, fertiliser etc.
----------------------
Fill in the blanks.
----------------------
1. ____________________ method is adopted by retailers.
----------------------
---------------------- Activity 2
----------------------
What are the various pricing strategies / methods? Give a real life example
---------------------- from the local market for each.
----------------------
---------------------- 8.4 CONSUMER AND INDUSTRIAL PRODUCTS

---------------------- According to Committee on definitions of America Management
Association, consumer goods are products ‘destined for use by ultimate
---------------------- consumers or household and in such form that they can be used without (further)
processing.’ Industrial goods are products ‘destined to be sold primarily for
----------------------
use in producing other goods or rendering services as contrasted with goods
---------------------- destined to be sold primarily to the ultimate consumer.’
---------------------- Goods and services brought by business and institutional buyers are
industrial goods, which they use for further production. The distinction between
---------------------- consumer goods and industrial goods lies in their ultimate use. Industrial goods
are used for making other products or for running of an enterprise, whereas
---------------------- consumer goods are meant for ultimate consumption by a consumer.
---------------------- For pricing industrial products, the following will have to be taken into
consideration:
----------------------
a. In the case of large equipments made to specifications, price is a matter of
---------------------- contract tender.
---------------------- b. Industrial products often involve services and the cost of services facilities
will have to be taken into account in fixing the price
----------------------
c. The margin of profit should make possible adequate research to keep
---------------------- abreast of technological changes.
d. The share of the market and the potential market are important considerations.
----------------------
----------------------

8.5 REACTIONS TO PRICE CHANGES Notes
When a firm considers a price cut or increase, the customers’ and ----------------------
competitors’ reactions must be carefully considered.
----------------------
Price cuts
----------------------
Price cuts may be initiated under the following circumstances:
a. Excess capacity: Additional business is required, but increased sales ----------------------
effort, product improvements/modifications etc. may not give the desired ----------------------
result. The only alternative then is to cut prices.
b. Falling market share: Due to severe price competition and promotional ----------------------
methods adopted by competitors, the firm experiences falling market ----------------------
share.
c. Market domination: To dominate the market, price cut may be restored to ----------------------
d. Price may be cut during periods of recession and depression. ----------------------

Price Increases ----------------------
Two situations compel firms to increase prices: a) Cost inflation b) Heavy
demand whereby demand exceeds supply ----------------------
Reaction of Buyers ----------------------

Buyers may interpret price cut in the following ways: ----------------------
a. That the company wants to withdraw the item and introduce a new one.
----------------------
b. That the product has some defect and the company wants to dispose it off
quickly. ----------------------
c. That the firm is facing financial problems. ----------------------
d. That the price may again decrease and it would be advisable to wait for
----------------------
some more time.
e. That the quality has gone down. ----------------------
A price increase may be interpreted as follows: ----------------------
●● That the item is very popular and may not be available later, so it is better
----------------------
to purchase it now.
●● That the item is of a good value and price increase justifies its worth. ----------------------
●● That the marketer is indulging is ‘profiteering.’ ----------------------

Reactions of Competitors ----------------------
The price cut made by the firm may be interpreted as: that the company
----------------------
wants acquire a major share of the market, it is in financial trouble and wants
additional revenue by increasing sales or it wants others also cut price so ----------------------
that total demand increases. A price increase may be interpreted as; that the
company wants to make more money by increasing sales by advertising and ----------------------
other promotional methods, it wants to become the market leader or the product
----------------------
has some special features which justify the price increase etc.
Pricing 143
Notes 8.6 PRICE VERSUS NON-PRICE COMPETITION
---------------------- Price competition is still one of the marketing strategies adopted by
---------------------- marketers. Price competition means offering products at lower prices. Under
non-price competition marketers maintain stable prices. Much emphasis is
---------------------- given to other aspects of marketing. This would enhance their market position.
Other aspects of marketing programme are given the prominence. Firms thus,
---------------------- try to improve their market position. But prices are still an important element
---------------------- and price change would take place over a period of time. That means, in non-
price competition, ‘emphasis is on something other than price.’
---------------------- Promotion and product differentiation are the two methods adopted in
---------------------- non-price competition. Apart from these methods, some firms emphasise prompt
and efficient service also. Trading stamps are used as a promotion technique.
---------------------- Trading stamps can be exchanged for gifts or cash. But now this technique
is not popular. Other promotion methods such as offering gifts, warranty
---------------------- free delivery etc. are employed. Product differentiation is made effective by
---------------------- making modifications and improvements in the products offered and stressing
the special features of the product. Prompt and efficient services, in the case
---------------------- of those products which require after-sales service are effectively adopted by
many manufactures.
----------------------
---------------------- Case Study

----------------------
---------------------- Pricing in the package holiday market

This case study considers how prices are set in the package holiday market
---------------------- had how price discrimination is used as part of the pricing strategies used
---------------------- Introduction
---------------------- UK holiday-makers take some 36 million overseas holidays each year.
Of these, almost half are “packaged holidays” - where the consumer buys a
---------------------- complete package of accommodation, flight and other extras - all bundled into
one price. This is a highly competitive market with a small number of large tour
----------------------
operators (including Thomson Holidays, Air Tours, First Choice, JMC) battling
---------------------- hard for market share.
Package holidays were devised partly as a way of achieving high sales
----------------------
volumes and reducing unit costs by allowing tour operators to purchase the
---------------------- different elements (flight, catering, accommodation etc) in bulk, passing some
of the savings on to consumers.
----------------------
Low margins require high asset utilisation
---------------------- Estimates of tour operating margins vary, but fairly low average figures
---------------------- - of the order of 5% (or around £22 on the typical holiday price of around
£450) are widely assumed in the mainstream segment of the market. It should
---------------------- however be noted that vertically-integrated holiday operators (where the tour

operator also owns an airline and a travel agency) will normally also generate Notes
profit from consumers. Accordingly, the gross margins on the total operations
of the integrated operators may be larger than those on their tour operation ----------------------
activities alone.
----------------------
Tour operators need to operate at high levels of capacity utilisation (figures
of the order of 95% or more in terms of holidays sold) in order to maintain ----------------------
profitability. Matching capacity and demand is therefore critical to profitability,
especially since package holidays are perishable goods - a given package loses ----------------------
all its value unless it is sold before its departure date.
----------------------
Perishable goods markets require highly flexible production and
distribution systems so that supply and demand can be closely matched and ----------------------
‘waste’ production minimised. But suppliers of package holidays are severely
----------------------
hampered in precisely aligning capacity and demand. They need to ‘produce’
(i.e. contract for the necessary flights, accommodation etc.) virtually the whole ----------------------
of what they expect to sell a long time before it is ‘consumed’ (i.e. when
the consumer departs for the holiday destination, or at the earliest, when the ----------------------
consumer pays the bulk of the price – usually around 8 weeks before departure).
----------------------
Long-term management of capacity
----------------------
Tour operators’ capacity plans and the associated contracts with hoteliers
and airlines, are typically fixed 12-18 months ahead of the holiday season. Some ----------------------
adjustments are possible after this date. However, within about 12 months of
departure date, once the booking season has begun (i.e. from about the summer ----------------------
of 2002 for departures in summer 2003) the scope for changes is severely
limited. This is due to the inflexibility of many commitments with suppliers and ----------------------
the problems associated with changing dates, flights, hotels etc. of customers ----------------------
who have already booked.
Only by contracting for their expected needs well ahead of time, enabling ----------------------
suppliers to plan ahead, can tour operators obtain a sufficiently low price to ----------------------
attract an adequate volume of profitable sales. Tour operators therefore need
to encourage early bookings. These improve cash-flow – a substantial deposit ----------------------
(usually around £100 per person, equivalent to around 25% of a typical short-
haul holiday price) is paid by consumers on booking; the balance is payable two ----------------------
months in advance of departure (except, naturally, for ‘late’ bookings).
----------------------
Tour operators also reduce the risk of unsold holidays, and the consequent
need for discounting, later on. Adding capacity is easier than reducing it during ----------------------
a season, although in some instances, e.g. where a particular resort is proving
especially popular, all suitable accommodation (and/or flights to the relevant ----------------------
airport) will already have been reserved, at least for the peak period. But, it is ----------------------
generally difficult for tour operators to ‘unwind’ their contracts, especially those
for air transport, without substantial penalties. The tour operator, accordingly, ----------------------
bears almost all the risk of any contracted capacity remaining unsold.
----------------------
The price mechanism
Faced with this limited ability to reduce output in the short-term (i.e. once ----------------------
the brochures are published and the selling season has started), tour operators ----------------------
Pricing 145
Notes can, for the most part, only try to match supply and demand via the price
mechanism – in other words, by discounting once it becomes clear that sales
---------------------- of their holidays appear unlikely to match the supply that they have contracted.
---------------------- The fixed costs of tour operation (mainly, the cost of the airline seat and
most of the accommodation and catering costs) make up a high proportion of
---------------------- total costs, so that relatively high levels of discount can be applied if necessary
to clear unsold stock. Reductions of up to 25% of the initial brochure price are
----------------------
available on some ‘late’ sales – although consumers will often in such cases be
---------------------- required to accept the operator’s choice of hotel, or even the resort, according
to availability.
----------------------
Discounting of holidays during this ‘late’ part of the selling season is a
---------------------- similar phenomenon to that of ‘end of season stock clearance’ sales in other
retail sectors (e.g. clothing). However, the impact of discounting on ‘late’ in a
---------------------- normal season should be seen in the context of the operator’s turnover for the
season; it is effectively reduced by only about 5% (25% off 25% of holidays
----------------------
sold). Discounts (or equivalent incentives such as ‘free child’ places or ‘free
---------------------- insurance’) for early purchase are also offered, but they are much less significant
both as to the amount of the reduction (5-10% appears typical) and its impact
---------------------- on costs and turnover. About three-quarters of all package holidays typically are
sold at or close to the brochure price.
----------------------
The fundamental rigidities in the market have important consequences
---------------------- for competition. They make suppliers closely dependent on each other from
a strategic, as well as a short-term, viewpoint. In particular, any decision by a
----------------------
tour operator to try to increase market share by increasing capacity (i.e. offering
---------------------- more holidays for sale) will lead to a fall in prices unless competitors reduce
their share by an equivalent amount by cutting capacity.
----------------------
---------------------- Summary
---------------------- ●● At the end of the day, it should be fairly easy to see whether your price
is right or not. Checking your sales on a monthly basis should give you
---------------------- a good indication of whether you are online to meet your costs and profit
margin. Doing this on a monthly basis will also give you time to take any
----------------------
action if the results are not as you hoped.
---------------------- ●● You should also keep an eye on supply and demand. In other words, look
at your sales ¬do you have a lot of products and only a few sales? Then
----------------------
it might be because your price is too high. You might want to look at
---------------------- decreasing your price and/or increasing your marketing efforts.
---------------------- ●● On the other hand, if you cannot keep up with the orders and you do not
have enough products in stock or people to supply a service then your
---------------------- prices might be too low.
---------------------- ●● Of course, there are always other reasons for changes in demand such as
the local economy, changes in fashion, the introduction of new competition
---------------------- or an existing competitor lowering their prices etc. So, you will need to

keep an eye on business and the news in general to help you understand Notes
the possible reasons for these changes.
----------------------
●● Finally, listen to what your customers are saying. But bear in mind, no
matter what price you set, no matter how low you go - someone will ----------------------
always complain about it. If they are not complaining however, maybe
your price is too low! ----------------------
----------------------
Keywords
----------------------
●● Intrinsic: Belonging to a thing by its very nature: the intrinsic value of a
----------------------
gold ring.
●● Connotes: To have as a related or attendant condition: For a political ----------------------
leader, hesitation is apt to connote weakness. ----------------------
●● Honorarium: A payment in recognition of acts or professional services
----------------------
for which custom or propriety forbids a price to be set: The mayor was
given a modest honorarium for delivering a speech to our club. ----------------------
●● Conversely: a group of words correlative with a preceding group but ----------------------
having a significant pair of terms interchanged, as “hot in winter but cold
in summer” and “cold in winter but hot in summer.” ----------------------
●● Consonance: Agreement; harmony; accord ----------------------
●● Skimming: To take (the best or most available parts or items) from
----------------------
something: The real bargains had been skimmed by early shoppers.
●● Penetration: The act or process of piercing or penetrating something, ----------------------
especially: The degree to which a commodity, for example, is sold or ----------------------
recognised in a particular market.
----------------------
●● Monopolist: Exclusive control by one group of the means of producing
or selling a commodity or service ----------------------
●● Estimating: To form an approximate judgment or opinion regarding the ----------------------
worth, amount, size, weight, etc., of; calculate approximately: to estimate
the cost of a college education. ----------------------
●● Elicit: To draw or bring out or forth; educe; evoke: to elicit the truth; to ----------------------
elicit a response with a question.
----------------------
●● Weans: To detach from that to which one is strongly habituated or
devoted: She weaned herself from cigarettes. ----------------------
●● Conversely: The relation between two terms, one of which is related to ----------------------
the other in a given manner, as “younger than” to “older than.”
----------------------
●● Ancillary: Something that serves in an ancillary capacity: Slides, records,
and other ancillaries can be used with the basic textbook. ----------------------
----------------------
Pricing 147
Notes
----------------------
1. Define or explain Odd Pricing.
---------------------- 2. Define or explain Prestige Pricing.
---------------------- 3. Define or explain Location Pricing.
---------------------- 4. Explain briefly the Pricing Objectives.

5. Briefly discuss the factors influencing Price Determination.
----------------------
6. What is the importance of break-even point in Price Determination?
----------------------
7. What are the various methods of pricing?
---------------------- 8. Explain the cost oriented pricing methods.
---------------------- 9. What is the role of government in pricing?
---------------------- 10. Discuss briefly the different methods of pricing a product.

11. Explain the various factors influencing price determination.
----------------------
----------------------
----------------------
---------------------- 1. True
---------------------- 2. True
Fill in the blanks.
----------------------
1. Loss Leader Pricing method is adopted by retailers.
----------------------

---------------------- 1. Cunningham & Cunningham. Marketing.
---------------------- 2.
Daly, John L. Pricing for Profitability: Activity-Based Pricing for
Competitive Advantage.
----------------------
3. Dolan, Robert J., Hermann. Power Pricing.
---------------------- 4. Harper, Donlad V. Price, policy and procedure.
---------------------- 5. Jensen, Marlene. Pricing psychology report.
----------------------
7. Kyle, Bobette. 7 Pricing Strategies That Improve Profit.
---------------------- 8. Still, Cundiff and Govoni. Fundamentals of Modern Marketing.
---------------------- 9. Vaknin, Sam. Global Differential Pricing.
10. Valletti, Tommaso M. Differential pricing, parallel trade, and the
----------------------
incentive to invest.

Customer Service Management
UNIT
9
Structure:
9.1 Introduction
9.2 Understanding Customer Behaviour
9.3 Customer Relations
9.5 Customise your Customer Care
9.6 Managing Customer Expectations
Case Study
Summary
Key Words
Suggested Reading
Customer Service Management 149

Notes
Objectives
----------------------
----------------------
• Explain what your customers expect of you and your organisation.
----------------------
• Discuss your personal impact on customers.
---------------------- • Analyse customer expectations.
---------------------- • Describe a first class customer experience within a stressful environment.
----------------------
---------------------- 9.1 INTRODUCTION
---------------------- Perhaps the most insidious strategic risk, companies face today is
decimation of the customer base by shifts in behaviour, preferences, and
---------------------- demographics. These shifts may happen gradually or literally overnight. Either
way, they can destroy a business design.
----------------------
Customers are people - unpredictable, irrational, emotional, curious,
---------------------- and highly prone to change. Customers cannot keep still. They re-segment
themselves from ‘product buyers’ to ‘value buyers’ to ‘price buyers’ and then
----------------------
back again. Their priorities change from ‘quality’ to ‘price’ to ‘solutions’ to
---------------------- ‘style’ to ‘brand’. They get richer. They get poorer. They get excited by and
attracted to different styles, different offerings, and different ways to buy.
----------------------
They get better informed and they get more demanding. They decide to
---------------------- shop at different places; they start buying shirts through catalogs, jewellery
from a TV network, vacations online. They pledge allegiance to product brands,
---------------------- then store brands, then no brands. They want carbohydrates and then they do
not. They want big cars; then small, thrifty ones; then humongous ones - then
----------------------
decide they value fuel-efficiency and ecological virtue after all.
---------------------- Every time customer priorities shift, our business design is at risk. Our
---------------------- value proposition gets a little fuzzier, a little out of focus. We lose a little
business from a few customers; they decide to peel away once in a while and
---------------------- buy a couple of items from another supplier.
---------------------- Then we start losing customers altogether. (That’s a little more worrisome.
But at least we’ve still got our old reliable). Then we start losing our most
---------------------- profitable customers, the 20 percent that generate more than 80 percent of the
income. A trickle of tiny changes turns into a torrent of departures, as 1 percent
---------------------- loss of revenue turns into a 6 percent loss of profit.
---------------------- Customer risk is the most subtle and perhaps the most widespread strategic
risk that any company faces. It’s also the most unnecessary.
----------------------
How can you take action to prevent customer risk? You cannot force
---------------------- people to buy from you. As Yogi Berra once said, “If the people don’t want to
come to the ballpark, you cannot call them.”
----------------------

You can reduce the risk of losing customers by reducing the uncertainty Notes
that creates the risk. No, you can’t, but you can reduce the risk of losing
customers by reducing the uncertainty that creates the risk in the first place. ----------------------
After all, that’s what risk is all about - not knowing what’s going to happen,
what your customers are thinking, what they want, what they will do, what will ----------------------
they respond to. ----------------------
If you could know those things, you could react appropriately with the
----------------------
kinds of pricing, marketing, and service offerings that would motivate them to
stay. ----------------------
This is why the first countermeasure for defeating customer risk is creating
----------------------
and applying continuous proprietary information about your customers. It’s
about answering the question: What do we know about customers that others do ----------------------
not, then using that knowledge to make and keep profitable customers for life.
----------------------
9.2 UNDERSTANDING CUSTOMER BEHAVIOUR ----------------------
To market your products/services successfully, you must understand who ----------------------
wants them, why they want them and how you can convince people to buy
them. Now that you have created a profile (or profiles) of your clients, it is ----------------------
important to understand what will affect their buying decisions.
----------------------
The following sections describe some of the behaviours of consumers and
how you can use them to your advantage. ----------------------
Customers want to feel comfortable ----------------------
Nobody wants to be uncomfortable, but as a marketer, it is important that ----------------------
you establish a strong sense of comfort for your clients. This is especially true
on the internet as users typically have a stronger resistance to being ‘sold’ due ----------------------
to the anonymous nature of this medium.
----------------------
Making your customers feel comfortable in person is vitally important
to your business, but it is also important that the visitors to your website feel ----------------------
comfortable with you. It is often the first contact they will have with you and if
they do not feel a sense of comfort and trust from your web pages, they are not ----------------------
likely to contact you to meet in person. ----------------------
You can make your website a comfortable place for your visitors by writing
the messages on your pages in a similar fashion to how your visitors would talk ----------------------
and write. Avoid the use of technical jargon (except where you visitors may be ----------------------
looking for it) and write in a conversational manner, address each visitor as an
individual rather than a large group of people. ----------------------
You can also increase the comfort and trust level that your visitors feel for ----------------------
you by showing many examples of your past work (for example, describe how
your satisfied the needs of previous customers) and including testimonials from ----------------------
several of your past clients (if you did a good job for them, your visitors will
----------------------
believe you can also satisfy their own needs).
----------------------

Notes Use emotions to sell
People tend to act faster and more often on emotions than on rational
---------------------- thinking. They prefer to receive benefits from products rather than features.
---------------------- Therefore, you should stress what your products/services can do for them rather
than just listing what your products/ services can do.
----------------------
Make your marketing message stir up feelings in your customers so that
---------------------- they will want to enhance or reduce those feelings by purchasing your products/
services. Four great motivators of consumers are:
----------------------
●● Guilt
---------------------- ●● Greed
---------------------- ●● Exclusivity
---------------------- ●● Fear
Determine which of these will work best with your services and then use
----------------------
it to your advantage.
---------------------- For example, a photographer’s wedding clients may have a fear that their
photographer will get in the way of the ceremony and the guests at the wedding
----------------------
and that in the end, the photographs they receive will not be what they wanted.
---------------------- To reduce this fear, you should explain the planning steps you take before you
photograph a wedding; describe how you operate at the ceremony and give
---------------------- examples, including testimonials, of how smoothly your past weddings have
gone and how happy your clients have been.
----------------------
Customers purchase based on image
----------------------
Your product/service is what it is plus what the consumer thinks it is. You
---------------------- may have the best service on the market but a client will not buy from you if he/
she feels that someone else’s is better.
----------------------
It is important to determine what the customer is looking for in terms of
---------------------- your products/ services and then to associate an image with them which matches
what the consumer wants. You should also determine how your customers
---------------------- view your competitors’ products/ services in relation to yours by conducting
---------------------- interviews. By knowing where your products/ services stand in the market in
the customers’ eyes, you can better determine how to capitalise on your image
---------------------- or alter it to increase demand.
---------------------- Examples of the value of an image are prevalent in the clothing industry.
Two similar dresses may have the same material and quality, yet one sells more
---------------------- often at a price of Rs 700 higher simply because the designer’s name has a
stronger image associated with it.
----------------------
How badly do your customers need your product?
----------------------
People have both needs and wants. Food, shelter, clothing and security
---------------------- are very basic necessities of every individual. However, for some people,
automobiles, microwaves, televisions and dishwashers are also considered vital
---------------------- to their existence.

As a marketer, you must understand where customers place your products Notes
on their list of priorities. This is very important because consumers usually
tend to satisfy all of their needs first (both real and perceived needs) and then ----------------------
they begin to satisfy their wants with what is often termed luxury items. If
you understand the need customers have for your products, you can determine ----------------------
when, where and how to market them more effectively. ----------------------
You may also alter the consumer’s priorities by creating a stronger need
----------------------
or desire for your services. You may associate your services with some of
their basic needs such as security, food, shelter and clothing. Examples of this ----------------------
include a teenager’s ‘need’ for jeans rather than just any pair of pants and a
home owner’s ‘need’ for a security system. ----------------------
If you cannot make your products a necessity for consumers, try to place ----------------------
it at the top of their ‘wants’ list by showing them how you can make their life
more enjoyable. The greater the desire for your product, the more the consumer ----------------------
will work to satisfy their “need” for it.
----------------------
----------------------
----------------------
1. People tend to act faster and more often on emotions than on rational
thinking. ----------------------
----------------------
Activity 1 ----------------------
Explain four motivators of consumers with live examples for each. ----------------------
----------------------
9.3 CUSTOMER RELATIONS ----------------------
If you think back to the time when you saw your home for the first time, ----------------------
you probably remember seeing things that needed to be fixed: the cracked wall,
the crooked light fixture, the kitchen hinge that’s just not right. After you moved ----------------------
in, suddenly you were able to walk past all those things without being bothered ----------------------
by them. In fact, you almost forgot about them.
The same thing happens with our customers. Since they are not walking to ----------------------
the door every day, they notice things that are not up to par and make judgments ----------------------
about your organisation based on those observations. If your company does not
have customer service systems and standards that are uniform and based upon ----------------------
customers’ expectations, chances are your customers are noticing things about
your organisation that are not acceptable to them. ----------------------
There is an easy approach to tuning up your customer service and giving it ----------------------
a consistent look so that your customers can expect to always receive high-quality
service. This simple five-step system will dramatically improve your service: ----------------------

Notes Step One
Identify your perception points. Every time a customer encounters anyone
----------------------
or anything from your organisation, he or she forms a perception. It could be
---------------------- good or bad, depending on how well that perception point met the customer’s
standards. Examples of perception points include telephone conversations,
---------------------- correspondence, greetings, and billings - anything that presents an opportunity
for the customer to make a judgement about your organisation. Identify all
---------------------- of your company’s perception points. Simply ask yourself, at what times are
---------------------- customers given the opportunity to form an impression on us? List them.
Step Two
----------------------
For each perception point, list your standards of performance. These are
---------------------- the minimum standards that everyone working in your organisation should meet
consistently. The standards should be measurable and definable. Since every
---------------------- organisation will have telephone conversations listed as a perception point, let
us list some examples of phone standards:
----------------------
Should’s
----------------------
●● Answer the phone by the second or third ring.
---------------------- ●● Identify yourself by giving your name.
---------------------- ●● Say ‘How may I help you?’ instead of ‘Can I help you?’ The fact that the
person called means he or she wants some sort of help.
----------------------
●● Transfer the call only once - make sure you are transferring to the right
---------------------- person.
●● Repeat your phone number at least once when leaving a voice mail
----------------------
message.
---------------------- ●● Exude confidence and competence.
---------------------- Should not’s
---------------------- ●● Never put a caller on hold without asking for permission and waiting for
a reply.
---------------------- ●● Never put a caller on hold for more than 30 seconds.
---------------------- ●● Never tell a customer what you cannot do without following with what
you can do: “I cannot have those papers for you by Wednesday, but I will
---------------------- deliver them to your business on Thursday morning.”
---------------------- Never say
---------------------- ●● ‘He went home early.’ Customer perception: ‘He does not care about my
business.’ Rather mention that the person is unavailable and ask how you
---------------------- can help.
---------------------- ●● ‘Our technical department always screws things up.’ Customer perception:
‘Oh, incompetence is the norm?’
---------------------- ●● ‘He’s dealing with an angry customer right now.’ Customer perception:
---------------------- ‘Now he has two.’

●● ‘She’s busy. You’ll have to call back.’ Customer perception: ‘Silly you. Notes
I’m the customer and customers don’t ever have to do anything.’ Rather
ask the customer how you can help or when would be a good time to call ----------------------
back.
----------------------
●● ‘Mrs. Smith is still in lunch.’ Customer perception: ‘Sounds like a Martini
lunch. Too busy having a good time to be there for customers!’ ----------------------
●● ‘I’m sorry, that’s just our policy.’ Customer perception: ‘Do I care about ----------------------
your policy?’ Customers hate nothing more than heading about your
policies. Tell them instead how the policy will benefit them - but never ----------------------
say the word policy. For example, instead of ‘You can’t smoke in here -
----------------------
it’s our policy’ say: ‘For the health of our customers, we allow smoking
outside the building.’ ----------------------
●● ‘Why don’t you call back later?’ Customer perception: ‘Why? Because I ----------------------
am the customer. If you want the business, you call back later.’
●● ‘I don’t know where she is.’ Customer perception: ‘Lose your employees ----------------------
often? I imagine you could lose my order then too.’ Instead, simply state ----------------------
she is not available and ask to take a message or if someone else can help.
Step Three ----------------------
Make sure everyone in your organisation understands and applies all of ----------------------
the standards. Document them and include them with new employee orientation
----------------------
packages.
Step Four ----------------------
Constantly elevate your standards. Take them to the next level. Customer ----------------------
services can always be improved on.
----------------------
Step Five
Apply peer pressure. If someone doesn’t meet the standards, it is a ----------------------
reflection on everyone in the organisation. Don’t wait for a manager crack down ----------------------
on someone who is not applying the standard. Ask the person if he or she needs
help understanding the standard. If he or she understands the standard but is not ----------------------
applying it, the person has an attitude problem. Be direct in asking the person to
apply the standard consistently. ----------------------
Never lose your child’s eye. When setting your standards, look at all of ----------------------
your approaches and systems as if you were seeing them for the first time. You
will be shocked at what you look at every day but don’t see. Once you have ----------------------
your customer service practices in a state of excellence, you can always go ----------------------
home and fix that crack!
----------------------
Activity 2 ----------------------
----------------------
Explain five steps for improving the customer service, with examples.
----------------------

Notes 9.4 CUSTOMER RETENTION
---------------------- One major impetus for the current interest in customer service is the
change in focus from customer acquisition to customer retention. Traditionally,
----------------------
the marketer’s role has been to acquire new customers; however, the pioneering
---------------------- work of Reichheld and Sasser (1990) shed light on the financial impact of
customer relationships, and revealed that it is in the later years of the customer
---------------------- relationship that the largest returns are generated. Accordingly, when a customer
defects, he will take all of that profit-making potential with him. The research
----------------------
showed that, across a range of industries, an increase in customer retention of
---------------------- as little as 5% can result in a long-run profit increase of between 25% and 95%.
Finding new customer’s costs five to seven times more than retaining current
---------------------- customers; and increasing customer retention by 2 percent can be the equivalent
of cutting operating expenses by 10 percent. More recent studies have found
----------------------
strikingly similar results for e-commerce-based firms. The golden rule, that
---------------------- profit increases with the length of a customer relationship, is perfectly illustrated
online. Companies like Dell and eBay focus on the delivery of superior customer
---------------------- experience that will motivate customers to return and interact again and again.
---------------------- To be able to create an environment for customer retention, companies need
to understand their customers’ evolving needs. Importantly, not all customers
---------------------- are equally profitable, and companies need to acknowledge that different groups
---------------------- of customers vary in their behaviours, desires and responsiveness to marketing.
A prerequisite will be the ability to collect and manage the data necessary
---------------------- to determine the economics of customer acquisition, customer retention and
lifetime value. Therefore, in order to facilitate these improved relationships on
---------------------- a company-wide basis, organisations need to utilise the appropriate technology;
---------------------- and, as Chen and Popovich (2003) put it: “Years of academically researched
topics of relationship marketing and customer retention are now practical and
---------------------- cost-effective to implement due to emerging technology”. Thus, information
technology is a critical enabler of CRM, and blending technology with customer
---------------------- requirements is an important success element in establishing and developing
---------------------- customer relationships.

----------------------
----------------------
1. To be able to create an environment for customer retention, companies
---------------------- need to understand their customers’ evolving needs.
----------------------
---------------------- 9.5 CUSTOMISE YOUR CUSTOMER CARE
---------------------- The most rewarding channel customer care programs attack the issues
at the level of specific customer segments. The creation of value reflects how
---------------------- service needs vary among customers.

To improve the value, channel customer care depends on accurate and Notes
sufficiently precise understanding of customers’ needs and the economics of
serving those needs. However, as noted, most suppliers tend to focus on the ----------------------
needs of the channel, and not the actual customer. Their views of customers are
limited in breadth and depth, often filtered by the channel and not necessarily ----------------------
current. The market research they do perform usually involves product-based, ----------------------
supplier-driven issues such as preferred product type and features.
Instead, customer care improvement requires knowledge of service-based, ----------------------
channel-driven needs. This understanding must typically be built from scratch. ----------------------
Facts and data are usually required to supplement counter existing biases and
intuition, and understanding the customer’s underlying economic dynamics is ----------------------
crucial. It is also essential to objectively assess the inevitable investment costs
versus the benefits. The insights about customer service requirements must ----------------------
clearly uncover specific variations across non-homogeneous groupings. The ----------------------
purpose of segmentation in this context is to identify sets of customers whose
key drivers of value differ, so that solutions can be designed accordingly. ----------------------
Consider the customised customer care program used by the General ----------------------
Electric Company’s electrical distribution products unit. One portion of
this business makes circuit breakers and panel boards for new or retrofitted ----------------------
commercial and industrial buildings. Contractors purchase the products from
----------------------
electrical distributors. They also receive a variety of services directly from the
manufacturer, depending on the size and type of job, since the products are ----------------------
often specified, priced and built for a particular job.
----------------------
The economics of the contractors’ business are such that delays in
receiving materials at the job site are extremely costly. People and equipment ----------------------
costs, possible completion deadline penalties and subsequent delays for other
contractors affect the economic equation. So the No. 1 need of all contractors ----------------------
is on-time delivery.
----------------------
However, the secondary need varies by type of contractor or type of job.
For many small projects, “quote responsiveness” is the No. 2 requirement. ----------------------
Unlike large jobs that have a long, complex bidding and quoting process, small
----------------------
jobs tend to have a short fuse and can be won or lost based on the contractor’s
ability to quote quickly. ----------------------
G.E. recognised this distinction and developed an easy-to-use, PC-based ----------------------
quoting system for small jobs that the distributor can utilise instead of having the
manufacturer involved, as in the process for large jobs. Consequently, G.E.’s quote ----------------------
time is recognised as faster than that of its three major competitors, a distinction
that has given G.E. a significantly greater share in this targeted and higher-margin ----------------------
portion of the market. It is revealing to build an understanding of customer needs ----------------------
in the context of what Jan Carlson, former head of S.A.S., the airline, called
‘moments of truth’ - the sequence of critical transactions across each stage of the ----------------------
ownership or use cycle (See Fig. 9.1). Evaluating the degree to which satisfaction
and value are affected at these different points in the cycle and how they vary by ----------------------
customer type, can be the key to understanding customer behaviour. ----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 9.1: Moments of Truth

---------------------- An interesting example of a ‘moments of truth’ analysis is in the cellular
phone service industry, where most consumers have only one interaction with
---------------------- a channel, at the time of the original sale. In the United States, high satisfaction
---------------------- with this initial sales experience turns out to be critically important. It translates
into a longer association with the service provider, which is the No. 1 determinant
---------------------- of customer profitability. The satisfaction level is based on how well the sales
channel explains features and service charges and sets the proper expectations
---------------------- for the consumer.
---------------------- One other ‘moments of truth’ example also illustrates the relevance of
differences across customer segments. A car manufacturer found that an important
---------------------- source of customer dissatisfaction with the buying process could be overcome by
---------------------- having dealer sales personnel carefully explain operating and instrument display
functions. Unfortunately, the manufacturer failed to realise that while some
---------------------- customers were indeed pleased with this service, others were put off by having
to sit through a mandated demonstration session that they viewed as bothersome
---------------------- and perfunctory.
----------------------
----------------------
---------------------- 1. To improve the value, channel customer care depends on

____________________ of customers’ needs and the economics of
---------------------- serving those needs.
----------------------
9.6 MANAGING CUSTOMER EXPECTATIONS
----------------------
In developing any type of business relationship, especially in a service-
---------------------- oriented type of relationship, expectation on both parties must be monitored and
maintained. In Managing to Keep the Customer, the service organisation should
----------------------
have the recognition of the needs, coupled with knowledge of what to change,
---------------------- capacity, and willingness of the management team to implement the needed
changes. Once a project is in motion, expressing those necessary changes
---------------------- in the current protocols of the client organisation is necessary and effective

communication of the goals of that client organisation is a must. Getting those Notes
necessary systems requirements prior to the engagement of a project is always
necessary, but is not always easy. Being able to change the project in the middle ----------------------
can be costly for the client and for the vendor. It can cause a change in focus
because of the fact that the whole picture was not fully presented prior to the ----------------------
beginning of the project or it can even scrap what has been done and must redo ----------------------
to encapsulate the whole system.
----------------------
First and foremost, the concept of understanding customer’s perceptions
must not be an afterthought, but must be the driving force behind every project. ----------------------
“Our expectations are influenced by our previous experience, our knowledge,
and our memory. And what we perceive is often what we expect to see or what ----------------------
we are looking for. This mental set functions at the unconscious level to delimit
----------------------
our capability to perceive.” Keeping this in mind, we are enabling our client
to use prior experience to maintain their expectations. Their perception is not ----------------------
always reality; therefore vendors must ‘shape’ those perceptions, so that it does
reflect reality. “A key to the design and operation of project management lies ----------------------
in understanding the user’s perceptions and matching the systems around those
----------------------
perceptions. Failure of most projects stem from systems developers denying
that the users have any say in the development of the systems”. ----------------------
In the development of customer systems requirements and understanding
----------------------
the customer’s expectations, there is a list of priorities that must be met in order
to perceive the system as a whole, according to Paul Bender of Design and ----------------------
Operation of Customer Service Systems:
----------------------
●● Measure internal knowledge of Customer Service Requirements
●● Identify the types of requirements to be established ----------------------
●● Determine the format and accuracy needed ----------------------

●● Establish the Survey Techniques to be used inside the client’s business ----------------------
●● Conduct Interview and gathering of information
----------------------
●● Analyse the results to establish customer service standards
----------------------
●● Identify the constraints and define acceptable ranges
●● Then set goals to meet the customer service requirements set ----------------------
This methodology is just a type of methodology to obtain the essence of ----------------------

what customers want. After a full review of the requirements, those requirements
must be well documented to keep the customer well informed. The goal is to ----------------------
have all the requirements of the system properly defined on paper so that it is well ----------------------
defined in the minds of the customer. This hopefully resolves issues of conflict
between the vendor and the customer and what the functional requirement ----------------------
specifications are. A service level agreement is made at that time to define what
standard procedures are set out as guidelines to enable the relationship a record ----------------------
of what is to be expected. This provides a contractual record of what the vendor ----------------------
is to provide and at what levels that is acceptable by the customer. According
to Steven Bragg, ‘Outsourcing projects present a conflicting strategy within ----------------------

Notes the vendors’ business. The client always wants functional and well-developed
systems, and they should expect it, but in order to maintain control of the
---------------------- process, there must be a scope to work under. Customers constantly try to fudge
that scope.’ Vendors must define the level of service in explicit means at the
---------------------- beginning of the project and informing the client that changes in that scope can
change the timing of the project completion date. A reason that is subject to more
----------------------
disputes is when management does not feel that a supplier is providing the level
---------------------- of service that was promised at the start of the relationship. In these cases, if
there is no clear set of performance measurements that both parties have agreed
---------------------- upon in advance, then the termination of the relationship may be rancorous in
the extreme, and may involve litigation. Instead, the company and the supplier
---------------------- should make this decision based on performance measurements that have been
---------------------- verified and approved. If those measurements do not exist at the time when
management is already questioning the ability of the supplier, it is still useful to
---------------------- being calculating the measurements, since it gives senior management a better
basis of information to use when deciding to terminate a project.
----------------------

----------------------
Fill in the blanks.
----------------------
1. A key to the design and operation of project management is _________
---------------------- and matching the systems around those perceptions.
----------------------
---------------------- Case Study
---------------------- Enterprise Rent-A-Car

The Challenge
----------------------
‘We receive a wide variety of calls, including people who have experienced
---------------------- a vehicle accident or theft and require an immediate replacement. Our agents
must be highly trained to deal with customers who may be in understandably
---------------------- stressful circumstances.’
---------------------- The vehicle rental market is a highly competitive one. Clients are hard
to win and even harder to retain. Celebrating its 10th anniversary in the UK,
---------------------- Enterprise Rent-A-Car is succeeding in delivering a high-quality and reliable
---------------------- customer service.
With a mission statement to look after their customers, look after their
---------------------- employees and the rest will follow, a culture of customer service has been firmly
---------------------- adopted as a way of life for all employees at Enterprise Rent-A-Car.
‘We have a promote from within career development policy,’ explains
---------------------- Project and Development Manager at Enterprise Rent-A-Car, Chris Tellegen.
---------------------- ‘Every employee must attain a high standard of customer service before they
progress. This ensures that a focus on service is entrenched across every part of
---------------------- the organisation, from those who valet the vehicles, to the boardroom.’

Enterprise is always looking at ways to improve the quality of service Notes
it delivers to its customers from both its branches and contact centre. ‘The
branch offices are the face of Enterprise and the contact centre is the voice,’ ----------------------
adds Tellegen. ‘We looked at our counterparts in the US that had successfully
improved customer service and training using call recording and quality ----------------------
monitoring technology.’ ----------------------
The Solution
----------------------
Enterprise in the UK recognised that capturing its own interactions would
provide them with a clearer picture of the quality of service delivered and act ----------------------
as a fundamental platform for ongoing training. Tellegen comments, ‘Upon
----------------------
evaluating the technologies on the market we selected NICE Systems. They
were competitive and the technology was the right fit for us.’ He adds, ‘We run ----------------------
our contact centre on an Avaya DEFINITY infrastructure, as a strategic partner
NICE could provide the integration and support we required long-term.’ ----------------------
Tellegen comments, “Any change to working practice can be greeted ----------------------
with a level of skepticisms from those it will affect. We did not want the
implementation of recording and quality monitoring to be considered a Big ----------------------
Brother tactic. We pre-empted this by involving employees in focus groups
----------------------
where the benefits of the technology to Enterprise and the employees were
explained and openly discussed.” ----------------------
By involving the entire contact centre from the beginning, the implementation ----------------------
and rollout of the NICE technology was swift with no disruption to the daily
running of the contact centre and the NICE team was on hand to provide full ----------------------
training. The Aldershot contact centre manages over 80,000 calls per month from
customers in the UK and Southern Ireland. It operates seven days a week, 365 ----------------------
days of the year. ----------------------
Enterprise is using NICE technology to monitor inbound, outbound
and internal calls. Tellegen explains; “We choose to automatically capture a ----------------------
selection of interactions for training purposes, of course we monitor more calls ----------------------
from new agents.”
The captured interactions then form the basis of the comprehensive ----------------------
training programme delivered by Enterprise, where by a trainer works with ----------------------
each individual agent to evaluate their own previous interactions.
----------------------
In addition to the voice calls, Enterprise is using the screen capture
function from NICE Systems to record the entire agent/customer interaction, ----------------------
with the playback of voice and the agents screen activity during the interaction
synchronised. “Using the screen capture and voice together we are able to ----------------------
accurately and efficiently review an interaction in full to identify where the
----------------------
agent can improve, what they are doing well and consider any issues that could
benefit the contact centre as a whole,” explains Tellegen. ----------------------
As well as learning from their own interaction experience, agents are
----------------------
cross-trained. Interactions from the most experienced Enterprise agents are
used to educate and enforce best practice across the contact centre. Tellegen ----------------------

Notes continues, “As we offer such a tailored training programme linked into the career
and financial aspirations of each of our agents we have seen an improvement
---------------------- in agent retention since the NICE quality monitoring and interaction capture
solution has been in place.”
----------------------
Following the success of agent training at the contact centre, managers
---------------------- from Enterprise’s 300 UK offices are encouraged to send field employees to the
contact centre for training. “With such high volumes of interaction we recognised
---------------------- that our contact centre is a goldmine of customer service experience that could
---------------------- be used to ensure that the entire organisation is providing a consistently high
quality of service.”
---------------------- NICE has helped to improve the quality of service at Enterprise and has
---------------------- improved agent retention. “NICE Systems is critical to our future success, we
are growing and will never compromise our commitment to superior customer
---------------------- service. Without NICE we could not gauge the customer service we deliver in a
cost-effective and efficient way.”
----------------------
----------------------
Summary
----------------------
●● The ultimate outcome of building a business around proprietary customer
---------------------- information is the creation of knowledge intensity - a way of doing
business by which the myriad unknowns that characterise every company
---------------------- have been systematically tracked, quantified, studied, analysed, and
codified so as to reduce uncertainty, enhance predictability, and enable
----------------------
managers to make more accurate decisions than ever before.
---------------------- ●● It’s simply about being obsessed with customers and unrelenting in the
---------------------- quest for information that will help you know them. Knowledge intensity
companies apply ten to twenty times as much information as their rivals
---------------------- do. And they are always looking for more. As a result, they have moved
from being passive victims of customer risk to active risk shapers, reading
---------------------- the changing patterns of customer choice and making informed decisions
---------------------- about how to respond.
---------------------- Keywords
----------------------
●● Insidious: Working or spreading in a hidden and usually injurious way;
---------------------- “glaucoma is an insidious disease”; “a subtle poison”
---------------------- ●● Humongous: Extremely large; enormous: “humongous baked potatoes

piled high with sour cream” (Boston Globe).
----------------------
●● Fuzzier: Muddleheaded or incoherent: a fuzzy thinker; to become fuzzy
---------------------- after one drink.
●● Worrisome: Worrying, annoying, or disturbing; is causing worry: a
----------------------
worrisome problem.
----------------------

●● Countermeasure: A measure or action taken to counter or offset another Notes
one.
----------------------
●● Jargon: The language, especially the vocabulary, peculiar to a particular
trade, profession, or group: medical jargon. ----------------------
●● Competitors: One that competes with another, as in sports or business;
----------------------
a rival.
●● Competence: The quality of being competent; adequacy; possession of ----------------------
required skill, knowledge, qualification, or capacity: He hired her because
----------------------
of her competence as an accountant.
●● Perception: The result or product of perceiving, as distinguished from ----------------------
the act of perceiving; percept. ----------------------
●● Peer: A person of the same legal status: a jury of one’s peers.
----------------------
●● Impetus: The momentum of a moving body, esp. with reference to the
cause of motion. ----------------------
●● Prerequisite: Required beforehand: a prerequisite fund of knowledge ----------------------
●● Determinant: A determining agent or factor.
----------------------
●● Perfunctory: Lacking interest, care, or enthusiasm; indifferent or
apathetic: In his lectures he reveals himself to be merely a perfunctory ----------------------
speaker. ----------------------
●● Vendors: One that sells or vends: a street vendor; a vendor of software
products on the Web ----------------------
●● Litigation: The act or process of litigating: a matter that is still in ----------------------

litigation; a lawsuit
----------------------
●● Accurately: Free from error or defect; consistent with a standard, rule, or
model; precise; exact ----------------------
●● Aspirations: A strong desire for high achievement ----------------------
----------------------
1. Define or explain Customer service in your own words. ----------------------
2. Explain the ‘Dos’ and ‘Don’ts of customer service.
----------------------
3. What are the process involved in Design and Operation of Customer
Service Systems? ----------------------
4. Explain the importance of customer retention. ----------------------
----------------------
----------------------
----------------------

---------------------- 1. True
----------------------
State True or False
----------------------
1. True
---------------------- 1. To improve the value, channel customer care depends on accurate and
sufficiently precise understanding of customers’ needs and the economics
---------------------- of serving those needs.
Fill in the blanks.
----------------------
1. A key to the design and operation of project management is understanding
---------------------- the user’s perceptions and matching the systems around those perceptions.
----------------------
Suggested Reading
----------------------
1. Adler, Paul S. Getting the Most Out of Your Product Development Process.
----------------------
2. Bardyn, Janet, and Fitzgerald, Donna. The Uses of Chaos Theory in
---------------------- Project Management.
---------------------- 3. Bender, Paul S. Design and Operation of Customer Service Systems.
4. Beyer, Hugh R., Holtzblatt, Karen. Apprenticing with the Customer.
----------------------
5. Connell, Charles H. Jr. Estimating and Scheduling.
----------------------
6. Crisp, Wynn Lee & Williams, Scott. Managing Scope, Schedule & Budget.
----------------------
7. David, Alev. The Scope Went Through the Roof.
---------------------- 8. Desatnick, Robert L. & Detzel, Denis H. Managing to Keep the Customer.
---------------------- 9. De Weaver, Mary Feeherry, and Gillespie, Lori Ciprian. Real-world
Project Management: New Approaches for Adapting to Change and
---------------------- Uncertainty.
---------------------- 10. Foxall, Gordon. Consumer Psychology in Behavioural Perspective.
---------------------- 11. Mahatoo, Winston H. The Dynamics of Consumer Behaviour

12. Windham, Laurie. The Soul of the New Consumer.
----------------------
13.
Wing, Michael J. The Arthur Andersen Guide to Talking With Your
---------------------- Customers.

Product Differentiation and Solution
UNIT
10
Structure:
10.1 Introduction
10.2 Significance
10.3 Vertical Differentiation
10.4 Horizontal Differentiation
10.5 Determinants
10.6 Impact on other Variables
10.7 Long-term Trends
10.8 Behaviour during the Industry Life-Cycle
10.9 Solution Selling
10.10 Solution Selling Definition
10.11 The Art of the Presentation
10.12 Sales Force Deployment
Case Study
Summary
Key Words
Suggested Reading
Product Differentiation and Solution 165

Notes
Objectives
----------------------
----------------------
• State the significance of differentiation.
----------------------
• Explain the types of differentiation.
---------------------- • Discuss impact of variables on differentiation.
---------------------- • Explain the art of solution selling.
----------------------
---------------------- 10.1 INTRODUCTION

---------------------- Products are differentiated when the products of different companies are
not perfect substitutes - instead, ‘every company has a monopoly of its own
----------------------
product.’ Nevertheless, companies may compete by changing the characteristics
---------------------- of the product they sell. The idea is not necessarily to make a better product
than the competitor, just different - to appeal to a different ‘market niche.’
----------------------
Again, economists (on the whole) regard this form of competition as a
---------------------- mixed bag:
It increases variety, thus increasing the range of consumer choice, which is
----------------------
good, but it divides up the market, leading to higher prices and costs. According
---------------------- to the traditional ideas on ‘imperfect competition’ developed in the first half
of the twentieth century, this form of competition is especially common in
---------------------- ‘monopolistic competition.’ In fact, it is part of the definition of monopolistic
competition but is also observed in many oligopolies.
----------------------
---------------------- 10.2 SIGNIFICANCE

---------------------- Offered under different brands by competing firms, products fulfilling the
same need typically do not have identical features. The differentiation of goods
----------------------
along key features and minor details is an important strategy for firms to defend
---------------------- their price from leveling down to the bottom part of the price spectrum.
Within firms, product differentiation is the way multi-product firms build
----------------------
their own supplied products’ range.
---------------------- At market level, differentiation is the way through which the quality
---------------------- of goods is improved over time, thanks to innovation. Launching new goods
with entirely new performances is a radical change, often leading to changes in
---------------------- market shares and industry structures.
---------------------- In an evolutionary sense, differentiation is a strategy to adapt to a moving

environment and its social groups.
----------------------
----------------------

10.3 VERTICAL DIFFERENTIATION Notes
Vertical differentiation occurs in a market where the several goods that ----------------------
are present can be ordered according to their objective quality from the highest ----------------------
to the lowest. It is possible to say in this case that one good is ‘better’ than
another. ----------------------
Vertical differentiation can be obtained: ----------------------
• along one decisive feature;
----------------------
• along a few features, each of which has a wide possible range of
(continuous or discrete) values; ----------------------
• across a large number of features, each of which has only a presence/ ----------------------
absence ‘flag’.
----------------------
In the second and third cases, it is possible to find out a product that is
better than another one according to one criterion but worse than it in respect ----------------------
to another feature.
----------------------
Vertical differentiation is a property of the supplied goods but, as it is may
be needless to say, the perceived difference in quality by different consumer ----------------------
will play a crucial role in the purchase decisions.
----------------------
In particular, potential consumers can have a biased perception of the
features of the good (say because of advertising or social pressure). ----------------------
Consumer decision rules when the product is differentiated are presented ----------------------
here.
----------------------
When evaluating a real market, a good starting point is a top-down grid of
interpretation; we shall present first in 3 segments. ----------------------
Class Price Crucial Feature ----------------------
Low Low The price is low, the product simply works.
----------------------
Middle Middle Use of the good is comfortable. Most people use it. Mass
market brand. ----------------------
High High Quality, exclusivity, durability (= low life-long price). ----------------------
To this basic classification, one should add two intermediate classes: ----------------------
Class Price Crucial Feature ----------------------
Extremely low Low It usually does not work, it does not last, and it has
----------------------
important defects.
Extermely high High Exclusivity, non practical, status symbol. ----------------------
In this way, you can vertically position different brands and product ----------------------
versions, also using clues from advertising campaigns.
----------------------
If you compare widely different goods fulfilling the same (highly-relevant)
need, you may distinguish at the extreme of your spectrum necessity goods and ----------------------

Notes at the other luxury goods. In other cases, what makes this difference is, instead,
the nature of the need fulfilled.
---------------------- As a general rule, better products have a higher price, both because
---------------------- of higher production costs (more noble materials, longer production, more
selective tests for throughput...) and bigger expected advantages for clients,
---------------------- partly reflected in higher margins.
---------------------- Thus, the quality-price relationship is typically upwards sloped. This
means that consumers without their own opinion nor the capability of directly
---------------------- judging quality may rely on the price to infer quality. They will prefer to pay a
higher price because they expect quality to be better.
----------------------
This important flaw in knowledge and information processing capability -
---------------------- an instance of bounded rationality - can be purposefully exploited by the seller,
with the result that not all highly priced products are of good quality.
----------------------
Through this mechanism, the demand curve - that in the neoclassical
---------------------- model - is always downward sloped can instead turn out to be in the opposite
---------------------- direction.
---------------------- 10.4 HORIZONTAL DIFFERENTIATION

---------------------- When products are different according to features that cannot be ordered,
a horizontal differentiation emerges in the market.
----------------------
A typical example is the ice-cream offered in different tastes. Chocolate
---------------------- is not “better” than lemon.
---------------------- Horizontal differentiation can be linked to differentiation in colours
(different colour version for the same good), in styles (e.g. modern / antique),
---------------------- in tastes. This does not prevent specific consumers to have a stable preference
---------------------- for one or the other version, since you should always distinguish what belongs
to the supply structure and what is due to consumers’ subjectivity.
---------------------- It is quite common that, in horizontal differentiation, the supplier of many
---------------------- versions decides a unique price for all of them. Chocolate ice-creams cost as
much as lemon ones.
----------------------
When consumers do not have strong stable preferences, a rule of behaviour
---------------------- can be to change often the chosen good, looking for variety itself. An example
is when you go to a fast food and ask what you haven’t eaten the previous time.
----------------------
Fashion waves often emerge in horizontally-differentiated markets with
---------------------- imitation behaviours among consumers and specific styles going ‘in’ and ‘out’.
---------------------- 10.5 DETERMINANTS

----------------------
How a product rates according to different measures of quality or taste
---------------------- depends on its physical and immaterial characteristics. The raw material from
which it has been built, its engineered design, its production process are typical
---------------------- determinants of product specificity.

Contrary to the neoclassical approach of technique choice, every change Notes
in proportion, in productive inputs entering in the final product results in product
differentiation. ----------------------
More broadly, product differentiation can be: ----------------------
●● The indirect effect of different endowments in raw materials, know-how,
----------------------
style preference of different firms ignoring each others;
●● The conscious choice, out of firm strategies, to position each product ----------------------
against competitors;
----------------------
●● The costly, uncertain, and difficult outcome of innovation efforts.
----------------------
10.6 IMPACT ON OTHER VARIABLES ----------------------
Differentiated versions of a good can have widely different costs of ----------------------
production. Upstream, they may be produced using different raw materials and
semi-manufactured parts, thus referring to diverse suppliers and their relative ----------------------
market power. Import of exotic substances can be the effect of the attempt to
----------------------
introduce new goods on the market (think for instance to cosmetics).
Downstream, the supply of different and better goods allows for deeper ----------------------
fulfillment of consumption needs, for production processes at higher productivity ----------------------
as well as for the opening of export opportunities to other countries.
For the firms introducing the new version of the product, the expected ----------------------
results are mainly improvements of profits (thanks to lower elasticity of ----------------------
consumption to price and higher mark-up on costs), sales, and market shares.
For the consumer, product differentiation can increase the satisfaction ----------------------
from its consumption. At the same time, he will be confronted with a wider ----------------------
spectrum of prices. Test how much quality is expensive by playing this business
game. ----------------------
----------------------
----------------------
1. Import of ________ can be the effect of the attempt to introduce new
----------------------
goods on the market.
----------------------
10.7 LONG-TERM TRENDS ----------------------
The ever growing product differentiation process due to new emergent ----------------------
firms/countries and the innovation efforts of incumbents has encountered
in the last decades in some form of break due to the pressure of globalised, ----------------------
standardised homogeneous goods with a dominant design. ----------------------
----------------------

Notes 10.8 BEHAVIOUR DURING THE INDUSTRY LIFE-CYCLE
---------------------- High product differentiation with radically different proposals is typical
of the early stage of an infant industry, until a dominant design will replace
----------------------
technically imperfect or simply unlucky models.
---------------------- Afterwards, when the industry reaches the maturity stage with few
---------------------- main competitors, differentiation re-emerge (often due to minor external
changes) as an attempt to soften price competition and to reach new niches of
---------------------- consumers.
----------------------
10.9 SOLUTION SELLING
----------------------
Ask any marketing services salesperson if they solution-sell, and they
---------------------- invariably answer yes. Yet ask buyers the same question about the salespeople
they meet, and they almost invariably answer no. Perhaps, the two groups have
---------------------- different views as to the definition of solution-selling.
---------------------- From the perspective of many salespeople, solution selling means finding
a need to meet or a problem to solve, and of course there is not a need or
---------------------- problem their product cannot address. From the perspective of the marketing
---------------------- services buyer, the question is often bigger than which vendor to choose. Their
first questions often centre on which strategy or tactics make the most sense to
---------------------- achieve a particular goal. The salespeople who get in on the opportunity at the
earliest planning stages often have the greatest chance of getting the business,
---------------------- but to get in at that level they have to deploy a level of solution selling that does
---------------------- not come naturally to all salespeople. Often, to get in on the high-level planning
process, you have to display a level of objectivity that could eventually exclude
---------------------- your product or service from the strategy. The rewards: You have an inside shot
at a strategy you helped to devise. The risk: The zero-based approach could rule
---------------------- out the strategy that would best benefit your company.
---------------------- The premise of solution-selling centres on the principle that clients prefer
to do business with people they trust, and that a sales process that focuses on
---------------------- the needs of the client above all will yield greater long-term trust. Most people
---------------------- remember it when a salesperson says in complete honesty, “You know, now
that I understand your needs, I don’t think that makes sense for our company. I
---------------------- would recommend so and so…” Proponents of solution selling believe that the
goodwill generated by such integrity creates valuable, positive, but impossible
---------------------- to measure, word of mouth. Often, the budgets involved with marketing services
---------------------- can reach into the six and seven figures, increasing the need for a client to trust
a vendor. How a vendor sells a new prospect establishes the level of trust that
---------------------- the client will need to proceed.
---------------------- Solution selling does not mean a proactive strategy to turn away business.
It means targeting the types of companies most likely to benefit from your
---------------------- products and services so that you do not waste time selling to people who would
not buy anyway.
----------------------

The sections specific to various marketing services sectors will address Notes
more granular approaches to solution selling. Below, you will find the principles
fundamental to all fields. ----------------------
----------------------
----------------------
1. Solution selling does not mean a proactive strategy to turn away
----------------------
business.
----------------------
10.10 SOLUTION SELLING DEFINITION ----------------------
Solution selling involves an honest analysis of a prospect’s objectives, ----------------------

needs and situation to impartially determine whether or not your product or
service makes sense. Instead of spending much of the early communication ----------------------
time on selling, more preliminary time is spent asking questions that both help ----------------------
establish your credibility with the client and help you qualify the prospect in
terms of true potential. Depending on the potential size of the client, or the stage ----------------------
of the selling process, solution selling also can involve research on the Internet
or through other sources to substantiate your recommendations. ----------------------
You cannot solution-sell unless your client truly believes you would walk ----------------------
away if your product or service does not make sense.
----------------------
10.11 THE ART OF THE PRESENTATION ----------------------
Organisations probably spend billions every year on making sales ----------------------

presentations and training salespeople to better conduct them. The huge sums
spent directly correspond to the challenge of imparting presentation skills to ----------------------
a vast workforce, when the true art of the presentation probably represents a ----------------------
relatively rare gift. The great presentation not only demands a total command
of the subject but a continual ability to read the audience, either over the phone ----------------------
or in person, and nuance the message on the fly based on raised eyebrows, nods,
smiles or smirks. Here are the fundamentals. For the rest, you might seek out ----------------------
a presentation coach to help you or your sales team gets the maximum benefit ----------------------
from this most critical of steps in the selling process.
●● Know your audience; make sure the content targets their issues and level ----------------------
of authority. ----------------------
●● Consider starting with a provocative question, especially if you know the
----------------------
answer will support your presentation.
●● Make sure you know how much time you have been allotted and respect ----------------------
it; do not stay longer unless asked.
----------------------
●● Focus on benefits to your audience.
----------------------
●● Demonstrate that you did some homework regarding your prospects.

Notes ●● Pause from time to time to make sure your audience is with you.
●● If your audience includes a talker who continually interrupts, keep your
----------------------
answers as direct and brief as possible.
---------------------- ●● Include time for you to ask questions.
---------------------- ●● Make sure your PowerPoint is appropriate to the audience.
---------------------- ●● Do not end without finding out if you have follow-up steps or if you can
add the individual to your mailing list or follow-up schedule.
----------------------
10.12 SALES FORCE DEPLOYMENT
----------------------
Obviously, the skills required of a strategic salesperson differ greatly
----------------------
from those of the tactical salesperson. The strategic salesperson has to know
---------------------- the industry, the players, the trends, the opportunities and the challenges related
to their field and have the confidence to apply those to real-life problem-
---------------------- solving and planning. The tactical salesperson has to have a firm grasp of sales
skills, the product and unique benefits, sales tools available and competitors.
---------------------- Strategic skills take time to acquire and come not only from a combination
---------------------- of knowledge and creativity, but real-life experience. Nothing compares to
personal involvement in multiple successes and even failures in terms of having
---------------------- some chances of predicting the potential success or failure of some new idea.
You cannot learn experience in books or in classrooms, but you can learn where
---------------------- to go to find more information and what problems to watch out for.
---------------------- As a result of the experience and preparation required of top producers,
strategic salespeople often command the highest salaries, enjoy the best
---------------------- client followings and avoid cold-calling and prospecting as much as possible.
Many marketing services companies do not even have ‘salespeople’ in the
----------------------
sense of representatives out cold-calling. They often rely on top management
---------------------- relationships and industry activities for really big accounts and on smart, hard-
working account executives to build relationships at the more tactical level to
---------------------- nurture additional business opportunities or cross-sell within current clients.
---------------------- Companies that sell products often do not have any strategic salespeople,
because they get contacted long after the strategic decisions are made, by people
---------------------- who themselves have no involvement with those decisions.
---------------------- Probably, the best solution for most marketing services companies includes
both a tactical sales force to conduct the hunt for qualified prospects and at
---------------------- least one to a few strategic salespeople whose natures combine the competitive
passion that fires successful sales with the extensive knowledge and creativity
---------------------- that customers value in trusted advisers and people they buy from.
---------------------- Depending on your business, you could divide your tactical sales force into two
groups:
----------------------
a. A telephone sales operation of sufficiently trained and well-spoken people
---------------------- to identify decision makers, obtain permission to begin a sales and/or
communications process and potentially get appointments for strategic
---------------------- salespeople

b. A salesperson who works in direct support of strategic salespeople to Notes
generate qualified leads for the strategic salesperson and help service
current customers. This provides a mentoring opportunity that nurtures ----------------------
potential strategic salespeople.
----------------------
----------------------
Fill in the blanks.
----------------------
1. The tactical salesperson has to have a ______________, the product
and unique benefits, sales tools available and competitors. ----------------------
----------------------
Case Study ----------------------
The Challenge ----------------------

A global telecommunication leader faced the prospect of losing market ----------------------
share amid stiff competition in the rapidly expanding area of telecommunications.
The client needed to improve its win/loss ratio to maintain and expand its ----------------------
position in the market. Its sales teams excelled in aggressiveness and work ethic
----------------------
but lacked key strategic skills to penetrate major accounts.
Solution ----------------------
The client needed a new approach to develop highly innovative and ----------------------
successful strategies to win new business from the competition and to protect
existing business from competitive loss. SMG’s sales consultants worked ----------------------
with the client to target specific accounts and customise the Strategic Selling ----------------------
program.
Each two-day Strategic Selling session began by analysing the target ----------------------
account’s business needs, challenges, goals, objectives, and strategies, as well as ----------------------
the key players involved in the decision-making process. The group then divided
into teams, where they assessed competitor’s vulnerabilities and strengths, and ----------------------
began planning their attack. Then, the teams developed successful response
strategies to what-if scenarios as well as a detailed action plan to pursue the sale. ----------------------
Results ----------------------
The Strategic Selling program was successful in identifying new strategies ----------------------
for the client’s sales professionals when approaching customers. In one case, the
client tried to win a large automobile company’s business from its competitor. ----------------------
During the Strategic Selling session, the client discovered that the ----------------------
automobile company was looking for a suitable business to co-sponsor its racing
team. The account manager contacted the automobile company’s advertising ----------------------
agency and won their support. Together, they met with the VP of Marketing and
----------------------
then the President of the automobile company. With the resulting marketing
agreement, the company also agreed to purchase all of their telecommunication ----------------------
services from the client. This deal resulted in $50 million dollars of new revenue.
Notes In another session, the client focused on trying to win a multi-year information
technology contract from a large government agency. The requirements of the
---------------------- Request for Proposal seemed unnecessarily complex and very different from
commercial requirements. The client used to build costly administrative systems
---------------------- from scratch to support these requirements. This elevated their costs to the point
---------------------- where they could not compete with the incumbent supplier, which already had
their systems in place.
----------------------
As a result of the Strategic Selling program, the client developed a new
---------------------- strategy: to bid as close to the requirements as possible without increasing cost.
Simultaneously, the client lobbied that the procurement requirements artificially
---------------------- raised costs and was anti-competitive. The government agency ultimately
awarded the contract to the client.
----------------------
---------------------- Summary
---------------------- ●● Solution selling sounds like a buzzword, but it is actually a formal sales
methodology that aims to help salespeople get beyond selling products
---------------------- and become more like consultants or trusted advisors to their customers.
---------------------- Rather than approaching a prospect with a list of gee-whiz features in the
latest and greatest product, salespeople who embrace solution selling take
---------------------- a more deliberative approach. They work to ferret out what a customer’s
underlying business problems or opportunities are, and then piece
---------------------- together comprehensive solution-using software, hardware and services-
---------------------- that addresses those needs.
●● ‘It is more than what most salespeople think of as solutions,’ says Keith
---------------------- Eades, CEO of Sales Performance International Inc. (SPI), a training
---------------------- company that helped Microsoft build the MSS curriculum and trains
partners on the methodology. ‘When I ask salespeople about the last
---------------------- solution they provided their customer, almost inevitably, they will tell me
the name of the product, service or packaged offering that they sold to
---------------------- them. That’s not solution selling. That’s product selling.’
---------------------- ●● When solution selling is done right, actual product names may only
come up in passing. The real emphasis instead is on how well the overall
---------------------- solution addresses the customer’s needs. “I remember a discussion with
---------------------- one of my clients centering around the difficulties they were having in
terms of systems, security and information management,” says George
---------------------- LaVenture, President and CEO of Trinity Consulting Inc., a Microsoft
Gold Certified Partner in Marlborough, Mass. “We talked for two hours
---------------------- and still had not used any product terminology. Successful solution selling
---------------------- focuses more on business processes and in mapping out a whole strategy,
not on individual products. By the time you introduce a product into the
---------------------- scheme, it is more of a given, just part of the overall solution.”
----------------------
----------------------

Keywords Notes
----------------------
●● Monopolistic: Exclusive control by one group of the means of producing
or selling a commodity or service. ----------------------
●● Oligopolies: A market condition in which sellers are so few that the actions
of any one of them will materially affect price and have a measurable ----------------------
impact on competitors. ----------------------
●● Spectrum: A broad range of varied but related ideas or objects, the
individual features of which tend to overlap so as to form a continuous ----------------------
series or sequence. ----------------------
●● Interpretation: An explanation of something that is not immediately
obvious; “the edict was subject to many interpretations”; “He annoyed ----------------------
us with his interpreting of parables”; “often imitations are extended to ----------------------
provide a more accurate rendition of the child’s intended meaning”
●● Invariably: Not variable; not changing or capable of being changed; ----------------------
static or constant. ----------------------
●● Perspective: A picture employing this technique, esp. one in which it is
prominent: an architect’s perspective of a house. ----------------------
●● Proactive: Descriptive of any event or stimulus or process that has an ----------------------
effect on events or stimuli or processes that occur subsequently; “proactive
inhibition”; “proactive interference” ----------------------
●● Tactical: Of or pertaining to a maneuver or plan of action designed as an ----------------------
expedient toward gaining a desired end or temporary advantage.
----------------------
●● Mentoring: A wise and trusted counselor or teacher.
●● Innovative: Being or producing something like nothing done or ----------------------
experienced or created before; “stylistically innovative works”;
----------------------
“innovative members of the artistic community”; “a mind so innovational,
so original” ----------------------
●● Incumbent: Obligatory (often fol. by on or upon): a duty incumbent
upon me ----------------------
----------------------
----------------------
1. What are the most critical steps in the selling process?
----------------------
2. What is solution selling? Explain in your own words.
----------------------
3. What is product differentiation?
4. What are the determinants in a product differentiation? ----------------------
----------------------
----------------------
----------------------


1. Import of exotic substances can be the effect of the attempt to introduce
---------------------- new goods on the market.
1. True
----------------------
----------------------
Fill in the blanks.
---------------------- 1. The tactical salesperson has to have a firm grasp of sales skills, the product
---------------------- and unique benefits, sales tools available and competitors.
----------------------
Suggested Reading
----------------------
1. Anderson, Simon P., Andre dePalma, Jacques-Francois Thisse. Discrete
---------------------- Choice Theory of Product Differentiation.
---------------------- 2. Baker, Michael John. The Marketing Book.

3. Daley, Kevin R. Socratic Selling: How to Ask the Questions That Get the
---------------------- Sale.
---------------------- 4. Eades, Keith M. The New Solution Selling.
---------------------- 5. J. Nancy. Streetwise Customer - Focused Selling: Understanding
Customer Needs, Building Trust, and ...
----------------------
6. Morgen, Sharon Drew. Selling With Integrity: Reinventing Sales Through
---------------------- Collaboration, Respect, and Serving.
---------------------- 7. Reilly, Thomas P. Value-Added Selling: How to Sell More Profitably,

Confidently, and Professionally by Competing.
---------------------- 8. Waterhouse, Steve. The Team Selling Solution: Creating and Managing
---------------------- Teams That Win the Complex Sale.
9. Weitz, Barton A., Robin Wensley. Handbook of Marketing.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

B2B Hub
UNIT
11
Structure:
11.1 Introduction
11.2 The What’s and How’s of Business Purchasing
11.3 Classifying B2B Hubs based on Purchase Situations
11.4 How Hubs Add Value: Aggregation versus Matching
11.5 Who Hubs Serve: Biased versus Neutral Hubs
11.6 More about Reverse Aggregators: Enter the “Reverse VAR”
11.7 Challenges in Implementing B2B Initiative
Case Study
Summary
Key Words
Suggested Reading
B2B Hub 177

Notes
Objectives
----------------------
----------------------
• Discuss B2B Hub.
----------------------
• Explain the types of B2B Hubs.
---------------------- • State the challenges in implementing a B2B hub.
----------------------
---------------------- 11.1 INTRODUCTION

---------------------- Wherever you look, it seems like B2B is the place to be. Ariba, Chemdex,
CommerceOne, Freemarkets, Internet Capital Group, and SciQuest.com have
----------------------
attained breathtaking stock market capitalisations. A torrent of research reports
---------------------- have been issued by Wall Street analysts. A robust community of ‘Net Market
Makers’ has emerged (www.netmarketmakers.com). The venture capital
---------------------- community is racing to get in on the B2B action.
---------------------- eHubs as neutral Internet-based intermediaries that focus on specific
industry verticals or specific business processes, host electronic marketplaces,
---------------------- and use various market making mechanisms to mediate any-to-any transactions
---------------------- among businesses. eHubs create value by aggregating buyers and sellers,
creating marketplace liquidity, and reducing transaction costs.
---------------------- eHubs will proliferate and thrive. In this unit, we will examine the
---------------------- dimensions on which B2B hubs can be classified. We use these dimensions
to develop taxonomy of business models for hubs. The taxonomy reveals
---------------------- important new categories of business designs that have yet to be exploited. The
taxonomy also provides a deeper understanding of the relative merits and value
---------------------- creation potential of different business models, and the settings where different
---------------------- models are most appropriate.
Let us begin by describing the process of business purchasing on two
---------------------- simple dimensions ¬what companies buy and how they buy. We use these
---------------------- dimensions to create a taxonomy of B2B hubs along three key dimensions
- (1) value creation mechanism (aggregation versus matching); (2) purchase
---------------------- situation (systematic versus spot purchasing); and (3) bias of the market-maker
(one-sided/biased versus two-sided/neutral). This taxonomy offers insights
---------------------- into a new class of B2B hubs called reverse aggregators that are biased,
---------------------- and do not suffer from the ‘chicken-and-egg’ problem in creating liquidity.
The taxonomy also helps us understand where matching-based mechanisms
---------------------- (exchanges and auctions) are more appropriate than aggregation-based
mechanisms (catalogs), and how these mechanisms differ on defensibility and
---------------------- value creation potential.
----------------------
----------------------

11.2 THE WHAT’S AND HOW’S OF BUSINESS PURCHASING Notes
To understand B2B hubs, it is useful to understand how businesses buy, ----------------------

and what they buy. Businesses buy a diverse set of products and services
----------------------
ranging from paper clips to computer systems, and steel to machinery. At the
broadest level, business purchases can be classified into manufacturing inputs ----------------------
and operating inputs. Manufacturing inputs are raw materials and components
that go directly into the manufactured product or manufacturing process. ----------------------
Manufacturing inputs tend to be vertical in nature, because the finished products
----------------------
that they go into are industry-specific. They are typically sourced from industry-
specific suppliers and distributors, and they require specialised logistics and ----------------------
fulfillment mechanisms. For instance, UPS is not a good fulfillment provider
for Hydrochloric acid or High Density Polyethelene. ----------------------
Operating inputs, on the other hand, are indirect materials and services ----------------------
that do not go into finished products. Operating inputs, sometimes called MRO
(Maintenance, Repair, and Operating) inputs, include industrial supplies, capital ----------------------
equipment, services, and travel-related services. Unlike manufacturing inputs, ----------------------
operating inputs tend to be horizontal in nature (with the exception of capital
equipment and some industrial supplies). For instance, every business needs ----------------------
computers, office supplies, and airline tickets. But an advertising agency does
not buy steel, and a chemical company does not buy semiconductors. Another ----------------------
important difference is that operating inputs are much more amenable to being ----------------------
shipped through 3rd party logistics providers like UPS. Operating inputs have
been traditionally sourced from MRO suppliers like W.W. Grainger, who ----------------------
aggregate MRO catalogs for a diverse set of industries.
----------------------
The other important distinction in business purchasing lies in how
businesses buy products and services. Businesses can either engage in systematic ----------------------
sourcing or in spot sourcing. Systematic sourcing involves buying through pre-
negotiated contracts with qualified suppliers. These contracts are often long- ----------------------
term in nature, so systematic sourcing tends to be relationship-oriented. A large ----------------------
proportion of manufactured inputs are purchased through this mechanism. In
the semi-commodity chemicals, for instance, over 90% of purchasing is through ----------------------
prenegotiated catalog-based mechanisms. On the other hand, businesses can
also buy commodity-like products on the spot market from anonymous sellers. ----------------------
Commodity trading for commodities like oil, steel, and energy exemplifies this ----------------------
mechanism. Spot sourcing is transaction-oriented, and rarely involves a long-
term or ongoing relationship between buyers and sellers. ----------------------
----------------------
----------------------
1. Manufacturing inputs tend to be vertical in nature, because the
----------------------
_____________ that they go into are industry-specific.
----------------------
B2B Hub 179

Notes 11.3 CLASSIFYING B2B HUBS BASED ON PURCHASE
---------------------- SITUATIONS
This simple two-way classification - manufacturing inputs versus
----------------------
operating inputs (the ‘what’); and systematic sourcing versus spot sourcing (the
---------------------- ‘how’) allows us to classify B2B hubs into four categories (See Figure 11.1):
●● MRO hubs (operating supplies, systematic sourcing, horizontal focus)
----------------------
●● Yield managers (operating supplies, spot sourcing, horizontal focus)
----------------------
●● Catalog hubs (manufacturing inputs, systematic sourcing, vertical focus)
---------------------- ●● Exchanges (manufacturing inputs, spot sourcing, vertical focus)
---------------------- MRO hubs focus on improving the efficiencies in the procurement
process for operating supplies for a diverse set of industries. Classic examples
----------------------
of these players are W.W. Grainger, Ariba, and Commerce One. These firms
---------------------- started out with an enterprise focus by licensing expensive ‘buy-side’ software
for eProcurement to large enterprises. These MRO players are now scrambling
---------------------- to reinvent themselves as MRO hubs on the Internet, by moving from a licensed
model to a hosted model for software, and by moving from an enterprise-
----------------------
centric model to a network-centric model, where all catalogs are hosted on a
---------------------- common hub that businesses connect into. Newer entrants who have started
out with the hub architecture in this space include Bizbuyer.com, MRO.com,
---------------------- PurchasingCenter.com, and ProcureNet.com. These players are horizontal in
nature, because operating inputs are common to a significant extent across a
----------------------
wide variety of industries. Given their horizontal nature, MRO hubs tend to use
---------------------- ‘horizontal’ third-party logistics. Therefore, they can disintermediate existing
middlemen in the channel, without having to replicate the fulfilment capabilities
---------------------- and assets owned by the current channel.
---------------------- Yield managers focus on the spot procurement of operating inputs.
Examples include human resources (Employease.com, Elance.com), utilities
---------------------- (Youtilities.com), capital equipment (iMark.com), manufacturing capacity
(CapacityWeb.com), and advertising inventory (AdAuction.com). These yield
----------------------
managers aim to insulate buyers and sellers from ups and downs in operations by
---------------------- allowing them to scale their operating resources upwards or downwards at short
notice by participating in the spot market. They add most value in situations
---------------------- where there is high degree of price and demand volatility (e.g. utilities), or
where there are huge fixed-cost assets that cannot be liquidated or acquired at
----------------------
short notice (e.g. manpower or manufacturing capacity). Yield managers tend
---------------------- to be more vertical in nature than MRO hubs, but are less vertical in nature than
industry-specific vertical hubs like Chemdex or PlasticsNet.com.
---------------------- Exchanges aim to create spot markets for commodities or near-commodities
---------------------- within specific industry verticals. These exchanges approximate commodity
exchanges, and largely focus on transactional sourcing. The exchange maintains
---------------------- relationships with buyers and sellers, but buyers and sellers rarely have direct
relationships. In fact, in many exchanges, buyers and sellers may not even know
---------------------- each others’ identities. Exchanges serve a yield-management role, because they

allow purchasing managers to smooth out the peaks and valley in demand and Notes
supply by ‘playing the spot market’. Examples of exchanges include E-Steel,
PaperExchange, and IMX Exchange. ----------------------
Finally, catalog hubs streamline the systematic sourcing of manufactured ----------------------
input within specific vertical industries. These players start out by putting
industry-specific catalogs online, and creating a large universe of supplier ----------------------
catalogs within the vertical. They aim to automate the systematic sourcing
----------------------
process, and create value for buyers by lowering transaction costs. These catalog
hubs can be buyer-focused or seller-focused, depending upon who they create ----------------------
more value for. Examples include PlasticsNet.com, Chemdex, and SciQuest.
Catalog hubs need to work closely with distributors, especially on specialised ----------------------
fulfillment and logistics requirements for each vertical.
----------------------
Classifying Business-to-Business Hubs
----------------------
MRO hubs Catalog Hubs
 Anba  Chemdex.com ----------------------
Systematic  Granger  SciQuest.com
sourcing  MRO.com  eChemicals.com ----------------------
How businesses buy
 NetBuy.com  ElectricalWeb.com
 BizBuyer.com ----------------------
Yield Managers Exchanges
 Employease.com  E-Steel
----------------------
Spot  NTE  PaperExchange
sourcing  iMark.com  Altra
Energy ----------------------
 Adauction.com  ChemConnect
 CapacityWeb.com ----------------------
Operating suppliers Manufacturing inputs ----------------------
What businesses buy
----------------------
Fig. 11.1: Classifying Business-to-Business Hubs
----------------------
11.4 HOW HUBS ADD VALUE: AGGREGATION ----------------------
VERSUS MATCHING
----------------------
As we think about the difference between systematic and spot purchasing,
it becomes obvious that the market-making mechanism that is appropriate ----------------------
for catalog hubs is quite different from the market-making mechanism used ----------------------
by exchanges and yield managers. Fundamentally, hubs create value by two
different mechanisms - aggregation and matching. The aggregation mechanism ----------------------
relies on bringing a large number of buyers and sellers under one roof, and
reducing transaction costs by ‘one-stop shopping’. For instance, PlasticsNet. ----------------------
com allows plastics processors to issue a single purchase order for hundreds of ----------------------
plastics products, and PlasticsNet.com sources these products from a diverse
set of suppliers. ----------------------
An important characteristic of the aggregation mechanism is that adding ----------------------
another buyer to the hub only benefits sellers, and does not benefit other buyers.
This happens for a simple reason - buyers can never be sellers in a catalog ----------------------
B2B Hub 181

Notes aggregation model. So adding a buyer to the system only benefits sellers, and
adding a seller to the system only benefits buyers. The aggregation mechanism is
---------------------- static in nature, because prices are pre-negotiated. The aggregation mechanism
(also called the “catalog mechanism”) works best in the following settings:
----------------------
●● The cost of processing a purchase order is high relative to the cost of
---------------------- items procured.
●● Products are specialised and not commodity-like.
----------------------
●● The number of SKUs (Stock Keeping Units) is extremely large.
----------------------
●● The supplier universe is highly fragmented.
---------------------- ●● Buyers are not sophisticated enough to understand dynamic pricing
mechanisms.
----------------------
●● Most purchasing is done on the basis of pre-negotiated contracts.
---------------------- ●● A metacatalog of products carried by a large number of suppliers can be
created.
----------------------
The matching mechanism is a trade mechanism that creates value by
---------------------- bringing buyers and sellers together to negotiate prices on a dynamic and real-
time basis. For example, iMark.com brings buyers and sellers together in the
----------------------
market for used capital equipment, and Altra Energy makes a market in energy
---------------------- and electricity. In contrast with the aggregation mechanism, buyers can be
sellers in the matching mechanism. So adding a buyer to the hub benefits buyers
---------------------- as well as sellers. The source of value creation in the matching mechanism
is improved matching due to improved marketplace liquidity. While catalogs
---------------------- benefit only from the aggregation mechanism, exchanges benefit from both
---------------------- aggregation and matching. As they benefit from both mechanisms, we think
that successful exchanges will reap greater benefits from being successful first-
---------------------- movers. The matching mechanism tends to work best in the following settings:
---------------------- ●● Products are commodities or near-commodities.

●● Trading volumes are massive, relative to transaction costs.
----------------------
●● Products are relatively standardised and can be traded sight-unseen.
---------------------- ●● Buyers and sellers are sophisticated enough to deal with dynamic pricing.
---------------------- ●● Purchasing is often done on a spot/transactional basis.
●● Logistics and fulfillment can be conducted by third-parties, often without
---------------------- revealing the identity of the seller or buyer.
---------------------- ●● Demand and prices are volatile.

----------------------
Fill in the blanks.
----------------------
1. An important characteristic of the ______________ is that adding
---------------------- another buyer to the hub only benefits sellers, and does not benefit
other buyers.
----------------------

11.5 WHO HUBS SERVE: BIASED VERSUS NEUTRAL Notes
HUBS ----------------------
There is one dimension that is important in describing a B2B hub - its bias.
----------------------
B2B hubs can be either neutral or biased. Neutral hubs do not favour buyers
over sellers or vice versa. All of the hubs listed in Fig.11.1 are neutral. Biased ----------------------
hubs, in contrast, favour either buyers or sellers. Neutral hubs, by definition,
are faced with a ‘chicken-and-egg’ problem, in that they need to get buyers as ----------------------
well as suppliers into their system, without compromising their neutrality. They
----------------------
need to be careful in taking equity investments from large buyers as well as
from large suppliers, because they can be perceived as biased. The benefit that ----------------------
neutral hubs have is that they are true ‘market-makers’, because they bring both
buyers and sellers together. ----------------------
There is another category of hubs that are one-sided and biased by design. ----------------------
These biased hubs either work for sellers or buyers, or help them to negotiate
better terms or streamline the buying/selling process. Biased hubs (like neutral ----------------------
hubs) can occur both as aggregators in systematic markets and as matchers in
----------------------
spot markets. When they favour sellers, biased hubs act as forward aggregators
or forward auctioneers. Examples include Ingram Micro in the computer ----------------------
industry or eChemicals in chemicals. When they favour buyers, biased hubs act
as reverse aggregators or reverse auctioneers. Examples include FreeMarkets. ----------------------
com (focusing on Fortune 500 companies with a spot purchasing mechanism),
----------------------
or FOB.com (focusing on demand aggregation for small buyers in chemicals
and other verticals). ----------------------
In Figure 11.2, we summarise this taxonomy of mechanisms for B2B ----------------------
hubs using a simple pictorial scheme. The direction of the arrow shows the bias
of the hub (forward, reverse, or two-sided/neutral). The line versus the curve ----------------------
shows the nature of value creation (linear versus non-linear/exponential). This
simple pictorial depiction allows us to classify hubs very parsimoniously on the ----------------------
mechanism they use, and who they serve (their bias). ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 11.2: Taxonomy of market mechanisms ----------------------
B2B Hub 183

Notes Two-sided (neutral ) One-sided (biased )
Two-way aggregator s Seller aggregators (forward aggregators)
Negotiated catalog-based prices Buyer aggregators (reverse aggregators)
---------------------- Aggregatio n Benefit buyers and sellers by aggregatin g Negotiated catalog-based prices
mechanism supply and demand Primarily benefit buyers or sellers by
---------------------- (systematic
purchasing)
Need to maintain neutralit y
Need bilateral participatio n
aggregating demand of supply
Can be biased as they represent buyers or
Ideal for systematic purchasin g sellers in aggregation
---------------------- Ideal for markets with bilatera l Ideal for systematic purchasin g
fragmentatio n Ideal in markets where large buyers or sellers
benefit vis a vis smaller ones
---------------------- Dynamic Market maker s Forward auctioneers (seller-driven
Dynamic market-based prices (two-wa y auctions )
---------------------- auctions or exchanges) Reverse Auctioneers (buyer -drive n
Matching Benefit buyers and sellers by aggregatin g auctions )
mechanism supply and deamand Dynamic market-based prices
---------------------- (spot Benefit buyers and sellers by improve d Primarily benefit buyers OR sellers by
purchasing) matching and liquidity improved matching and liquidity
---------------------- Need to maintain neutralit y
Need bilateral participatio n
Can be biased as they represent buyers of
sellers in match-making
Ideal for spot purchasing Ideal for sport purchasing
---------------------- Ideal for markets with bilatera l Ideal for markets with unilateral fragentatio n
fragmentatio n (demand of supply)
----------------------
Fig. 11.3: Taxonomy of business models for B2B hubs
---------------------- By their very nature, biased hubs do not need to worry about the
---------------------- ‘chicken-and-egg’ problem, and can therefore hitch their wagon to one side
of the transaction. This helps them to scale quicker than two sided or neutral
---------------------- hubs. It also helps them to focus on smaller buyers or sellers, because they can
aggregate demand or supply. Furthermore, biased hubs that represent buyers
---------------------- typically will not have to overcome channel conflict. This is true, for example,
of free markets, which organises auctions for large buyers.
----------------------
Neutral hubs and biased hubs also differ in one important way. Neutral
---------------------- hubs are most likely to succeed and add value in markets that are fragmented
on both the buyer and seller sides. In such markets, neutral hubs add value both
----------------------
by reducing transaction costs (aggregating) and improving matching (providing
---------------------- liquidity). If one side of the market is concentrated, these benefits are small or
non-existent to the concentrated side of the market. Biased hubs, in contrast,
---------------------- can succeed as long as one side of the transaction is fragmented. In fact, reverse
aggregators like FOB.com will add most value when the supplier universe
---------------------- is relatively concentrated, while the buyer universe is fragmented. In these
---------------------- situations, ‘leveling the playing field’ for smaller buyers has a significant value.
---------------------- 11.6 MORE ABOUT REVERSE AGGREGATORS: ENTER

---------------------- THE ‘REVERSE VAR’
---------------------- Reverse aggregators deserve some additional discussion, because they

are a relatively recent development in the B2B arena. Reverse aggregators form
---------------------- groups of buyers of particular products or commodities within specific vertical or
horizontal markets. They reduce two major inefficiencies. First, by aggregating
----------------------
the buying power of many buyers ¬particularly, small and medium-size buyers -
---------------------- they can negotiate price reductions for those buyers. In some industries, volume
discounts can approach 20%. Second, the purchasing hub can reduce procurement
---------------------- transaction costs by outsourcing the procurement function.

A vertical reverse aggregator pursues this buyer aggregation / purchasing Notes
outsourcing strategy in manufacturing inputs. FOB.com is pursuing this strategy
in chemicals. BizBuyer.com and PurchasingCenter.com are a few of many ----------------------
firms pursuing this strategy in horizontal markets (MRO procurement). An
interesting way to think about a reverse aggregator is that they act as ‘reverse ----------------------
VARs’ or ‘Value-Added Rebuyers’! Traditionally, firms like Ingram Micro have ----------------------
worked as ‘forward aggregators’ by aggregating selling power for small VARs
(Value Added Resellers), by providing them with virtual back office functions, ----------------------
and virtual economies of scale in purchasing (See Figure 11.4). In contrast,
players like FOB.com are turning this supply chain on its head by reversing the ----------------------
direction of aggregation. They aggregate buying power for smaller buyers. In ----------------------
this way, they are exactly the reverse of Ingram Micro (See Figure 11.5 for an
illustration of this). ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 11.4: Ingram Micro as a Forward Aggregator
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 11.5: FOB.com as a reverse Aggregator in the Chemicals - Vertical ----------------------
----------------------
B2B Hub 185

Notes Reverse aggregators have some advantages and disadvantages relative
to neutral hubs for procurement of manufactured inputs. On the negative side,
---------------------- reverse aggregators will not be attractive to larger purchasers who already enjoy
substantial volume discounts. Thus, unlike exchanges, reverse aggregators are
---------------------- unlikely to have all buyers as possible customers. On the positive side, reverse
---------------------- aggregators can potentially address both spot and systematic sourcing of
inputs, in contrast with exchanges, who are largely tied to spot transactions. For
---------------------- example, a manufacturer looking for a long-term supply of steel is less likely to
use e-STEEL than to negotiate directly with a steel manufacturer. Even in those
---------------------- instances where manufacturers do source inputs on the spot market, some fraction
---------------------- of that sourcing is still likely to be systematic and relationship-oriented in nature.
Reverse aggregators will be able to aggregate buyers not only for spot purchases,
---------------------- but also to negotiate long-term contracts with suppliers. In many industries, we
suspect that reverse aggregators will have access to at least as large a market as
---------------------- exchanges and catalogs. Where will we see reverse aggregators emerge? First,
---------------------- such hubs are likely to spring up in vertical and horizontal markets in which
buyers are fragmented. As mentioned above, it is not necessary for the market to
---------------------- be fragmented on both the buy and the sell side. Second, the primary benefit that
purchasing hubs provide is demand aggregation, so they will thrive in markets
---------------------- where there are a few large buyers and a large number of small buyers. In these
---------------------- situations, larger buyers enjoy significant volume discounts, while smaller buyers
do not have the buying power to negotiate with sellers, especially with larger
---------------------- sellers. Third, purchasing hubs will be favoured in products and services that can
be more easily broken down into smaller orders. The smaller the lot size that the
---------------------- purchasing hub can deliver, the greater its value addition. Finally, they will add
---------------------- most value in product categories where the number of SKUs (Stock Keeping
Unit) is not too large, because demand aggregation adds less value when product
---------------------- diversity is extremely high.
---------------------- A logical concluding question to ask is - why does the reverse aggregator
opportunity exist? Can’t the neutral hubs (Chemdex, SciQuest, PlasticsNet)
---------------------- destroy these new entrants? Interestingly, we believe that existing neutral hubs
in the relevant vertical markets or horizontal markets are unlikely to create
----------------------
reverse aggregators. First and most important, neutral hubs must provide
---------------------- effective neutrality between buyers and sellers to obtain the participation of both
sides. If a neutral hub were to favour one side too heavily, it would risk losing
---------------------- its liquidity. Second, neutral hubs (especially exchanges) provide marketplaces
for buyers and sellers to make spot purchases and sales. Exchanges are not
----------------------
designed to support systematic or contractual purchases. In other words, a
---------------------- manufacturer might use ChemConnect to find chemicals that it unexpectedly
needs in the next month. That same manufacturer, however, is less likely to
---------------------- use ChemConnect for the chemicals that it buys under long-term contracts or
through relationships.
----------------------
In the din and noise of the rapidly-evolving B2B marketplace, there is
---------------------- an enormous amount of confusion about what the different B2B hub business
models are, where they add most value, and how profitable and defensible
----------------------
are they likely to be. We hope that the simple classification frameworks and

taxonomy that we offer provides some clarity and direction as we see the Notes
landscape evolve. We also hope that the frameworks presented in this article
will help entrepreneurs identify promising B2B hub business designs, and to ----------------------
better understand the what, where, why and hows of B2B hubs.
----------------------
11.7 CHALLENGES IN IMPLEMENTING B2B INITIATIVE ----------------------
Most companies have recognised the potential of B2C and B2B ----------------------
commerce. Thus, by choice or by force (as a result of competition) they have
jumped onto the bandwagon in some form or the other, often without realising ----------------------
the magnitude of implementation challenges. To fully exploit the benefits of ----------------------
this new phenomenon, companies must set their house in order. Any company
that participates in the e-business faces many challenges. In the following pages ----------------------
we have mentioned few important challenges. In his book ‘Opening Digital
Markets’, Walid Mougayar has categorised challenges into following categories: ----------------------
a. Technological Challenges ----------------------

b. Business Challenges ----------------------
c. Legal and Regulatory Challenges
----------------------
d. Behavioural and Educational challenges
----------------------
a. Technological challenges
Key challenges faced by organisations under this category are as follows: ----------------------
Security - Providing adequate security to IT resources of company is ----------------------

a very important issue. Adequate measures must exist to provide security to
databases, networks, applications, payment systems and transaction systems. ----------------------
Authentication procedures and policies should be developed, implemented ----------------------

and regularly updated to provide a secure environment. Use of technologies
----------------------
like Encryption, Secured Socket Layer and Public key infrastructure can help
organisation overcome this challenge. ----------------------
Another challenge that arises is that company should have clear privacy
----------------------
policies. Customers will not like to trade on exchanges where the information
is not secured or privacy policies are not in place. Implementation of initiatives ----------------------
like TRUST goes a long way in establishing a company’s creditability and
gaining customer confidence. ----------------------
Integration of systems - Most organisations run a multitude of ----------------------
incompatible legacy systems, data definitions and communications standards.
Organisation must integrate its disparate systems to consolidate the information ----------------------
and thus leverage its power. ----------------------
Communication gap between disintegrated and isolated systems cannot
only lead to increased inventory and purchasing but also lead to critical material ----------------------
shortage and disruption of business processes. ----------------------
Integrating eMarket platforms and implementing new protocols and
processes are the most challenging steps in an eMarket development program. ----------------------

B2B Hub 187
Notes This process is both complex and difficult not only because there are many
points of integration within company but also technology keeps changing and
---------------------- new markets keep emerging.
---------------------- Companies can follow number of strategies to create an integrated
organisation. Three such strategies are as follows:
----------------------
1. Ad hoc interconnection strategy
----------------------
2. The integration hub
---------------------- 3. Common hub
---------------------- Before choosing any integration strategy the company must weigh the
time and cost required implementing such strategy, against the benefits offered
----------------------
by different options.
---------------------- Ad hoc interconnection strategy: It is a quick fix strategy. It connects
internal systems with external eMarkets as required.
----------------------
The integration hub: In this strategy-dedicated hub, systems are
---------------------- implemented between company’s internal applications and external eMarkets.
---------------------- Integration hubs use custom interfaces to link with key points in the company.
This is a more flexible and less expensive strategy. Company can maintain
---------------------- connections to eMarkets through a centralised hub ¬using direct connections
with individual eMarkets or external third party integration hub providing a
----------------------
single eMarket interface.
---------------------- Hubs generally have enterprise application integration capabilities (EAI).
---------------------- This provides true integration even between incompatible legacy systems. Hubs
provide capabilities to communicate between disparate systems using some
---------------------- translation technology like Electronic data interchange (EDI), middleware or
extensible Markup Language XML.
----------------------
Integration hubs offer relatively simple and quick connectivity to new
---------------------- customers or platforms. Corporate Express, a leading B2B office product
---------------------- was asked to establish connections with a large customer using Ariba’s B2B
Ecommerce platform. Corporate Express using web methods B2B (a SAP
---------------------- product) was able to provide connectivity to its customer in three weeks.
---------------------- To derive the maximum benefit of integration the companies must
carefully define connectivity requirements for each market and set priorities for
---------------------- integration efforts across different eMarkets. Alternative to this approach is to
---------------------- implement common systems.
Common systems: In this strategy number of integration efforts is
----------------------
reduced as common systems within the organisation are implemented. However,
---------------------- upgrading to common systems is expensive and time consuming.
---------------------- Before implementing any of these strategies, company should evaluate

the value and investment required in each strategy and opportunity cost before
---------------------- choosing among these alternatives.

Networking capabilities: Organisation should not only have adequate Notes
networks implemented within the four walls of the organisation but it should
extend to external entities also. Companies should have a wide area network. ----------------------
Technologies like Virtual private network (VPN) can assist organisations in
meeting this challenge. ----------------------
Content management: Ability to update and provide reliable information ----------------------

in real time is another challenge faced by companies implementing B2B
----------------------
applications. Content on the web should be accurate and current. Companies
that do not have properly managed internal operations are not able to realise ----------------------
full benefits of e-business. Whether a company is selling or buying, it needs to
establish efficient operations in-house. ----------------------
For example, if the company is on the sell side of e-business it has to ----------------------
provide customised dynamic content, example product information, pricing,
and product availability information. If the organisation does not have systems ----------------------
in place, it will not be able to provide this information in timely and accurate
----------------------
fashion. Similarly, on the buy side, organisation can consolidate purchases
of similar goods across the divisions and thus achieve increased efficiencies. ----------------------
However, if they do not have properly implemented and integrated systems
they will not know what they are buying and why they are buying or if they are ----------------------
getting the best price. Properly implemented and integrated ERP systems across
----------------------
the company can play a very positive role.
Backup recovery and disaster recovery plans Organisations must be ----------------------
proactive in their approach. Adequate backup and disaster recovery systems
----------------------
must be in place to allow companies to back in business with minimum loss of
data and time in case of any eventuality. ----------------------
b. Business Challenges ----------------------
Managing Change
----------------------
Among business challenges, managing change is a big challenge. Whether
an organisation is implementing new system or developing new ideas, companies ----------------------
have to spend considerable amount of energy and resources managing change.
----------------------
Resistance to change can come from within the organisation and from
external partners of a company. Speaking in the context of supply chain the ----------------------
resistance can come from buyer, sellers or eMarkets.
----------------------
Resistance can be against new process or procedures to be followed,
new systems, increased job responsibilities. For example, as eMarket become ----------------------
omnipresent and corporate jump on to them, procurement personnel will be
----------------------
required to gain new skills and improve existing skills. They will have to
respond to dynamic pricing, 24 X 7 X 365 availability, quick turnaround and ----------------------
shorter response time towards their customers’ queries. Implementing new IT
systems requires extra coordination between more than one business function ----------------------
and process. Employees will have to acquire new skills like risk management
----------------------
to understand concepts like hedging. While some may enjoy these challenges,
some would resist this. ----------------------
B2B Hub 189

Notes Another important issue is eMarket-related change. Buyers, sellers and
channel partners for example might feel the eMarket system works against
---------------------- them. For example, in eAuctions competitive trading partners may feel that
probability to win future contract is minimum. General Electric is convincing
---------------------- its sellers to participate in eAuctions, by positioning eAuctions as potentially
profitable, fast and negotiating platform. On the one hand, buyers may shy away
----------------------
from eMarkets if it does not provide large number of sellers or does not provide
---------------------- adequate services like logistics, finance and risk management system.
These challenges cannot undermine the importance of eMarkets. Training
----------------------
and education of parties involved in eMarket operation can help organisations
---------------------- overcome the resistance to change. While, is some cases hiring fresh talent may
solve this problem
----------------------
Often companies fail to understand the potential of ecommerce.
---------------------- Companies exhibit lack of decisiveness and lack of enthusiasm in implementing
such applications. This factor can play an important role in overall success and
---------------------- failure of the whole venture.
---------------------- Business Models
There are no successfully proven business models that organisations can
----------------------
study and try to emulate in their strategy. Lack of understanding of environment
---------------------- increases the risk in such initiatives. However, as more and more companies are
taking initiatives this will no longer be a challenge. Many consulting companies
---------------------- have already developed a pool of knowledge created as a result of their being
part of such initiatives. Hiring such consulting companies can definitely be a
---------------------- source of guidance.
---------------------- Channel conflict
---------------------- Organisations need to look at how the role of traditional sales function is
changing. They need to evaluate the role of all entities - customers, distributors,
---------------------- retailers and company sales representatives involved in sales. Traditional sales
channel alone is no longer a viable option and does not provide complete
---------------------- value. Companies need to evaluate web enabled sales channels. They need to
understand how these can provide greater value to the company. Roles of entities
----------------------
need to be evaluated and re-defined to make it fit into this new paradigm.
---------------------- Another important aspect is that there are no successful proven business
models that organisations can study and try to emulate in their strategy. This
----------------------
increases risk in such initiatives.
---------------------- c. Legal and regulatory challenges
---------------------- There are many legal and regulatory issues involved, electronic copyright,
cash policies, tariffs, privacy, digital offers to name a few. Since e-business is
---------------------- a new phenomenon, there is lack of consistent rules and procedures. There are
issues related to taxes which need to be carefully reviewed by companies.
----------------------
Companies that buy and sell over the Internet, often conduct business beyond
---------------------- the national boundaries of one country. This gives rise to another important issue
about the role of Government and other nations’ laws.
----------------------

d. Behavioural and Educational challenges Notes
Another barrier that can be difficult to overcome is related to consumer
----------------------
and employee attitude. It is difficult for companies to encourage customers to
change their habits and start shopping online. Besides, companies have a huge ----------------------
task to gaining customers trust and confidence. They have to provide reasonable
assurance to trading partners and customers that their private information is ----------------------
secured and will not be compromised. Initiatives like TRUSTe spearheaded
----------------------
by Electronic Frontier Foundation can go a long way in helping companies
overcome this challenge. ----------------------
Also companies have to re-train their employees and business partners to
----------------------
adapt to new business model and become conversant with new technologies.
As mentioned earlier, employees may have to learn new skill set. Employees ----------------------
may not always be willing to learn new skills and learn new ways of doing
things. Education and change management programs can be effective methods ----------------------
in tackling this challenge.
----------------------
----------------------
Fill in the blanks.
----------------------
1. ________________ and policies should be developed, implemented
and regularly updated to provide a secure environment. ----------------------
----------------------
----------------------
Case Study ----------------------
Agfa puts e-Business in the picture ----------------------

The challenge ----------------------
Agfa needed a B2B communication platform capable of electronic
----------------------
communication with all its trading partners. This single central platform solution
had to be easy to deploy and had to integrate with both Agfa’s SAP system and ----------------------
the existing EDI infrastructure. Connectivity with multiple trading partners in
multiple formats and via multiple communication protocols was a prerequisite. ----------------------
The solution ----------------------
The electronic global communication infrastructure of Agfa consists of
----------------------
two parts: the Electronic Data Communication Center (EDCC) and the Non-
Production Related Materials (NPR) private transaction hub. ----------------------
The Certipost Document Broker is the core of the solution around which ----------------------
the EDCC is built for the entire Agfa group. Agfa has developed a standard
concept for B2B data communication in order to directly accept electronic ----------------------
documents from trading partners in any format. Through this EDCC, the
Document Broker generates interfaces for back-end and front-end integration, ----------------------
B2B Hub 191

Notes as well as for incoming and outgoing business documents, like orders, invoices,
stock movements, and customs declarations (NCTS).
----------------------
The Certipost Portal Server is the core of the solution around which the
---------------------- private transaction hub for Non-Production Related Materials is built. This NPR
system consists of a web-based e-mail system for business documents (Bizmail)
---------------------- and a secure FTP pipeline (Bizconnect), allowing for B2B communication with
small and medium JIT-suppliers of NPR materials. The Portal Server extends
----------------------
Agfa’s existing EDI system with a real-time, flexible XML-based infrastructure.
---------------------- Business benefits
---------------------- Agfa leverages its existing systems and EDI investments by using
the Certipost Portal Server. Their B2B Servers efficiently automate critical
---------------------- business information flows, regardless of current or future B2B infrastructures.
By automating the business processes, less effort is demanded from the supply
----------------------
chain partners while accuracy and quality increase.
---------------------- Today, the Certipost B2B Servers process transactions continuously,
handling many international partners that generate thousands of transactions a
----------------------
day. These transactions cover the entire procurement cycle, including purchase
---------------------- orders, delivery notes, invoice proposals and invoices. It’s true; Agfa delivers
on the B2B promise with Certipost and the CertiBusiness B2B products.
----------------------
Agfa’s portal for Non-Production Related goods facilitates the
---------------------- procurement of indirect materials, allowing every MRO supplier - even small
ones - to exchange documents electronically with Agfa. This dramatically lowers
---------------------- the threshold for e-Business and allows every trading partner to participate in
bidirectional electronic communication.
----------------------
---------------------- Summary
---------------------- ●● EMarkets, provide considerable value creation. Even though eMarkets
are in their infancy, they definitely have a number of advantages. Each
----------------------
type has its own set to specialties and functionalities. Companies need
---------------------- to evaluate what model fits their need best or do they need to participate
in multiple eMarkets of different types. Companies may adopt more than
---------------------- one model. For example, Dow Chemicals has diverse need and hence it
participates in independent eMarkets, consortium and private exchange.
----------------------
For more details, see case study of Dow’s Portfolio of eMarkets in Smart
---------------------- path forward.
●● As eMarkets evolve further, become more efficient and develop more
----------------------
sophisticated capabilities, and make way for greater information sharing
---------------------- and collaboration, companies will definitely associate themselves with
them in some or the other form.
----------------------
----------------------
----------------------

Keywords Notes
----------------------
●● ggregating: Constituting or amounting to a whole; total: aggregate
A
sales in that market ----------------------
●● iquidity: The ability or ease with which assets can be converted into
L
cash. ----------------------
●● Proliferate: To increase in number or spread rapidly and often excessively. ----------------------

●● Taxonomy: The science, laws, or principles of classification; systematics ----------------------
●● ggregation: A group or mass of distinct or varied things, persons, etc.:
A
an aggregation of complainants ----------------------
●● Defensibility: That can be defended in argument; justifiable ----------------------
●● Commodity: An article of trade or commerce, esp. a product as
----------------------
distinguished from a service
●● Exemplify: To illustrate by example: exemplify an argument ----------------------
●● Inventory: A complete listing of merchandise or stock on hand, work in ----------------------
progress, raw materials, finished goods on hand, etc., made each year by
a business concern ----------------------
●● Negotiated: To deal or bargain with another or others, as in the preparation ----------------------
●● Volatile: Tending or threatening to break out into open violence; explosive: ----------------------
a volatile political situation. ----------------------
●● Neutral: Not aligned with or supporting any side or position in a
controversy: The arbitrator was absolutely neutral. ----------------------
●● Biased: A particular tendency or inclination, esp. one that prevents ----------------------
unprejudiced consideration of a question; prejudice.
----------------------
●● Magnitude: Size; extent; dimensions: to determine the magnitude of an
angle. ----------------------
●● Omnipresent: Present everywhere at the same time: the omnipresent
----------------------
God.
----------------------
1. Explain B2B in your own words. ----------------------
2. What is the role of Yield Managers in B2B HUB?
----------------------
3. What are the differences between Aggregation Mechanism and versus
Matching Mechanism? ----------------------
4. What are the different types of business models for B2B HUBS? ----------------------
5. What are the business challenges in implementing a B2B HUB? ----------------------
6. What are Reverse Aggregators?
----------------------
B2B Hub 193

1. Manufacturing inputs tend to be vertical in nature, because the finished
----------------------
products that they go into are industry-specific.
---------------------- 1. An important characteristic of the aggregation mechanism is that adding
another buyer to the hub only benefits sellers, and does not benefit other
---------------------- buyers.
Fill in the blanks.
----------------------
1. Authentication procedures and policies should be developed, implemented
---------------------- and regularly updated to provide a secure environment
----------------------
Suggested Reading
----------------------
1. www.certipost.be
----------------------
2. sloanreview.mit.edu/article/the-matrix-of-change/
----------------------
3. Arbin, K & U. Essler. Emerging Industrial eMarkets.
---------------------- 4. Barber, N. F. Hubs and Spokes.
---------------------- 5. Brooks, Jeff and Roger Dik Boston. B2B eMarkets: The Smart Path.
---------------------- 6. Davenport, Thomas H., Jeffery D Brooks and Susan. Do Independents
E-Markets have a future?
----------------------
7. Hajibashi, Mohammed. E-Marketplaces: The Shape of the New Economy.
---------------------- 8.
Kaplan, Steven and Mohanbir Sawhney. E-Hubs the new B2B
Marketplaces.
----------------------
9. McKelvie, Kevin M., Accenture and Mark Simmonds. EHubs: The New
---------------------- Web - Enabled Technology Driving True Supply Chain Collaboration.
---------------------- 10. Mougaya, Walid. Opening Digital Markets Battle Plans and Business
Strategies for Internet Commerce.
----------------------
11. Shannon, Paula. See Beyond: Powering Today’s and Tomorrow’s
---------------------- E-Businesses including language in your global strategy for B2B
e-commerce.
----------------------
12. Whitaker, Jonathan D, Jay A. Stephens, Andy H Haltzel, Roger W Dik and
---------------------- Jeffery D. Brooks. Private Exchanges: The Smart Path to Collaboration.
----------------------

International Business
UNIT
12
Structure:
12.1 Introduction
12.2 The Theory of Comparative Cost
12.3 Trade Policies
12.4 Tariffs
12.5 Commercial Treaties
12.6 Dumping
12.7 International Monopolies
12.8 Important Export Policy of Government
12.9 Export Promotion Measures
12.10 Exports House
Case Study
Summary
Key Words
Suggested Reading
International Business 195

Notes
Objectives
----------------------
----------------------
• Explain International Trade Policies.
----------------------
• Discuss export promotion measures taken by our country.
---------------------- • Explain export import policy of government.
---------------------- • State issues facing International Business.
----------------------
12.1 INTRODUCTION
----------------------
---------------------- International business or trade may be defined as exchange of goods and

services between residents of a given country and those of the rest of the world
---------------------- where as Internal Trade may be defined as the exchange of goods and services
among the residents of the same country. Thus, while international business
---------------------- generally refers to trade among different countries, internal trade indicates
---------------------- within the territory or a single country.
Though both refer to the exchange of goods and services, the principles or
---------------------- laws governing international business are considered to be different from those
---------------------- of domestic business due to the following reasons:
a. Factor mobility is considered to be greater within a nation than between
---------------------- nations. Consequently, greater equalisation of factor prices is possible in
---------------------- the former case.
b. National markets are said to differ more widely than regional markets on
----------------------
grounds of tastes, customs, habits etc.
---------------------- c. International business runs between different political units, each with
sovereign government responsible for the wellbeing of the unit. This
----------------------
generally results in different national policies relating to trade, commerce,
---------------------- industry, taxation, labour-wages etc.
d. Finally, the use of different money units in different countries gives rise
----------------------
to problems of exchange rates and balance of payments adjustments.
---------------------- The existence of such differences has resulted in the emergence of a
---------------------- separate branch of study i.e. International economics which focuses attention
on trade between the nations of the world.
----------------------
12.2 THE THEORY OF COMPARATIVE COST
----------------------
The credit for developing the theory of comparative cost as a systematic
----------------------
theory explaining international trade goes to David Ricardo. The basis of trade,
---------------------- according to this theory, is found in differences in comparative cost. The theory
in its simple form of states that a country will export those goods for which it
---------------------- has a comparative advantage (i.e. where its relative cost of production is lower)

and import the one for which it has comparative disadvantage. Trade will be Notes
mutually advantageous, as long as there are differences in relative cost ratio
between two countries. ----------------------
The model clearly indicates that even if one country is more efficient than ----------------------
the other in the production of every commodity, as long as it is not equally more
efficient in every commodity, a basis for trade exists. It will pay the country ----------------------
to produce more of those goods in which it is relatively more efficient, (i.e.
has a comparative advantage) and to export these in return for goods in which ----------------------
absolute advantage is least ( i.e. has a comparative disadvantage) .
----------------------
Ricardo’s model, it must be admitted, has a number of limitations. The
following are the major criticisms leveled against it. ----------------------
●● Only two countries, two goods and one factor of production i.e. labour ----------------------
are considered.
●● The model is static and assumes given resources. ----------------------
●● It is assumed that labour is mobile nationally but not internationally. In ----------------------

fact, labour may not be perfectly mobile even within a country.
----------------------
●● The model assumes constant cost of production in both countries which
need not be the case. ----------------------
●● It also makes the unrealistic assumption that transportation costs between ----------------------
countries are zero.
----------------------
●● According to this theory, trade is determined by supply factors (cost) and
demand has no apparent role. ----------------------
●● No explanation is given for the differing costs of production between
----------------------
countries.
●● The mechanism whereby the relative price at which countries exchange ----------------------
goods (the terms of trade) is determined is not explained.
----------------------
Despite these limitations, it must be admitted that the Ricardian model
provided the starting point for further developments. Post-Ricardian trade ----------------------
theory takes this comparative advantage as the starting point and investigates
all those factors which determine differences in comparative costs. For instance, ----------------------
the Heckscher-Ohlin theory of trade views these differences as emanating from ----------------------
different endowments of factors of production. The Ricardian model has also
been generalised allowing for more countries, more factors of production, and ----------------------
more goods and for the effects of demand on trade as well as supply.
----------------------
12.3 TRADE POLICIES ----------------------
By commercial or trade policy we mean all the measures regulating the ----------------------
external economic relations of a country. It refers to those measures taken by a
territorial government which has the power of assisting or hindering the export ----------------------
or import of goods and services. These consist primarily of duties, bounties and ----------------------
prohibitions upon imports or exports. Of these, import duties are considered to
be the most important and most rational. ----------------------

Notes Evolution of Trade Policy Process
Other changes were seen as well from 1999. The consultation process
----------------------
encompassed an active effort to communicate. During that year, over 30
---------------------- seminars were held in different parts of the country. There were talk shows and
media briefings. The Ministry of Industry conducted workshops in most states
---------------------- on the TRIPS agreement and the implications of the product patent regime.
---------------------- The debate on multilateralism became much more inclusive. The Ministry of
Commerce and Industry lost some of its secretiveness.
----------------------
Trade policy in India is primarily the responsibility of the Ministry of
---------------------- Commerce and Industry (MoCI) and it plays a major role in defining and setting
policy. The MoCI occupies a privileged and exclusive space in Indian politics,
----------------------
and formulates policy largely in isolation earlier, that is, without consulting other
---------------------- government branches, often taking instructions directly from the Prime Minister.
The MoCI also negotiates bilateral agreements. However, the consistency of
---------------------- domestic and external policies is addressed at the cabinet with the assistance of
---------------------- advisory committees. Inter-ministerial consultations always include the Ministry
of Finance (MoF), and the Ministry of External Affairs (MoEA). Ministry of
---------------------- Textiles (MoT), Ministry of Agriculture (MoA) are involved in the process
on specific agenda. A small group of ministers, consisting of the Ministers for
----------------------
Commerce, Finance, External Affairs, Agriculture, assists the Prime Minister
---------------------- at stages leading up to the ministerial. The cabinet is invariably consulted on
negotiating stances and strategies, and the Prime Minister is kept informed
---------------------- daily on the progress of the negotiations. After each of these, the Commerce
---------------------- Minister briefs Parliament.
India’s trade policy can be said to consist of three levels: (i) its multilateral
----------------------
negotiating position at the international level; (ii) the framing and operation of
---------------------- import-export policy at home (‘traditional’ trade agenda), and (iii) the sectoral
policy affected by trade agreements (‘new’ trade agenda). The first level deals
---------------------- mainly with trade agreements, WTO, Free Trade Agreements (FTAs), etc. The
---------------------- second one focuses on changes in the tariff level, duty drawback, subsidies,
incentives for exporters and the concession for importers, etc. and in a sense is
---------------------- a support mechanism for its exporters to deal with uncertainties of the exposure
to globalisation. The last level deals with emerging sectoral trade agreements
----------------------
such as General Agreements on Trade in Services (GATS).
----------------------
Though the structure remained the same, there was more interaction and
---------------------- more thinking on issues. That this resulted in greater maturity in handling the
WTO agenda can be evidenced from several subsequent developments.
----------------------
The negotiations and the failure of movement at Seattle demonstrated
---------------------- to the Indian public and legislators the weaknesses of a consensus bound
arrangement, that lack of consensus could derail the transactions. Introduction
----------------------
of labour standards and Singapore issues was strongly resisted by India and
---------------------- other leading groups. At Doha, the stand that India took, considered intransigent

by all, won domestic legitimacy to the MOC in the process of negotiation, and Notes
the acceptance of Parliament and States. That India was an important client to
be consulted, was evident subsequently from the discussions on agriculture, and ----------------------
way forward could be found only after several countries, including India, had
----------------------
agreed on the approach.
The Road Ahead ----------------------
At this stage of its development India is looking forward to engage more ----------------------
progressive not only at the multilateral level but also at the bi-lateral and regional
----------------------
level. The integration of South Asian countries into a trading block may take
some time to realise, but would be pursued at a pace that would be acceptable to ----------------------
all constituents. Participation in ASEAN trade is of importance and India would
pursue this opportunity vigorously. Regional trade pacts with China and with ----------------------
Japan are in the area of consultation. Trade with China will continue to grow. ----------------------
At the multilateral level, India’s primary concern would be agriculture
----------------------
and services. On the issue of reduction of agricultural subsidies, India would be
seeking enlargement of its list of sensitive products and exert greater pressure on ----------------------
reduction in tariffs by the developed countries. Non-tariff barriers to agricultural
trade including psyto-sanitary conditions, and environmental issues would be ----------------------
taken up strongly to increase market access of Indian agricultural products. ----------------------
In the area of services, India would seek to extend opportunities for cross
----------------------
border service. It would seek greater flexibility in movement of technically
qualified personnel and greater opportunities for its skilled manpower to ----------------------
work in different countries. It would seek that the agenda for negotiations in
the WTO is not enlarged to cover all of the Singapore issues. It would ensure ----------------------
that public health concerns are highlighted and also the opportunities for its ----------------------
pharmaceuticals products to provide cheaper drug delivery to rest of the world.
----------------------
At the same time, it would continue the process of reform and
liberalisation by opening up FDI in more sectors including retail, real estate ----------------------
and infrastructure. Irrespective of the political composition of the country and
succeeding governments, progress along the path will perhaps always be a ----------------------
balance of management of internal constituents and external opportunities.
----------------------
----------------------
----------------------
1. India’s trade policy can be said to consist of four levels.
----------------------
12.4 TARIFFS ----------------------
A tariff is essentially a tax or a duty on commodity imports/exports, ----------------------

designed principally to change the relative prices of commodities and thereby ----------------------

Notes (latter) the pattern of international trade, although it may also be levied as a
revenue raising exercise. It is most commonly applied on an ad valorem basis
---------------------- (ad valorem duty) i.e. as a percentage of value. But some¬times it takes the
form of specific amount per unit (specific duty), such as Rs. 200 per ton. The
---------------------- former method is generally favoured since it has a built-in-allowance for
---------------------- inflation in world prices. Tariffs may be discriminatory or non-discriminatory. A
discriminatory tariff calls for different rates of duties depending on the country
---------------------- of origin or destination of the product. A non-discriminatory tariff on the other
hand imposes a uniform rate of duty regardless of their source of origin. Finally,
---------------------- there are also retaliatory tariffs and countervailing tariffs. When a country A
---------------------- imposes duties against the product from country B, it is quite possible that
country B will retaliate and levy duties on goods imported from country A.
---------------------- Country B’s tariffs are then described as retaliatory tariffs. Tariffs are said to
be countervailing when a country imposes import duties with a view to offset
---------------------- export subsidy in the country of origin.
---------------------- Tariffs on import are far more widespread than those on exports. In fact,
export duties are even prohibited by some countries like the United States.
----------------------
Import duties, on the other hand are advocated by many. The arguments put
---------------------- forward by them in favour of import duties are as follows:
●● t helps a country to achieve self-sufficiency which is advantageous for
----------------------
defence purpose.
---------------------- ●● It reserves the home market for domestic industries and thus helps to
create employment within a country.
----------------------
●● They help to improve the balance of payments by bringing down the
---------------------- quantum of imports.
---------------------- ●● Such Protective duties are also said to be necessary for an underdeveloped
nation to promote those industries which are generally in infant stages and
---------------------- hence cannot effectively compete with those of the developed countries.
---------------------- (This is the famous infant industry argument).
●● These duties are sometimes necessary to avoid dumping.
----------------------
Many of these points are much debated upon and consensus is yet to be
---------------------- reached. However, the major argument against the import duties are provided
by the advocates of free trade who opine that such tariffs distort free trade,
----------------------
hinder the most rational allocation of world resources and there by prevents the
---------------------- maximization of global economic welfare.
----------------------
----------------------
----------------------
1. Tariffs may be discriminatory or non-discriminatory.
----------------------
----------------------

Notes
Activity 1
----------------------
Explain Tariff with real life example from India. ----------------------
----------------------
12.5 COMMERCIAL TREATIES ----------------------
In the course of development, the economic relations between states have ----------------------
become more and more complex, and it has therefore become usual to regulate ----------------------
certain matters (such as questions of copy right, double taxation, legal aid etc.)
by special agreements. Such agreements are known as commercial treaties. ----------------------
Though such treaties may cover a wide range of subjects (i.e. consular matters,
----------------------
rights of foreigners, transport questions and tariff and trade questions), in general
usage, the term commercial treaties have come to mean general agreements on ----------------------
tariff questions. Such commercial treaties (or agreements on tariff questions)
may be either bilateral treaties (or agreements on tariff questions), may be either ----------------------
bilateral treaties (i.e. between two countries) or multilateral treaties (more than ----------------------
two countries).
----------------------
12.6 DUMPING
----------------------
The term ‘dumping’ is now almost universally taken to mean the sale
of a good abroad at a price which is lower than the selling price of the same ----------------------
good at the same time and in the same circumstances at home, taking account ----------------------
of differences in transport cost. Thus, dumping is simply price discrimination.
It takes place when the demand abroad is more elastic than at home and arises ----------------------
only because of the monopolistic element in the home market.
----------------------
Various kinds of dumping have been distinguished in theory, including
sporadic, predatory and persistent dumping. Sporadic dumping is the sort which ----------------------
occurs when a company, which typically stays clear of foreign markets, finds ----------------------
itself with distress goods (excess inventory) on its hands that it wants to dispose
off without harming its normal markets. Predatory dumping is selling at a loss in ----------------------
order to gain access to a market, to drive out competition or for any other short-
----------------------
run purpose. It normally is followed by an increase in price after the necessary
objective has been achieved. Persistent dumping occurs when a producer sells ----------------------
consistently at a lower price in one market (generally the foreign market) than
in other. Both sporadic and predatory dumping are considered to be harmful ----------------------
to the importing countries. Hence, a large number of countries impose penalty ----------------------
tariffs or quotas against goods which they believe are being dumped within
their borders from abroad. On the other hand, persistent dumping is usually ----------------------
considered by most economists to be beneficial to the importing country.
----------------------
----------------------

Notes 12.7 INTERNATIONAL MONOPOLIES
---------------------- Generally, two kinds of International Monopolies can identify:
---------------------- a. In the first place, one country or a small group of countries has a
monopolistic position in the world market which it endeavours to exploit
---------------------- by charging high prices to the rest of the world.
---------------------- b. In the second case, the producing countries, or a large number of
countries form an international alliance or cartel in order to jointly restrict
---------------------- production and control price.
---------------------- International monopolies of the former type are based almost always
upon control of raw materials. They arise when one country may contain most
----------------------
or all sources of supply of an important raw material, the further processing of
---------------------- which can be carried out in many different places. But in general, attempts to
monopolies’ raw materials have not met with much success owing to the growth
---------------------- of production in other countries and the development of technical substitutes to
---------------------- replace these raw materials. International cartels result from a process of uniting
of the producers, in a given branch of industry, or as many countries as possible
---------------------- into an organisation to exercise a single planned control over production and
raising. Generally, cartels can achieve their aim of controlling production and
----------------------
raising the price only when the output is not too widely distributed among
---------------------- different producers. A typical example of such an international cartel is the
OPEC (Organisation of Petroleum Exporting Countries).
----------------------
----------------------
12.8 IMPORTANT EXPORT POLICY OF GOVERNMENT
---------------------- Since, independence, a definite trade policy has been used in India, as a
part of the general economic policy, to promote the development efforts of the
---------------------- country. This policy initially took the form of restricting imports and boosting
exports. Although the country put forth the cause of export promotion, during
----------------------
the early days the main emphasis remained on import substitution and reliance
---------------------- on foreign aid for meeting the foreign exchange gap. But of late, it is being
increasingly recognised that a lasting solution to the balance of payments,
---------------------- problem lies in the promotion and diversification of our export trade. Accordingly,
---------------------- the government for the first time introduced the Export Policy Resolution in the
Parliament in 1970 with the purpose of emphasising the importance of exports
---------------------- in the national economy. Since then, we have continued to lay emphasis on the
development of the export sector and the objective of the government’s present
----------------------
trade policy is to stimulate export promotion via import liberalisation.
----------------------
12.9 EXPORT PROMOTION MEASURES
----------------------
To attain this objective of rapid export development, the Government of
----------------------
India has introduced a number of export promotion measures. Such measures
---------------------- may be classified into the following areas:

i. Those for promoting export production Notes
ii. Those for reducing the price disadvantage
----------------------
iii. Those for marketing product, and other facilities
I. Export Production Measures ----------------------
Export production is a necessary pre-condition for export expansion. The ----------------------
basic idea of government help in the area of production is to enable the
exporters’ production on a long -terms basis. In this context, the various ----------------------
steps taken by the government include the following: ----------------------
a. Identification of certain sectors and product groups for concerted
and concentrated export drives, ----------------------
b. Relaxation of the MRTP Act and removal of various licensing ----------------------
restrictions which had hitherto hampered export production.
----------------------
c. Liberations of the import policy so as to bring about technological
upgradation cost reducing and ensure continuity in the supply of ----------------------
export goods.
----------------------
d. Introduction of the concept of Free Trade Zones and Export Processing
Zones. ----------------------
e. Implantations of the scheme of 100 per cent Export Oriented Units ----------------------
f. Introduction of the scheme of Export and Trading Houses, and
----------------------
g. Encouragement to set up joint ventures in other countries
----------------------
II. Measures for Reducing the Price Disadvantage
The various measures offered by the government to reduce the price ----------------------
disadvantages faced by the Indian exporters include: ----------------------
a. The International Price Reimbursement Scheme which makes
----------------------
available key-inputs at international prices
b. The scheme of Duty Drawback by which customs duties and other ----------------------
central excise duties levied on export production are reimbursed to
----------------------
the exporters,
c. The scheme of cash compensatory support which seeks to ----------------------
compensate the exporters for the non-refundable taxes and other
----------------------
levies paid,
d. Manufacture in Bond, whereby, manufacture under a bond facilities ----------------------
exemption from payments of various taxes and thus does away with ----------------------
blocking up of funds,
e. Air and ocean freight subsidy on exports of various goods etc. ----------------------
III. Assistance in the Area Marketing ----------------------

Among its promotional measures, the government has accorded considerable ----------------------
importance to market exploration and development. For instance:
----------------------

Notes a. The Market Development Assistance (MDA) provides financial
assistance to various export promotion agencies for undertaking
---------------------- market surveys, for publicity measures abroad, for participation in
international trade fairs and exhibitions etc.
----------------------
b. Rigorous training in export marketing is provided by the Indian
---------------------- Institute of Foreign Trade.
---------------------- c. Advanced and latest information and training in packaging
techniques are provided by the Indian Institute of Packaging.
----------------------
d. Quality control and reshipment inspection is undertaken so that
---------------------- Export Inspection Council minimise complaints Sand assure the
quality of goods.
----------------------
IV. Other Facilities
---------------------- Other promotional measures include:
---------------------- a. Provision of credit at concessional rates of interest by various
agencies like the ECGC, IDBI SBI, EXIM Bank etc.
----------------------
b. Provision of insurance facilities against the risks of export operation.
---------------------- These measures are backed by a sound institutional infrastructure meant
---------------------- to promote exports from India. There are six deferent fields in which institutions
for exports effort have been established.
---------------------- At the top is the Department of Commerce, of the Ministry of Commerce.
---------------------- This is the main organisation to formulate and guide India’s trade policy. At the
second layer are the deliberative and consultative organisation which ensures
---------------------- that the collective advice of the commercial interest is available to government
for formulating export promotion and import policies (e.g. Cabinet Committee
---------------------- on Export, Central Advisor Council on Trade, Zonal Export and Import Advisory
---------------------- Committees). At the third tier are the organisations that have been established
to promote and strengthen commodity specialisation (e.g. the various Export
---------------------- Promotion Councils, Commodity Boards, Marine Processed Food Products
Export Development Authority (APEDA) etc. Another tier consists of service
---------------------- institutions which have been established to meet the requirements of industry
---------------------- and trade, (e.g. Indian Institute of Foreign Trade, Trade Development Authority,
ECGC, Trade Fair Authority of India, Export Inspection Council, Indian Institute
---------------------- of Packaging etc.). The next tier consists of government trading organisations
specially set up to handle export of specific commodities and to supplement
---------------------- the efforts of the private enterprise in the area of export promotion, (e.g. State
---------------------- Trading Corporation and its subsidiaries, the Minerals and Metals Trading
Corporation etc.). Lastly, state governments have set up agencies for export
---------------------- promotion at the state level (e.g. some state government have set up export
promotion boards, export corporations etc.).
----------------------
Export Credit and Guarantee Corporation Export Insurance
---------------------- In the context of growing competition in International markets, no export
---------------------- can manage without selling goods on credit. Giving credit poses two problems:

i. The exporter should find enough money to offer credit, and Notes
ii. He should be prepared to take credit risks.
----------------------
Exporting on credit has its own risks. The overseas buyer may default
or go bankrupt; there may be an earthquake or war in his country; there may ----------------------
be sudden exchange restrictions and so on. The risks involved are not little.
The Export Credit Guarantee Corporation (ECGC) seeks to promote exports ----------------------
by providing insurance against such export risks. It also provides guarantees
----------------------
to banks enabling exporters to obtain credit facilities. The ECGC charges a
premium for its services but it keeps the rates at the lowest possible level, ----------------------
working on a no-profit-no-loss basis.
The insurance covers issued by ECGC can be divided broadly into four ----------------------
groups: ----------------------
●● Standard policies issued to exporters to protest them against the risk of
not receiving payments while trading with overseas buyers on short-term ----------------------
credit. ----------------------
●● Specific policies designed to protect Indian firms against the payment
risks involved in (a) exports on deferred -terms of payment, (b) services ----------------------
rendered to foreign parties, and (c) construction works undertaken abroad. ----------------------
●● Financial guarantees issued to banks against the risks involved in
providing credit to exporters, and ----------------------
●● Special schemes - The ECGC also provides certain special schemes ----------------------
like providing extra facilities to small scale exporters by offering higher
percentage of cover and procedural relaxation, providing exchange ----------------------
fluctuation risk cover for capital goods and engineering contractors etc. ----------------------
Other Agencies Providing Export Finance
----------------------
Apart from those provided by the ECGC, a number of export credit
and financing facilities are being run under various prescribed channels and ----------------------
institutional arrangements. The major agencies providing such financing
facilities include ----------------------
i. The Reserve Bank of India: The RBI offers a number of financing ----------------------
facilities like the Bill Market Scheme, packing credit facilities etc. to
promote export development in the country. Under the Bill Market Scheme, ----------------------
the exporters who are sending goods to IMF member countries can draw
----------------------
export bills against which advances are made available at minimum rates.
The purpose of extending packing credit facilities to commercial banks ----------------------
for refinancing operations is to bring down the cost of export credit. These
commercial banks, to which finance is made available, are advised not to ----------------------
charge more than 6 percent on packing credit advances to exporters.
----------------------
ii. Industrial Development Bank of India: For providing long-term credit
to exporters, a system has been developed in India under the leadership of ----------------------
IDBI. Under this, the exporters can either (a) get credit from commercial
banks that then can secure refinance from IDBI, or (b) get direct credit ----------------------
from the IDBI. ----------------------

Notes iii. The State Bank of India: The SBI has also made operative certain
schemes for providing export finance at concessional rates of interest. For
---------------------- instance, it has started a scheme under which a company can, against the
bank guarantee, secure a loan in foreign currency for the import of raw
----------------------
materials, the repayment of which is to be made out of the proceeds of the
---------------------- finished products. It also extends packing credit advances to exporters.
---------------------- iv. The Export-Import Bank: The Bank among other services, grants loans
and advances and participates with any bank or financial institution in
---------------------- India or outside, for the purpose of import and export trade. It is also
intended to function as the principal financial institution for coordinating
----------------------
the working of institutions engaged in financing foreign trade.
---------------------- v. State Trading Corporation: The STC has evolved a scheme entitled
---------------------- ‘Export Aid to Small Industries’ (East) whereby, small and medium sized
exporters who are not in a position to obtain credit facilities from the
---------------------- banking institutions are given the necessary financial assistance.
---------------------- The Government of India has also constituted a Marketing Development
Fund, which among other facilities, provided financial assistance for
----------------------
projects aimed at development of foreign markets.
----------------------
----------------------
---------------------- 1. Export ___________ is a necessary pre-condition for export

expansion.
----------------------
---------------------- 12.10 EXPORTS HOUSE

---------------------- One of the schemes introduced by the government to promote exports is
the registration of export houses. Under the scheme, recognition as an export
----------------------
house is accorded on the basis of track-record of export performance by the
---------------------- registered exporters over a period of time. To gain this status, the average
annual exports of registered exporters should amount to Rs. 3 crore in select
---------------------- products and Rs.7 crore in non-select products. In the case of SSI units, the
---------------------- targets are Rs. 0.75 crore and Rs. 3 crore for select and non-select items
respectively. Under the scheme, a number of benefits and facilities are made
---------------------- available to these recognised houses. (For instance, they can import non - OGL
capital goods items and second hand capital equipment against Replenishment
----------------------
licences, are eligible for additional licences, can import electronic telephone
---------------------- exchange, technical designs etc. and are also eligible for, the facility of blanket
foreign exchange permit for export promotion activities in overseas markets).
---------------------- As on 1st March 1987, there were 820 export houses in India, of which over
---------------------- 50% constituted SSI export houses.

Export Promotion Councils Notes
Over the years, seventeen export promotion councils have been set up in
India with the objective of promoting the export of specified commodities like ----------------------
basic chemicals and pharmaceuticals, chemicals and allied products, cashew, ----------------------
engineering goods, gems and jewellery, sports goods electronics and computer
software etc. These councils are registered as non-profit organisations under the ----------------------
Companies Act or the Societies Registration Act. The main functions of these
councils include: ----------------------
a. To apprise the government of the exports’ problems; ----------------------

b. To keep its members informed with regard to trade enquiries and export ----------------------
opportunities;
----------------------
c. To render assistance on specific problems confronting individual exporters;
d. To assist overseas buyers with information relating to various aspects of ----------------------
the Indian industry and also to bring them in touch with reliable sources
----------------------
of supply in India;
e. To help resolve amicably disputes between exporters and importers of ----------------------
Indian goods; and
----------------------
f. To offer various facilities to exporters in line with other exporting countries.
----------------------
Some of the councils also provide services like supply of indigenous and
imported raw materials, compilation and dissemination of statistical information ----------------------
on export-import policy, tariffs, competitive prices etc. extending help in
shipping and transport problems and securing shipping freight concessions ----------------------
offering advice on finance, banking and insurance etc. The Ministry of ----------------------
Commerce provides the necessary assistance to this council in relation to their
programme of work. ----------------------
----------------------
Case Study
----------------------
Food Safety in Food Security and Food Trade
----------------------
Case Study: India responds to International Food Safety Requirements
----------------------
As awareness grows about food safety issues, the need for countries to
provide greater assurance about the safety and quality of food also grows. The ----------------------
increase in world food trade and the advent of the Sanitary and Phytosanitary
(SPS) Agreement under the World Trade Organisation (WTO) have also raised ----------------------
interest in food safety requirements. To ensure a strong presence in global ----------------------
markets, India realises the need to meet these challenges and keep pace with
international developments. This briefly reviews ----------------------
i. How India utilises the international framework for food safety standards ----------------------
set forth by the Codex Alimentarius Commission (hereafter referred to as
Codex), and ----------------------
----------------------

Notes ii. How India provides safety assurances for exports and promotes access to
international markets for exporters.
----------------------
Codex Standards and India’s Food Safety System
---------------------- The SPS Agreement provides for harmonisation of the SPS measures of
member countries with the international standards set by Codex. The Agreement,
----------------------
however, allows members to lay down more stringent standards than those
---------------------- of Codex, provided they can be scientifically justified. In India, international
standards, guidelines, and recommendations are increasingly used to guide
---------------------- domestic as well as international trade. The Directorate General of Health
Services in the Ministry of Health and Family Welfare is working to integrate
----------------------
Codex standards into national food laws as much as possible. Where specific
---------------------- local needs justify more stringent requirements, specifications are being fixed
based on scientific data. India is now reorienting its food laws to emphasise
---------------------- food safety as well as food quality. National standards for both domestic and
export trade lay down parameters for pesticide residues, antibiotic residues,
----------------------
heavy metals, aflatoxin, pathogens, and other contaminants.
---------------------- The Export Inspection Council of India (EIC), the official certification
body for exports, is developing standards for exports based mainly on Codex,
----------------------
but it also takes into account that an importing country may impose stiffer
---------------------- requirements.
As Codex standards are increasingly used as a benchmark for global
----------------------
trade, India has increased its participation in several Codex committees to
---------------------- ensure that domestic conditions are reflected in the development of international
safety standards, thereby facilitating acceptance of Indian products in global
---------------------- markets. At Codex meetings, India has proposed that risk assessment studies
be conducted in developing countries and that the resulting data be taken into
----------------------
consideration when framing Codex standards. Within India, risk analysis and
---------------------- setting of national standards are supported by new data generated at several
research institutes.
----------------------
The Hazard Analysis Critical Control Point (HACCP) approach has been
---------------------- recognised by Codex as a tool for assessing hazards and establishing control
systems that focus on preventive measures rather than relying primarily on
---------------------- end-product testing. Besides incorporating the HACCP approach into the new
---------------------- hygienic codes, Codex is developing guidelines for applying HACCP systems
to small or less-developed businesses. The Codex HACCP and food-hygiene
---------------------- standards have been adopted by the Bureau of Indian Standards, the national
standards body in India. Food processing units are being encouraged to adopt
---------------------- these systems on a voluntary basis.
---------------------- Export Inspection and Certification
---------------------- In view of the import controls being imposed by importing countries,

export controls have acquired renewed relevance. Export certification, which
---------------------- had been made voluntary with liberalisation, has once again been made
mandatory by the Indian government in sensitive areas such as marine, milk,
---------------------- meat, poultry, and egg products and honey.

Inspection and certification in India has a regulatory basis in the form Notes
of the Export (Quality Control and Inspection) Act of 1963.The EIC was set
up under this Act with statutory status to certify the quality of products for ----------------------
exports. Under the EIC, there are five Export Inspection Agencies (at New
Delhi, Kolkata, Kochi, Chennai, and Mumbai) that carry out inspection and ----------------------
certification activities, with 41 sub offices and laboratories to provide backup. ----------------------
All inspection agencies are gearing up to implement ISO 17020, “General
Criteria for the Operation of Various Types of Bodies Performing Inspection,” ----------------------
issued by the International Organisation for Standardisation (ISO), as well as the
Codex “Guidelines for the Design, Operation, Assessment, and Accreditation ----------------------
of Food Import and Export Inspection and Certification Systems.” ----------------------
The main system of export inspection and certification being followed
----------------------
in the Indian food sector is the Food Safety Management Systems-based
Certification (FSMSC), which is founded on international standards including ----------------------
HACCP, Good Management Practices (GMP), and Good Hygiene Practices
(GHP). Under this certification system, exporting firms are approved based ----------------------
on an assessment of how they measure up against international requirements.
----------------------
Approval is normally granted for two years, and the responsibility for
maintaining quality lies with the firm. However, periodic surveillance, in the ----------------------
form of monitoring visits, supervisory visits, and corporate audits, is carried
out to ensure continued conformity to the requirements. Through this system, ----------------------
international requirements are met and rejections reduced at the importing end.
----------------------
All units approved by EIC necessarily have to implement HACCP/
GMP/GHP at all stages of food production, in addition to meeting end-product ----------------------
requirements. There are also various export promotion bodies under the
----------------------
Ministry of Commerce and Industries that assist processors in implementing
safety and quality-control systems. Today, more than 1,000 units in India ----------------------
have been certified for HACCP, of which at least 400 are under compulsory
export certification. The export certification system is based on an HACCP ----------------------
approach that requires the processor to deal with the hazards arising from
----------------------
contaminants in the raw material as well as during processing. Surveillance
involves checking hygienic conditions and records maintained by the units, and ----------------------
drawing and testing samples for various contaminants to ensure safety of the
product. The SPS Agreement encourages member countries to recognise the ----------------------
concept of equivalence in different safety measures. If the exporting member
----------------------
objectively demonstrates to the importing member that its measures achieve the
importing member’s appropriate level of sanitary or phytosanitary protection, ----------------------
the importing member is obliged to accept these measures. India is seeking
equivalence agreements with the health authorities of major trading partners. ----------------------
The EIC has already been designated a competent authority by the European
----------------------
Commission (EC) for marine products and basmati rice and by the U.S. for
black pepper. For these commodities, the EIC has the authority to approve unit ----------------------
exports. It is awaiting similar recognition from the EC for egg, milk, and poultry
products. The EIC has also signed equivalence agreements with Australia for ----------------------
marine products and with Sri Lanka for 86 items. It is negotiating an agreement
----------------------
in various sectors with Singapore and will soon have an agreement with Italy.

Notes Under such agreements, in addition to recognition of EIC certification,
both sides will exchange information on specifications, methods of sampling,
---------------------- inspections and tests, provisions for retest and appeal in case of rejections, and
return of rejected consignments. Such agreements facilitate trade and also lead
---------------------- to less frequent inspection and rejection of India’s products in overseas markets.
---------------------- To meet these obligations, India needs to strengthen its regulatory
framework. His process would include upgrading testing facilities to meet
----------------------
international as well as importing-country requirements; upgrading human
---------------------- capabilities or empowering personnel in areas of testing, risk analysis, and
development and auditing of HACCP plans; developing GMP/GHP/ HACCP
---------------------- modules for implementation at both domestic and export levels; and establishing
databases on requirements of importing countries.
----------------------
India is either funding these upgrades itself or seeking assistance under
---------------------- programs funded by the Food and Agriculture Organisation of the United
Nations (FAO) or the EC. Initiatives include the following:
----------------------
●● Upgrading of laboratories - Laboratories are being strengthened in
---------------------- terms of equipment, manpower, and systems. The EIC laboratories used
for export testing have been furnished with state-of-the-art instruments.
----------------------
To meet the requirements for testing, specifically for testing for
---------------------- chloramphenicol, nitrofurans, and other antibiotics, the EIC labs and five
other government labs now have the capability to test at 0.02 parts per
---------------------- billion.
---------------------- ●● Training and technical assistance - Training efforts in India focus on
developing and upgrading skills of industry and government personnel.
---------------------- Human Resource and Quality Development Centre has been established
under the EIC. It offers EIC certification personnel a chance to keep
----------------------
abreast of the latest developments and take training programs, as similar
---------------------- training and awareness programs are being organised for industry on
various issues, including HACCP, testing, milk quality, and rice quality.
----------------------
●● Establishing a database on importing - country requirements
---------------------- -Information on regulations and specifications regarding methods of
sampling, inspection, and testing in various countries is often unavailable
---------------------- or available only in the language of the importing country. His lack of
clarity about specific requirements can sometimes lead to rejection at
----------------------
the point of import. EIC is building a database of requirements of major
---------------------- import partners that can be accessed by exporters. Technical assistance in
this area has been sought from the EIC.
----------------------
Some importing countries are imposing unjust measures that conflict
---------------------- with Codex and impede trade. Some of these measures include applying
standards more stringent than Codex without carrying out a risk analysis,
---------------------- destroying nonconforming consignments, imposing new requirements without
notification or information, and applying test methods that may be different
----------------------
from internationally specified ones. To work out solutions to such issues, India
---------------------- is entering into a dialogue with importing governments.

Conclusion Notes
The safety measures described here have led to increased export of food
----------------------
products and fewer inspections and rejections. The impact has been especially
significant in the marine sector in which export certification has been in ----------------------
operation since 1997. In other areas, such as milk and egg products, in which
certification has only recently been introduced, efforts are still underway to ----------------------
obtain recognition of Indian certification by the EC, Australia, and other
----------------------
countries so that Indian products can gain access to these markets.
In spite of all of the measures taken by India and other developing countries ----------------------
to improve quality and strengthen safety systems, rejections by developed
----------------------
countries continue as they impose additional, new, and often unjustifiable SPS
requirements. Such requirements include testing a wider range of antibiotic ----------------------
residues, destroying rejected consignments, specifying requirements without
scientific justification, and using highly sensitive test methods based on testing ----------------------
capability rather than scientific need. These measures raise testing costs and
----------------------
lower competitiveness of exports from developing countries.
India is trying to take advantage of WTO no tariff agreements to address ----------------------
these obstacles. Thereby, Indian producers are hoping to gain further access
----------------------
to global markets while providing safe products. Developed countries need to
recognise these efforts and make their own efforts to facilitate trade, rather than ----------------------
to impose new no tariff measures to protect their producers.
----------------------
Summary ----------------------
●● Traditionally, trade was regulated through bilateral treaties between two ----------------------
nations. For centuries under the belief in Mercantilism, most nations
had high tariffs and many restrictions on international trade. In the 19th ----------------------
century, especially in Britain, a belief in free trade became paramount
----------------------
and this view has dominated thinking among western nations for most of
the time since then which led to the general decline of Great Britain. In ----------------------
the years since the Second World War, controversial multilateral treaties
like the GATT and World Trade Organisation have attempted to create ----------------------
a globally regulated trade structure. These trade agreements have often
----------------------
resulted in protest and discontent with claims of unfair trade that is not
mutually beneficial. ----------------------
●● Free trade is usually most strongly supported by the most economically
----------------------
powerful nations, though they often engage in selective protectionism for
those industries which are strategically important such as the protective ----------------------
tariffs applied to agriculture by the United States and Europe. The
Netherlands and the United Kingdom were both strong advocates of free ----------------------
trade when they were economically dominant, today the United States,
----------------------
the United Kingdom, Australia and Japan are its greatest proponents.
However, many other countries (such as India, China and Russia) are ----------------------
increasingly becoming advocates of free trade as they themselves
----------------------

Notes become more economically powerful. As tariff levels fall, there is also
an increasing willingness to negotiate non tariff measures, including
---------------------- foreign direct investment, procurement and trade facilitation. The latter
looks at the transaction cost associated with meeting trade and customs
---------------------- procedures.
---------------------- ●● Traditionally, agricultural interests are usually in favour of free trade
while manufacturing sectors often support protectionism. This has
---------------------- however, changed somewhat in recent years. In fact, agricultural lobbies,
---------------------- particularly in the United States, Europe and Japan, are chiefly responsible
for particular rules in the major international trade treaties which allow
---------------------- for more protectionist measures in agriculture than for most other goods
and services.
----------------------
●● During recessions, there is often strong domestic pressure to increase
---------------------- tariffs to protect domestic industries. This occurred around the world
during the Great Depression leading to a collapse in world trade that
---------------------- many believe seriously deepened the depression.
---------------------- ●● The regulation of international trade is done through the World Trade
Organisation at the global level, and through several other regional
---------------------- arrangements such as MERCOSUR in South America, NAFTA between
---------------------- the United States, Canada and Mexico, and the European Union between
27 independent states. The 2005 Buenos Aires talks on the planned
---------------------- establishment of the Free Trade Area of the Americas (FTAA) failed
largely due to opposition from the populations of Latin American
---------------------- nations. Similar agreements such as the MAI (Multilateral Agreement on
---------------------- Investment) have also failed in recent years.
---------------------- Keywords
---------------------- ●● Indicate: To show the way to or the direction of; point out: an arrow
---------------------- indicating north; indicated the right road by nodding toward it.
●● Mobility: The movement of people in a population, as from place to
---------------------- place, from job to job, or from one social class or level to another.
---------------------- ●● Sovereign: A group or body of persons or a state having sovereign
authority.
----------------------
●● Wellbeing: A good or satisfactory condition of existence; a state
---------------------- characterised by health, happiness, and prosperity; welfare: to influence
the well-being of the nation and its people.
----------------------
●● Existence: Continuance in being or life; life: a struggle for existence.
---------------------- ●● Policy: A course of action adopted and pursued by a government, ruler,
political party, etc.: our nation’s foreign policy.
----------------------
●● Encompassed: To constitute or include: a survey that encompassed a
---------------------- wide range of participants. Multilateral: Having several or many sides;
many-sided.
----------------------

●● Negotiating: To deal or bargain with another or others, as in the preparation Notes
●● Drawback: A hindrance or disadvantage; an undesirable or objectionable ----------------------
feature. ----------------------
●● Subsidies: A direct pecuniary aid furnished by a government to a private
industrial undertaking, a charity organisation, or the like. ----------------------
●● Sectoral: A section or zone, as of a city ----------------------
●● Consensus: Majority of opinion: The consensus of the group was that
----------------------
they should meet twice a month.
●● Intransigent: Refusing to agree or compromise; uncompromising; ----------------------
inflexible.
----------------------
●● Legitimacy: Lawfulness by virtue of being authorised or in accordance
with law. ----------------------
●● Tariffs: A list or system of duties imposed by a government on imported ----------------------
or exported goods.
●● Quantum: Quantity or amount: the least quantum of evidence. ----------------------
●● Persistent: Persisting, especially in spite of opposition, obstacles, ----------------------

discouragement, etc.; persevering: a most annoyingly persistent young
man. ----------------------
●● Monopolies: Exclusive control of a commodity or service in a particular ----------------------
market, or a control that makes possible the manipulation of prices.
----------------------
●● Cartels: A combination of independent business organisations formed to
regulate production, pricing, and marketing of goods by the members. ----------------------
●● Hitherto: Up to this time; until now: a fact hitherto unknown ----------------------
●● Concessional: Something conceded by a government or a controlling
authority, as a grant of land, a privilege, or a franchise. ----------------------
●● Fluctuation: Continual change from one point or condition to another ----------------------
----------------------
----------------------
1. ‘The laws governing International trade are considered to be different
from those of Domestic Trade’. Why? ----------------------
2. Explain Export Import policy of our government. ----------------------
3. Enumerate the limitations of Comparative Cost Theory.
----------------------
4. Why tariffs on imports are advocated in states?
----------------------
5. Explain the functions of Export Credit Guarantee Corporation.
6. Briefly explain the Export Promotion Measures taken by the government ----------------------
in the recent years. ----------------------
----------------------

---------------------- 1. False
----------------------
----------------------
1. True
---------------------- 1. Export production is a necessary pre-condition for export expansion.
----------------------
Suggested Reading
----------------------
1. Allen, Roy George Douglas, J. Edward Ely. International trade statistics.
---------------------- 2. Baker, James Calvin. Financing International Trade.
---------------------- 3. Choi, Eun Kwan, James Harrigan. Handbook of International Trade.
---------------------- 4. Desai, Rajiv. Indian Business Culture: An Insider’s Guide.
5. Fox, William F. International Commercial Agreements.
----------------------
6. Grimwade, Nigel. International Trade Policy: A Contemporary Analysis.
----------------------
7. The Indian Year Book of International Affairs. University of Madras.
---------------------- 8.
Jain, Padam Kumar. Export Marketing of Indian Goods: Problems,
---------------------- Procedure, and Prospects.
9. Kindleberger, Charles Poor. International Economics.
----------------------
10. Krugman, Paul R. Rethinking International Trade.
----------------------
11. Manoharan, V.M. Indian Export Processing Zones and CEPZ.
---------------------- 12. Stewart, Charles Frank, George B. Simmons. A Bibliography of
International Business.
----------------------
13. Subrahmanian, Kalarickal Kumaran, P. Mohanan Pillai. Multinationals
---------------------- and Indian Export: AStudy of Foreign Collaboration and ...
---------------------- 14.
Suri, R.K., J.K. Budhiraja & Namita Rajput. A Text Book of I.S.C.
Economics Vol-II.
----------------------
15. Thomspon, Thomas. Clegg’s International Directory of the World’s Book
---------------------- Trade.
---------------------- 16.
Wheeler, Lora Jeanne. International Business and Foreign Trade:
Information Sources.
----------------------

Marketing Communication
UNIT
13
Structure:
13.1 Introduction
13.2 Communication Theory
13.3 Understanding How Consumers Process Information
13.4 Communication Strategy
13.5 Rational of Advertising Expenditure
13.6 Advertising Budget
13.7 Ethics in Advertising
Case Study
Summary
Key Words
Suggested Reading
Marketing Communication 215

Notes
Objectives
----------------------
----------------------
• Explain what marketing communication is
----------------------
• Explain types of Communication.
---------------------- • Discuss ethics in Communication.
---------------------- • State strategies of Communication.
----------------------
13.1 INTRODUCTION
----------------------
---------------------- Marketing communications (or marcom) are messages and related media
used to communicate with a market. Those who practice advertising, branding,
---------------------- direct marketing, graphic design, marketing, packaging, promotion, publicity,
sponsorship, public relations, sales, sales promotion and online marketing are
---------------------- termed marketing communicators, marketing communication managers, or
---------------------- more briefly as marcom managers.
Traditionally, marketing communication practitioners focus on the
---------------------- creation and execution of printed marketing collateral; however, academic
---------------------- and professional research developed the practice to use strategic elements of
branding and marketing in order to ensure consistency of message delivery
---------------------- throughout an organisation. Many trends in business can be attributed to
marketing communication; for example: the transition from customer service to
---------------------- customer relations, and the transition from human resources to human solutions.
---------------------- In branding, opportunities to contact stakeholders are called brand touch points
(or points of contact). Marketing communication is concerned with the general
---------------------- behaviour of an organisation and the perceptions of the organisation that are
promoted to stakeholders through these touch points.
----------------------
Integrated marketing communication presents aspiration for companies
---------------------- to develop an optimal combination of communication elements in order to
maximise effects and minimise losses (defined as investment which did not
---------------------- result in goal achievement).
---------------------- Marketing communications is focused on product/produce/service as
opposed to corporate communications where the focus of communications
----------------------
work is the company/enterprise itself. Marketing communications is primarily
---------------------- concerned with demand generation, product/ produce/service positioning
while corporate communications deal with issue management, mergers and
---------------------- acquisitions, litigation etc.
----------------------
13.2 COMMUNICATION THEORY
----------------------
Man has forever fought against the forces of entropy, working very
---------------------- diligently at creating order and meaning, dissecting and perusing until order is

achieved. For civilisation, this has been important. It has lent the world many Notes
fascinating theories about our surroundings and the effect human beings can
have. As order driven beings, we seek to stretch and apply knowledge gained in ----------------------
all aspects of life to situations and experiences very different from the origin of
knowledge. It is through the stretching and manipulating of old thought that new ----------------------
insights are made and new psychological mountains are tackled. It is through ----------------------
this stretching and manipulating of one socio-political based theory that the field
of Advertising has defined some of its capabilities and constraints in the area of ----------------------
mass communication. This theory involves the two-step flow of communication.
----------------------
Development of the Two-step Flow of Communication Theory
----------------------
As with most theories now applied to Advertising, the two-step flow
of communication was first identified in a field somewhat removed from ----------------------
communications-sociology. In 1948, Paul Lazarsfeld, Bernard Berelson, and
Hazel Gaudet published ‘The People’s Choice’, a paper analysing the voter’s ----------------------
decision-making processes during a 1940 presidential election campaign. The
----------------------
study revealed evidence suggesting that the flow of mass communication is less
direct than previously supposed. Although the ability of mass media to reach a ----------------------
large audience, and in this case persuade individuals in one direction or another,
had been a topic of much research since the 1920’s, it was not until the People’s ----------------------
Choice was published that the society really began to understand the dynamics
----------------------
of the media-audience relationship. The study suggested that communication
from the mass media first reaches ‘opinion leaders’ who filter the information ----------------------
they gather to their associates, with whom they are influential. Previous theories
assumed that media directly reached the target of the information. For the ----------------------
theorists, the opinion leader theory proved an interesting discovery considering
----------------------
the relationship between media and its target was not the focus of the research,
but instead a small aspect of the study. ----------------------
Lazarsfeld et al suggested that “ideas often flow from radio and print to
----------------------
the opinion leaders and from them to the less active sections of the population.”
People tend to be much more affected in their decision making process by face ----------------------
to face encounters with influential peers than by the mass media (Lazarsfeld,
Menzel, 1963). As Weiss described in his 1969 chapter on functional theory, ----------------------
“Media content can be a determining influence… What is rejected is any
----------------------
conception that construes media experiences as alone sufficient for a wide
variety of effects.” The other piece in the communication process is the opinion ----------------------
leader with which the media information is discussed.
----------------------
The studies by Lazarsfeld and his associates sparked interest in the exact
qualities and characteristics that define the opinion leader. Is an opinion leader ----------------------
influential in all cases, on all topics? Or is the influence of an opinion leader
constrained to certain topics? How does an opinion leader come to be influential? ----------------------
The Opinion Leaders ----------------------
Who are they? How have they come to be defined? ----------------------
A study by Robert Merton revealed that opinion leadership is not a general
characteristic of a person, but rather limited to specific issues. Individuals, who ----------------------

Notes act as opinion leaders on one issue, may not be considered influential with regards
to other issues (Merton, 1949). A later study directed by Lazarsfeld and Katz
---------------------- further investigated the characteristics of opinion leaders. This study confirmed
the earlier assertions that personal influence seems more important in decision
---------------------- making than media. Again, influential individuals seem constrained in their
---------------------- opinion leading to particular topics, non-overlapping among the individuals.
The opinion leaders seem evenly distributed among the social, economical, and
---------------------- educational levels within their community, but very similar in these areas to
those with whom they had influence.
----------------------
Katz and Lazarsfeld did not identify any particular traits amongst opinion
---------------------- leaders that stand out. The traits that characterise each of the opinion leaders
in their niche did have things in common, though. For one thing, the opinion
----------------------
leaders were identified as having the strongest interest in their particular niche.
---------------------- They hold positions within their community affording them special competence
in their particular niches. They are generally gregarious, sociable individuals.
---------------------- Finally, they had/have contact with relevant information supplied from outside
their immediate circle. Interestingly enough, Katz and Lazarsfeld observed
----------------------
that the opinion leaders receive a disproportionate amount of their external
---------------------- information from media appropriate to their niche.
Criticisms
----------------------
Although the theory of indirect flow of information from media to the target
---------------------- was quickly adopted, the original study performed by Lazarsfeld, Berelson, and
Gaudet was not. It had a few faults. The panel method by which they attempted
----------------------
to better understand the influences reaching a voter was unfaulted. It very
---------------------- effectively allowed the researchers to notice changes in a voter’s feelings almost
immediately. The resulting unit of change was an objective measurement that
---------------------- could easily be recorded and compared. The faults lie in the manner with which
the researchers addressed the flow of influences.
----------------------
Since the research was not designed to specifically test the flow of
---------------------- influence, the experiment was decidedly lacking in explanations. The first
---------------------- problem concerning the findings of the study were that the data had to be
collected in a random sample, but subjects in a random sample can only speak
---------------------- for themselves. For these reasons, each person could only say whether or not
they considered his/herself an advice giver. Lazarsfeld and his associates in the
---------------------- 1940 election study were unable to determine the specific flow of influence.
---------------------- They determined there were a number of opinion leaders spread throughout
the socio-economic groups; however, these leaders were not directly linked to
---------------------- particular groups within the socio-economic levels.
---------------------- Even within studies specifically designed to determine who opinion

leaders are and how they are different from the average populace, there have
---------------------- been problems born from experimental design. “The criticisms of the concept
of opinion leaders has focused mainly on its methodological deficiencies
---------------------- (Weimann, 1991).” As Weimann suggested in his 1989 study of pervious
---------------------- research, much of the design problems involved determining the opinion leaders

while studying the flow of information. There seemed to be too many factors Notes
to control. Despite the difficulties in qualifying the influentials, the theory of a
group of individuals that filter the flow of media information has lived on. ----------------------
Praises and Support ----------------------
Although the empirical methods behind the two-step flow of
----------------------
communication were not perfect, the theory did provide a very believable
explanation for information flow. The opinion leaders do not replace media, but ----------------------
rather guide discussions of media. Brosius explains the benefits of the opinion
leader theory well in his 1996 study of agenda setting, “The opinion leaders ----------------------
should not be regarded as replacing the role of interpersonal networks but, in
----------------------
fact, as reemphasising the role of the group and interpersonal contacts.”
Lazarsfeld and his associates detailed five characteristics of personal ----------------------
contact that give their theory more validity:
----------------------
●● Non-purposiveness/Casualness - One must have a reason for tuning into
a political speech on television, but political conversations can just ‘pop- ----------------------
up’. In this situation, the people are less likely to have their defenses up in ----------------------
preparation; they are more likely open to the conversation.
●● Flexibility to counter resistance - In a conversation, there is always ----------------------
opportunity to counter any resistance. This is not so in media, a one sided
----------------------
form of communication.
●● Trust - Personal contact carries more trust than media. As people interact, ----------------------
they are able to reach the others through body language and vocal cues to
----------------------
judge the honesty of the person in the discussion. Newspaper and radio
do not offer these cues. ----------------------
●● Persuasion without Conviction - The formal media is forced to persuade
----------------------
or change opinions. In personal communication, sometimes friendly
insistence can cause action without affecting any comprehension of the ----------------------
issues.
----------------------
Menzel introduced another strong point in favour of the two-step flow
of information theory. First, there are an abundance of information channels ----------------------
‘choked’ with all types of journals, conferences, and commercial messages.
These are distracting and confusing to their target. With the barrage of ----------------------
information, human are flooded with daily, it is not hard to understand why
----------------------
someone might turn to a peer for help evaluating all of it.
Applications of the Theory ----------------------
To those who claim that there are no applications of a socio-political ----------------------
theory in advertising, exhibit A is the barrage of articles written daily on the very
subject. No longer does the advertising industry doubt the existence or qualities of ----------------------
influentials, as they are most commonly referred to today. Instead, the discussion ----------------------
revolves around effectively targeting messages to reach these influentials.
For fifty years, the research organisation Roper has considered the group ----------------------
of ‘influentials’ important enough to track. Regularly, reports and studies are ----------------------

Notes performed in an attempt to unlock the secret to reaching these influentials.
Who are they? What has the term ‘influential’ come to describe? According to
---------------------- Diane Crispell, these people are the ‘thought leaders’ and ‘pioneer consumers’.
‘Influentials are better educated and more affluent than the average American,
---------------------- but it is their interest in the world around them and their belief that they can
---------------------- make a difference that makes them influential (Crispell, 1989).’
The influentials today seem to be isolated in the upper class. They are the
----------------------
trend-setters. It is this group that is first to adopt new technology, and remains
---------------------- on the leading edge of trends (Poltrack, 1985). This is the group that advertising
attempts to reach. Daily articles are published on maximising the market by
---------------------- reaching these influentials. The idea remains that the most efficient media is
word-of-mouth, and it is by reaching the influentials with other forms of media
----------------------
that this word-of-mouth is generated. It seems the opinion leaders of yesterday
---------------------- have been overlooked for the smaller subset of influentials.
---------------------- 13.3 UNDERSTANDING HOW CONSUMERS PROCESS

---------------------- INFORMATION
---------------------- A key factor in successfully marketing new/existing products or
implementing a product extension is a thorough understanding of the motivation,
---------------------- learning, memory, and decision processes that influence consumers purchasing
behaviour. Consumer purchasing behaviour theories have found their way into
----------------------
managerial decision making to help companies more effectively develop and
---------------------- launch new products, segment the market, determine market entrance and in
brand management.
----------------------
Therefore, a better understanding of how consumers decide what to
---------------------- purchase is critical to the success of a product. There are numerous theories
and models describing the consumer purchasing decision process. The basic
---------------------- concept behind these theories and models are similar.
---------------------- Five steps describing the consumer purchase decision are given below followed
by a brief description:
----------------------
●● Problem Recognition
---------------------- ●● Information Search
---------------------- ●● Evaluation of Criteria
---------------------- ●● Purchase Decision

●● Post Purchase Evaluation
----------------------
Problem recognition
---------------------- It is simply the awareness of a need. The need may be perceived or real.
---------------------- The problem recognition process occurs every time consumers decide they
need something, whether it is toilet paper or a new home. This is the first and
---------------------- most basic step in the purchase decision process. Marketers can effectively
initiate consumers’ awareness of a need with the right advertising campaign.
----------------------

For instance, the concession advertising prior to the start of a feature movie is Notes
geared toward, making movie goers aware that they ‘need’ a drink and a snack.
----------------------
Information search
It is the process where consumers gather information on a prospective ----------------------
product. Consumers may rely on their past experiences, information recall,
----------------------
friends and family, publications, the media and the company to provide them
with information on the product being considered. The extent of the information ----------------------
search is typically related to the cost of the product and the consumer’s prior
knowledge and experience with the product and/or product category. This is ----------------------
the process where the consumer will develop their purchase set, or group of
----------------------
products that they will consider for purchasing. If a consumer is considering
the purchase of a pick¬up truck, at this stage they will collect information and ----------------------
research automobile manufacturers and their trucks. However, the information
search may be less extensive when the consumer considers purchasing less- ----------------------
expensive or daily-use items.
----------------------
Marketers can significantly impact the decision process by providing
product information. Detailed product information, available product features/ ----------------------
attributes and benefits may satisfy potential consumers need for information.
----------------------
Marketing at this step allows companies to ‘toot their own horn’ to a degree
and explain the advantages of their product. In some instances, companies ----------------------
compare their product to competing products to help the consumer realise
that their product is clearly superior to its competitors. One consideration is ----------------------
that comparison information may be misinterpreted or may confuse potential
----------------------
consumers. If this happens, the potential consumer might mistake the competing
product as having the advantage over the product being marketed. ----------------------
Evaluation of criteria
----------------------
Evaluation of criteria is the process where consumers determine what
features they would prefer. Consumers evaluate and assign a value to various ----------------------
product features and attributes. Think about purchasing an automobile. There
----------------------
are numerous features that can be added or removed from an automobile. The
consumer decides on what features they desire. As there is generally a cost ----------------------
associated with the various features, consumers have to rank the features and
decide which ones are most important to them. If the consumer is not satisfied ----------------------
with the selection or the evaluation of the product criteria, they will revert back to
----------------------
the information search process. Again, marketers have an opportunity to supply
information and tout the advantages of its product’s features and attributes. ----------------------
Detailed feature and attribute descriptions and benefits allow consumers to
thoroughly evaluate the product as well as allow the consumer to think about ----------------------
trade-off between competing products.
----------------------
Purchase decision
----------------------
Purchase decision occurs when the consumer actually makes the purchase.
It includes the product, method of payment, package, location of purchase and ----------------------
all other factors that are associated with purchasing the product. This step is
directly influenced by marketers. If the marketing campaign was effective, ----------------------

Notes consumers purchase the product. Marketers have an impact on this portion of
the process by their interaction with consumers. Advertising directly impacts
---------------------- the purchase decision by stimulating consumers’ awareness of a need, providing
relevant product information and helping them evaluate the product and derive
----------------------
that this is their best purchase option.
---------------------- The following list provides the four types of purchasing behaviour which
---------------------- are ranked according to the amount of research or information required in the
purchase decision.
----------------------
●● Impulse purchasing generally occurs spontaneously without conscious
---------------------- planning. Retail establishments estimate that approximately 60% of all
sales are impulse purchases. Impulse purchases generally involve the
---------------------- first step of the purchasing behaviour process - problem recognition or
---------------------- a ‘need’. Consumers realise they have some real or perceived need for a
product and make a purchase.
---------------------- ●● Routine purchases involve purchasing frequently-bought items (i.e. paper
---------------------- towels, soft drinks, milk) and are purchased almost automatically. These
products are generally considered to be low-cost items and require very
---------------------- little research and decision effort. Routine purchases do not require lots of
thought or research and involve the first, and to a degree, the second step
----------------------
of the purchasing behaviour process. Again, these purchases are almost
---------------------- automatic and require little thought.
---------------------- ●● Limited decision making purchases are thought of as items that are
purchased occasionally. The purchase of these items may require a
---------------------- limited amount of research if the purchase involves an unfamiliar brand
or product category. These types of purchases may require a moderate
----------------------
amount of research and information gathering prior to making a purchase
---------------------- decision - steps one to three.
●● Extensive decision making purchases require large amounts of information
----------------------
gathering and research. The purchase of a ‘big-ticket item’ like electronic
---------------------- products, automobiles or homes would be an extensive decision making
purchase. Consumers involved in an extensive decision making purchase
---------------------- go through all five of the aforementioned purchasing behaviour steps.
---------------------- Post purchase evaluation refers to the consumers purchase decision
afterthoughts. At this stage, the consumer determines their level of satisfaction
----------------------
with the product and questions themselves as to whether they have made the right
---------------------- purchase decision. Marketers can lessen their anxieties by offering warrantees,
money-back guarantees, after-sales support and generous return policies.
----------------------
Understanding the principles of the consumer decision process, allows
---------------------- marketers to gain insight into the process a consumer undertakes when purchasing
their products. It is also important to understand that the actual purchasing
---------------------- behaviour process may not necessarily include all five steps depending on the
---------------------- product being purchased.

Additional Factors Influencing Consumers Purchase Decision Notes
It is not enough to understand how consumers arrive at their purchase
decision because there are personal, psychological and social factors that ----------------------
influence the purchase decision. A thorough understanding of these factors is ----------------------
essential to effectively market products.
----------------------
Personal factors - Personal factors (demographic variables) significantly
impact the consumer purchasing process. Men and women have needs for ----------------------
different products that may or may not cross gender lines. Teenagers may
purchase a product for different reasons than older people. Also, it is important ----------------------
to determine who buys the product and who is actually going to be the end user.
----------------------
One household member may be responsible for purchasing household items.
However, a different member of the household may be the only person actually ----------------------
using the product.
----------------------
Psychological factors - There are four psychological factors impacting
the purchasing decision. These are motivation, perception, learning beliefs and ----------------------
attitudes. First, it is important to determine the motive for making the purchase.
Motives are based on Maslow’s hierarchy of needs starting with physiological ----------------------
and ending with self actualisation. Is the product being bought to satisfy a basic
----------------------
need like nourishment or is it being purchased to show one’s level of success?
Motives are often subconsciously driven and therefore measuring them is ----------------------
difficult.
----------------------
Secondly, consumers’ perception impacts their purchasing decision.
Perception has a significant role on consumers’ information search and how the ----------------------
information is interpreted. Consumers choose what information they perceive
as important/relevant and discard the remaining. Therefore, they are more likely ----------------------
to remember information that supports their existing beliefs and disregard
----------------------
information that does not.
Attitudes are derived through experiences, interactions, personality ----------------------
and lifestyles. Consumer personalities are quite varied; no two people are the ----------------------
same. Personalities are thought of as internal traits derived from hereditary
and personal experience that make individuals unique. Marketers try to match ----------------------
their products’ image to the personalities (or perceived personalities) of their
target market, thus creating a means of allowing consumers to identify with the ----------------------
product. ----------------------
Social factors - Social factors play an important role in consumers’
purchasing decisions. Opinion leaders (i.e. sport stars, musicians, politicians), ----------------------
families, reference groups, social class and culture all impact a consumers’ ----------------------
purchasing decision. Consumers may try to emulate famous people through
purchasing certain products. Reference groups can be thought of as any group ----------------------
that has an influence, positive or negative, on an individual. Social class impacts
purchasing decision directly and indirectly. Annual household income is used ----------------------
to define social status and also places limits on household spending. Culture ----------------------
impacts the purchasing decision process in that the values, ideas and attitudes
of people are shaped by the culture in which they reside. ----------------------

Notes
Activity 1
----------------------
---------------------- Explain additional factors that influence Consumers Purchase Decision.
----------------------
13.4 COMMUNICATION STRATEGY
----------------------
In military terminology, ‘strategy’ means planning the movements of
----------------------
armed forced for fighting and defeating enemy. “Strategy is an ingenious design
---------------------- for achieving an end”. In a competitive market, a fight is going on among the
producers to capture the market. They all use the weapon of advertisement.
---------------------- The skill with which they use this weapon determines their success in the
competition. An advertiser has to decide and plan how, where and when to use
----------------------
the weapon of Communication. Communication strategy, therefore, is planning
---------------------- advertisement and advertising. It is really a decision-making process. There
are numerous decision alternatives. Each decision is a choice of one of the
---------------------- alternatives which is called a strategy. A creative strategist can find new ways
of securing an appeal to his product in the mind of the consumer through an
----------------------
effective advertisement strategy. The decision to advise itself is a strategy.
---------------------- While formulating the communication strategy, the advertiser must
give due consideration to the advertisability of the product or service to be
----------------------
advertised. A product has advertisability if its demand can be increased by
---------------------- advertisements. Soaps, textiles of higher qualities, fridge, two wheelers etc.
are examples. Basic necessities like air and water have least advertisability as
---------------------- long as they are freely available and their consumption cannot be increased.
Unbranded items like vegetables, pulses, etc. do not have advertisability value,
----------------------
because the product of one manufacturer cannot be differentiated from that
---------------------- of another. Advertisability is the least in the case of items which are used to
satisfy a bare need. For example, coffin, common salt, etc. The demand for
---------------------- such things cannot be increased beyond a certain level by giving more and more
advertisement. If any increase in demand is felt, it is due to sharing of market
----------------------
already enjoyed by competitors e.g. Tata Salt, and Sprinkler Salt. The advertiser
---------------------- also should remember that advertisement cannot strongly hold attitudes and
therefore, it is meaningless to advertise certain products among certain people.
---------------------- For example, the items marketed by Meat Products of India Ltd., like pork bits,
beef, pork sausage etc. have least advertisability among vegetarians.
----------------------
Divisions of Advertising Strategy
----------------------
Advertising strategy includes:
---------------------- A. Copy Strategy
---------------------- B. Time Strategy
---------------------- C. Media Strategy
D. Budget Strategy
----------------------

A. Copy Strategy Notes
Copy in advertisement is the selling message. It should communicate the
----------------------
advantages of the product memorably and convincingly. The advertiser has to
decide what message is to be communicated and in what form it should be ----------------------
communicated. A decision on these points becomes a copy strategy. In other
words, a decision about the content and shape of an advertisement is a copy ----------------------
strategy.
----------------------
The copy strategy includes the layout and substance of the copy. These
elements of execution of copy strategy have a decisive role to play in a successful ----------------------
advertisement. A poor design or layout can destroy a good advertisement copy.
The product which is advertised must get a prominent position in the copy. ----------------------
Pictures used and illustrations given, all should direct the reader’s attention to ----------------------
the object advertised. A creative copy and execution will penetrate perceptual
screen of individuals. ----------------------
In order to increase the effectiveness of advertisement, the market may ----------------------
be segmented according to consumer benefits, e.g. in toothpaste market, four
benefit segments can be identified. They are: sensory (children), social (young ----------------------
people), worrisome (large families) and independent (economic sense). The
market for talcum powder, soap, etc. can also be segmented like this. The ----------------------
process of segmenting the total market according to benefit to different groups ----------------------
of people is called benefit segmentation. The copy strategy should be different
for each segment. Preparation of advertisement copy separately for each benefit ----------------------
segment is called ‘benefit copy segmentation.’ ‘Benefit copy segmentation
improves the communication with target groups, thereby increasing the impact ----------------------
of advertising two or three fold.’ The benefit copy informs each group the benefit ----------------------
it can receive from the product. This message differentiation is as important
as product differentiation. The copy-writer develops a creative insight for ----------------------
effective benefit segmentation from lifestyle research, group interviews, brain-
storming and synetics. “An effective copy will focus attention on the needs of ----------------------
the buyer without drawing attention to itself.” For instance, if the advertisement ----------------------
is humorous and does not focus attention on the product, it may fail to sell
the product as the consumer may remember the humour and not the product. ----------------------
Therefore, while writing the copy, the copy-writer should not forget to support
the copy with the product facts. ----------------------
B. Time Strategy ----------------------
In military operation, the time of starting the operation is very important. ----------------------
It has great influence on the attainment of the aim with a minimum loss of men
and materials. For instance, the ‘Operation Blue Star’ was started at 2 a.m. This ----------------------
particular time was intentionally selected considering the strength of enemy,
the nature of the place where they were hiding, etc. We have seen earlier that ----------------------
every businessman is fighting against his competitors to capture or extend the ----------------------
market for his goods and services. The technique of advertisement is used to
defeat the competitors. Experience has proved that advertisement at all times ----------------------
is not fruitful. For instance, advertisement by textile dealers just before the
festivals like Onam, X-mas, etc. have been found to be more effective than ----------------------

Notes advertisements in the off-season. Therefore, to obtain maximum benefits, the
right decision should be taken about the time and frequency of advertisement.
---------------------- This decision in advertisement is called the time strategy.
---------------------- While shaping the advertising strategy, the strategist must consider certain
timing factors such as seasonal demand or the length of time within which the
---------------------- customer will react. He has to decide whether the advertisement should appear
in the media in a short period of ‘time as a burst’ or ‘pulse’ of effort, or whether
----------------------
it should be spaced over a long period of time. The former is called ‘pulse
---------------------- strategy’ and the latter ‘space strategy’. Research has proved that pulse strategy
can produce greater awareness where initial levels of brand awareness are low.
----------------------
Another time factor in advertising is the consumer’s usual purchase
---------------------- cycle. The longer the purchase cycle, the larger will be the tendency for pulse
advertisement. The strategy may be used for products that have a high brand
---------------------- loyalty and products which are purchased after lengthy deliberation. On the
other hand, steady and high frequency advertising must be adopted for products
----------------------
that have a short purchase cycle, low brand loyalty and those which are bought
---------------------- on impulse.
Decision about the frequency of message duplication to the same audience
----------------------
is another problem related to timing strategy. Introduction of new products or
---------------------- correction of a wrong image may require duplication of the message many
times. In other cases, duplication can be reduced.
----------------------
The strategist must consider different combinations of media and vehicle
---------------------- in order to attain the optimum reach and frequency. “The total number of
exposures generated by a media strategy is determined by the percentage of
---------------------- market that is reached by the strategy (known as reach) and the average number
---------------------- of times that each prospect is exposed to the message (known as frequency).” If
the budget for advertisement is fixed, the media strategist must keep a balance
---------------------- between reach and frequency, because an increase in one will cause a decrease
in the other.
----------------------
Another consideration that comes up in time strategy is the time of media
---------------------- booking. In television and radio advertisements, as the number of transmitters is
limited, the programme must be booked sufficiently in advance as mechanical
---------------------- requirements in printing also create difficulties. If an advertisement in four
---------------------- colours is to be given, it will take more time to prepare the colour negatives.
Due to of these mechanical or technical difficulties, the media should be booked
---------------------- sufficiently early or the strategy should be changed.
---------------------- C. Media Strategy
Media are the means used for communicating the message to consumers;
----------------------
radio, film, newspapers, magazines, television, etc. are examples of
---------------------- advertisement media. Media strategy is one of the complicated decisions of
modern marketing. It is an art as well as a science. There are a large number
---------------------- of media and media combinations. Each medium has certain disadvantages. A
media strategist has to skillfully choose from among the various combinations
----------------------
of media. Media strategy gives shape to the selection process. Each decision

will be a strategy. In simple terms, media strategy is the art and science of Notes
selecting appropriate media for giving advertisements.
----------------------
The basic task of a media strategist is to communicate the message to the
target audience at the lowest media cost. Through demand analysis, the target ----------------------
audience can be determined. Once they are identified, the media strategist must
consider the percentage of the audience to be communicated to, the frequency ----------------------
with which communication is to be given and the media which are to be used
----------------------
- budget limitations, media efficiency, competitors’ media strategy, nature of
consumer coverage of the media, message wear out, and advertisement copy ----------------------
must be considered while choosing the media. These are the factors influencing
the selection of media which are explained under media selection. ----------------------
Media Selection: A large number of advertising media are available for ----------------------
advertising a product or service. Newspapers, TV, Radio, etc. are examples.
Selection a suitable medium for advertisement is one of the important decisions ----------------------
in advertisement strategy. The considerations that influence the selection are as
----------------------
follows:
Objectives of Advertisement: The choice of media will be influenced by ----------------------
the purpose for which advertisement is to be given. For instance, if the purpose
----------------------
of advertisement is to induce action within a day or two, a newspaper will be
a better medium than a monthly or weekly magazine. Bit notices, radio, and ----------------------
loudspeaker announcements also are effective while the rest of the media are
not so much effective. Similarly, when the advertiser wants to motivate a class ----------------------
of people to buy his products, press media will be effective only if they are
----------------------
literate.
Cost of Media: The cost of advertisement media influences the selection ----------------------
of media. Some media like television, radio, etc., are very costly while bit ----------------------
notices, posters, etc. are cheap. The cost of press media varies according to its
reputation and circulation. Advertisement in reputed magazines like Reader’s ----------------------
Digest, Illustrated Weekly and the like costs more than in local magazines like
Malayala Manorama, Mathru Bhanu, etc. The advertiser chooses the media ----------------------
according to the budget allocation. ----------------------
Circulation of the Media: The circulation of the media should match
with the extent of market. The selected media must be able to carry the matter ----------------------
to the whole area of the present and probable market, e.g., if a product has a ----------------------
national market. Advertisement in a local daily will produce only a little benefit.
In such a case, a medium that has national coverage should be selected. ----------------------
Requirement of the Message: Sometimes the message to be advertised ----------------------
may require pictorial presentation to make it more attractive. In such cases,
newspapers, magazines, film or television will be better than radio. ----------------------
Time and Location of Buying Decision: The advertisement should reach ----------------------
the prospective buyers at the time and place they make their buying decisions.
For instance, various, textile dealers in towns give large-scale advertisement ----------------------
during festival seasons like Onam, Diwali, etc. offering maximum discount.
----------------------
They use outdoor banners and posters to persuade consumers. Such media will

Notes attract people who come to the town for buying textiles, without decision from
which shop they should buy.
----------------------
The Type of People: The type of people for whom advertisement is made
---------------------- influences the selection of media. To take an example, if the advertisement is
meant for ordinary working-class people in Kerala, Malayalam dailies produce
---------------------- better results than English dailies. If the people are illiterate, film advertisement
---------------------- or loudspeaker advertisement can attract more people.
Media adopted by Competitors: Media selection also will be influenced
----------------------
by the media used by competitors. Now in Kerala, radio advertisement is
---------------------- becoming popular. When one dealer advertises through radio, other competing
dealers also are induced to use the same medium to advertise their products.
---------------------- Example, textile dealers.
---------------------- Types of Advertisement Media
---------------------- There are different advertisement media. They can be classified into
Indoor, Outdoor, Postal, Display and Special media. Each division has several
---------------------- sub-divisions.
---------------------- Indoor Media
---------------------- These are media which take the message to the consumers when they
---------------------- are inside a house or building. Newspapers, magazines, television, film, radio,
etc. are examples of indoor advertising media. Each one of these has different
---------------------- merits and demerits.
---------------------- Newspaper: Newspapers have secured the most important position among
media of advertisement. Effectiveness of newspaper advertisement depends on
---------------------- the selection of a proper newspaper, its circulation, time to the issue, selection
of appropriate space, etc.
----------------------
Outdoor Media
----------------------
Outdoor or ‘mural’ advertising is the cheapest and perhaps the oldest form
---------------------- of advertising. It is still popular even today. Posters, electric signs, neon signs,
---------------------- car cards, sky writing and sky advertisement, painted display, sandwichmen,
banners and the like are examples of outdoor advertisement media. When this
---------------------- media is used, the message advertised is exhibited, painted or displayed in busy
centres of the town or places where people crowd or pass by. Posters, banners,
---------------------- electric and neon signs are the very commonly used media. Car card is used in
---------------------- vehicles like cars, buses, trains, etc. to advertise goods and services. For sky
writing, smoke is used. Balloons and searchlights used by circus companies
---------------------- for advertisement are example of sky advertisement. Sandwichmen are people
wearing special example of sky advertisement. Sandwichmen are people
---------------------- wearing special type of attractive dress and moving along the street selling
---------------------- goods. Their dress, talk, movements and expressions will attract everybody.
Outdoor advertisement may be painted (wall paintings) or printed and pasted to
---------------------- a large board. This medium is popular because of its advantages.

Display Media Notes
Display media include the means by which one can exhibit his goods.
----------------------
Display of goods in shop windows, lighted shelves, exhibitions, trade fairs, etc.
will attract the attention of the people who pass by. While an advertisement only ----------------------
can give an illustration of the product, a display can give a direct vision of the
product. An attractive display may induce people to enter the shop, ask the price ----------------------
and buy the product.
----------------------
There are different forms of display. They are as follows:
----------------------
Window Display: Window display means display of goods at shop
windows or in well-lighted shelves in front of the shop or at busy centres like ----------------------
the railway stations or the bus stand. The goods exhibited in shelves at railway
station and bus stands attract the attention of people. In order to attract the ----------------------
attention of the people, there must be sufficient space in the shelves to display
----------------------
goods and the arrangements of goods must be neat and beautiful. The display
needs changes at regular intervals to provide novelty. Attractive lighting, ----------------------
decoration, rotating stand etc. can be used to capture the attention of the people.
----------------------
Exhibitions: Exhibitions and trade fairs are two effective methods of
advertisement. There are local, national and international fairs and exhibitions. ----------------------
They provide the consumer with ample opportunities to see, study and
understand the features and performance of products. In trade exhibitions, the ----------------------
consumers can get a chance to see the products of competing manufacturers ----------------------
also. The manufacturers are getting a forum to display their goods, attract more
consumers and exploit them. ----------------------
Special Media ----------------------
Businessmen are using some special media for giving publicity to their
products and promoting sales. These are called ‘advertising specialities.’ They ----------------------
include a large number of items such as diaries, calendars, matches, pens, ----------------------
pencils, key-rings, knives, cigarette lighters, etc. These are given to consumers
as gifts. The name and address of the advertisers, his phone number, and a short ----------------------
sales message are imprinted on these items. As these are consumer’s items they
will always remind the consumers about the advertiser. As these advertisement ----------------------
specialities are given free of cost, there will be a natural obligation on the part ----------------------
of the consumer to buy some things from that shop which gives the items or to
keep his customership by giving such items. ----------------------
D. Budget Strategies ----------------------
Budget strategy means planning the spending pattern on advertisement
----------------------
by a business firm during a certain period. It determines how much fund should
be expended on advertisement. The outcome of this process is the advertising ----------------------
budget. A long period of short period budget may be prepared. If budget strategy
determines how much should be expended on advertisement, the other three ----------------------
strategies determine how and when the budgeted fund should be expended.
----------------------
There are two methods for determining advertising budget. They are (i)
Breakdown method and (ii) Build-up method. In the first method, the size of the ----------------------

Notes budget is determined and then the total is broken down into copy strategies and
media strategies. In the second method, the costs to execute different strategies
---------------------- are estimated and these costs are added to build up the total budget. The budget
strategy is a factor influencing the selection of advertising media and frequency
---------------------- of advertisement.
---------------------- Effectiveness of Advertisement
---------------------- Advertising is an endeavour through which a lot of money can be lost.
The effectiveness of advertisement should be measured to know whether the
---------------------- amount spent on advertising is resulting in increased sales.
---------------------- It is very difficult to measure the effectiveness of an advertisement. The
first problem is the inability to identify the result of any particular advertisement
---------------------- from the result of the entire campaign. Secondly, many advertisements do not
aim primarily at immediate increase in sales. For example, some advertisements
----------------------
are intended to create a good image for the company, while some others are
---------------------- meant to announce the new service policies. It is very difficult to measure the
effectiveness of these kinds of advertisements. The third difficulty is the non-
---------------------- availability of reliable information. In spite of these difficulties, advertisers
measure advertising effectiveness simply because they want some knowledge
----------------------
about it. To measure the effectiveness of advertisement, the goal of advertisement
---------------------- must be expressed in terms of magnitude and time, and it must be capable of
being measured.
----------------------
Even though several difficulties are faced in measuring the effectiveness
---------------------- of advertising, most marketers use various methods for testing advertisements.
These methods are intended to test the result at two stages in the advertising
---------------------- process: (1) to see whether the proposed advertising should be existing,
---------------------- advertising should be continued, modified or stopped.
Different methods are used for gathering data about advertisement
---------------------- effectiveness. They are
---------------------- (1) Survey method (2) Experimental method (3) Laboratory method (4)
Historical method (5) Keying method and (6) Recall test.
----------------------
Under the survey method, the advertiser conducts a survey for measuring
---------------------- the reader’s recall of magazine advertisement. Mail survey, telephone survey
and personal interview may be used to measure the effects of advertisement
----------------------
on brand awareness, brand choice, attitudes, probability of buying, and actual
---------------------- purchase. Sometimes, respondents are shown part of all of the previously run
advertisement. This is done to understand (a) whether the advertisement was
---------------------- read, or (b) what part of advertisement was remembered by the respondent, or
(c) whether the respondent, noticed and who sponsored the advertisement.
----------------------
1. Survey Method
----------------------
The principle lying under this test is that the larger the number of people
---------------------- who read the advertisement, the greater will be the number of people who will
act according to the intention of the advertiser. Sometimes, a panel of consumers
---------------------- is used to appraise an advertisement. In case of TV or radio advertisement,

a survey can be conducted to determine how many people saw or heard the Notes
advertisement. The principle behind this test is that the number of people who
buy the product varies proportionately with the number who watches or hears ----------------------
the programme.
----------------------
2. Experimental Method
----------------------
Under the experimental method, the cause and effect relationship
between advertising and change in the buyer is studied. For this purpose, an ----------------------
experimental design is prepared. The simplest design is a two - group design. Of
these one group is studied before the advertisement and the other is studied after ----------------------
the exposure. A comparison of the two results points out the effectiveness of
----------------------
advertisement. There are more complex designs which provide opportunities for
the use of variance analysis which will indicate the effectiveness of interactions ----------------------
such as colour and size as well as individual effects of colour of size.
----------------------
3. Laboratory Method
In advanced countries, laboratories are frequently used to measure the ----------------------
effectiveness of advertisement for a new product. This method is cheaper than ----------------------
test marketing. Another benefit of this method is that it keeps the new product
or advertising strategy secret while the product or strategy is being tested. ----------------------
The method of conducting laboratory test is as follows. The advertiser ----------------------
selects a number of prospective customers. They are the respondents. Their brand
awareness, prior purchase and use, brand-purchase intentions, demographic ----------------------
characteristics, etc. are measured. Then the participants are allowed to see
the advertisements for the test product and those of the competitors. They are ----------------------
allowed to buy from a simulated shop and are asked to rate the new product and ----------------------
the products of its competitors on the basis of selected benefits and attributes.
The data collected are fed into a computer model which will disclose the share ----------------------
of market at each possible level of awareness and the sales that the new product
may bring in. ----------------------
4. Historical Method ----------------------

Another method for testing effectiveness is analysing historical data. ----------------------
Recorded facts before and after the advertisement are compared to measure
the benefits of advertisement. For example, sale before and after advertisement ----------------------
may be compared. Keying of advertisement, econometric models, etc. are also
----------------------
used to measure advertising effectiveness.
5. Keying Method ----------------------
This is a technique used by advertisers to measure the effectiveness ----------------------
of advertisement and advertising media. The advertiser attaches a ‘key’ (a
request/card/form etc.) along with the advertisement or the product. In the ----------------------
advertisement, the prospective customers are requested to mention in the order ----------------------
the name of the paper/magazine or the source of information or to fill a card /
form and to return the same to the advertiser. From the information collected, ----------------------
the advertiser will be able to know which advertisement and advertising media
are more effective. ----------------------

Notes 6. Recall Test
The effectiveness of advertisements is measured by another test termed
----------------------
‘readership,’ ‘recognition,’ or ‘recall’ test. In this test, the respondents are
---------------------- shown a part of all of the previously run advertisements. By interviewing the
respondents, answers to questions such as (1) whether the respondent read the
---------------------- advertisement (2) what portions in the advertisement are obtained. These tests
are based on the theory: ‘The greater number of people who see, read, and
----------------------
remember an advertisement, the greater will be the number who does as the
---------------------- advertisement urges them.’ The effectiveness of various themes, advertisements
or elements is measured on the basis of the number of coupons or enquiries
---------------------- received in response to certain advertisements.
----------------------
----------------------

1. Decision about the frequency of message duplication to the same
----------------------
audience is another problem related to ____________.
---------------------- 2. Under the __________, the advertiser conducts a survey for measuring
---------------------- the reader’s recall of magazine advertisement.
----------------------
Activity 2
----------------------
---------------------- Explain different advertisement media with real life examples.
----------------------
13.5 RATIONAL OF ADVERTISING EXPENDITURE
----------------------
A product should possess the following opportunity factors to be
----------------------
advertised extensively:
---------------------- 1. Newness: A product needs heavy support in the market in the form
of advertisement and publicity at the introductory stage. The level of
----------------------
advertisement spending will therefore be very high at this stage. This level
---------------------- of spending falls progressively with the ageing of the product unless at a
later stage certain latent and hidden qualities are brought to light as a part
---------------------- of innovation in marketing through advertisement techniques. It is very
difficult to isolate and ascertain the return on investment in advertisement
----------------------
of such items.
---------------------- 2. Distinctive Features: If a product by its appearance, shape, quality, use
---------------------- and applicability in the market is unique and it can be easily identified from
among a group, advertisement expenditure will have a positive correlation
---------------------- with consumer response. In the absence of such qualities, products
closely resembling each other will get cross benefit of advertisement by
---------------------- one company, e.g. shoes, medicines, etc. This results in poor response

to advertisement expenditure of a particular company relatively to its Notes
position of moderate publicity.
----------------------
3. Absence of Price War: If rival products in a market are not engaged
in a price war, advertisement expenditure will be productive. Heavy ----------------------
expenditure on advertisement will result in price rise. A firm may incur
heavy expenditure on advertisement to occupy considerable portion of ----------------------
the market without a price hike at the introductory stage of the product.
----------------------
On the other hand, if rival firms resort to undercutting, the effect of
advertising expenditure is nullified. The phenomenon is predominant ----------------------
when the product concerned is uniform.
----------------------
4. Massive Basic Demand: If, due to a structural change in the economy,
a favourable condition is obtained creating a massive basic demand ----------------------
for the product, the different firm dealing in the product with brand
variation and separate trademarks will vie with one another to preempt ----------------------
the best part of the market through heavy advertisement expenditure. ----------------------
The marketing of TV sets in the years of 1984, 1985 and 1986 in India
are examples. With the introduction of more and more transmission ----------------------
stations, a massive basic demand existed in these years which could be
tapped through advertisement by Keltron, Weston, Solidaire, Dyanora, ----------------------
Onida and the like. ----------------------
5. Emotional Appeals: Some products are brought to the market by
----------------------
advertisement purely on the basis of emotional grounds. At Sabarimala
pilgrimage route, one could sell articles of devotion to Lord Ayyappa like ----------------------
books, pictures, lockets, chains, rings, etc., on emotional grounds. Even
private transport companies plying their tourist buses from various places ----------------------
to Sabarimal get pilgrims through this technique.
----------------------
6. Presence of Competition: Advertising creates demand. Heavy
competition means ingenious ways of appeal to consumers educating ----------------------
them on the uses of products. This process of knowledge creation makes ----------------------
the work of individual advertiser light and keeps his expenditure relatively
small compared to the position of absence of other advertisers. ----------------------
Introduction of a new brand or imparting information to potential ----------------------
customers on the new uses of an existing product are instances of constructive
advertising. The expenses on such advertisement can be productive only if the ----------------------
market is not vitiated by price disturbances. Cost considerations can exert little
----------------------
influence on combative advertisement, which a firm resorts to for counteracting
the strategies of competitors. We cannot consider any spending pattern for such a ----------------------
situation. However, as advertising is any paid form of non-personal presentation
of goods, services or ideas to a group, such presentation being openly sponsored ----------------------
by the advertiser, the result of advertising should justify the expenditure on it.
----------------------
Hence, the superstructure of spending decisions on advertising are built on the
bed-rocks of adequacy, media, markets and sales areas. Excess expenditure on ----------------------
advertising lead to wastage of resources and this would result in opportunities
being lost. ----------------------

Notes Allocation of expenditure to different media markets and sales areas based
on productivity of the unit of expenditure on each is a management problem.
---------------------- How much funds are to be allotted to support new products, how much for
the existing products, how much for innovation, fortification, whether a rapid
----------------------
skimming or a slow skimming would do or the like are matters of concern
---------------------- for the people who advertise and the marketing management. The concept of
budgetary control can be introduced in this field.
----------------------

----------------------
Fill in the blanks.
----------------------
1. Allocation of expenditure to different media markets and sales areas
---------------------- based _______________ on each is a management problem.
----------------------
---------------------- 13.6 ADVERTISEMENT BUDGET

---------------------- Advertisement budget is a ways and means plan to control the utilisation
of the total sum of money allocated to advertising during a financial period. The
---------------------- budget allocation on advertisement expenditure is classified into direct costs
---------------------- and overheads. Overheads are further classified into administrative expenses
and flexibility reserves.
----------------------
Direct Costs: This relates to the cost of producing the advertisement copy.
---------------------- In the case of a matter to be advertised through print media such as newspapers,
magazines, etc. the cost of production includes the printing charges and block-
---------------------- making. If it is through television, direct cost is the cost of the video tape
---------------------- preparation, including the cost of set and the expenses on artists, models, their
travelling expenses and other expenses incidental to the making of the same.
----------------------
Administrative Overheads: The maintenance cost of the advertisement
---------------------- department of the company, including the salary and allowances of the personnel
employed and the resources used by them, constitutes administrative expenses.
---------------------- The incidental expenses of the advertisement department such as payments
---------------------- made by them to outside agencies for market research, fees and commissions
paid to intermediaries also go to make this class of expenditure. Budget
---------------------- provision should, therefore, contain all costs of this nomenclature incidental to
the administration of the advertisement function.
----------------------
Flexibility Reserve: A reserve is kept in the advertisement budget to
---------------------- serve as a source of funds for meeting contingencies. Unforeseen situations
---------------------- demanding immediate expenditure which merits spending must be responded
to with immediate effect lest the firm should lose opportunities. Hence this
---------------------- provision in the budget.
----------------------

13.7 ETHICS IN ADVERTISING Notes
Today, an average person is exposed to hundreds of advertising messages ----------------------

through a variety of media. If the seller respects the buyer, then they must ----------------------
put forth the qualities of the product in an advertisement without under or
overestimating them and allow the consumer to make a rational and intelligent ----------------------
decision. There are cases where the advertiser reveals only facts favourable
to him, e.g. in the advertisement of medical products harmful side-effects are ----------------------
concealed. Similarly, advertisements may be used to misguide and cheat the ----------------------
consumers.
To crack down on and curb misleading and unethical advertising, a ----------------------
self-regulatory body, called Advertising Standards Council of India (ASCI) is ----------------------
formed. Again, in order to control the wordy war and to protect the consumers,
the government has formulated a code of ethics for advertising, particularly on ----------------------
TV and radio. The main rules of conduct are as follows:
----------------------
1. The advertising should be so designed as to conform to the laws of the
country. ----------------------
2. It should not offend morality, decency, and religious feelings of the ----------------------
people.
----------------------
3. No advertisement should be permitted:
a) Which derides any race, caste, colour, creed or nationality ----------------------
b) Which is against the objective principles or provision of the ----------------------
Constitution of India
----------------------
c) Which will lead people to crime or to promote disorder or violence
d) Which presents criminality as desirable or details thereof ----------------------
4. Advertisement by the following are not permitted. ----------------------

a) Money lenders ----------------------
b) Chit funds and saving schemes other than those conduced by ----------------------
recognised banks
c) Unlicensed employment services ----------------------
d) Fortune tellers or sooth-sayers etc. ----------------------

5. No advertisement shall contain reference to quality which is incapable of ----------------------
being established e.g. cure of baldness.
----------------------
6. There is a separate section in the code on advertising for children. It says
“No advertisement is allowed which leads children to believe that if they ----------------------
do not own the product advertised, they will be inferior in some way to
other children or that they are liable to be condemned or ridiculed for not ----------------------
owning it.”
----------------------
Very often the commercial advertisements would appear to violate these
codes. ----------------------

Notes
Case Study
----------------------
Internal Marketing Communications
----------------------
Abstract
---------------------- Marketing communications is traditionally thought of as organisations’
efforts to promote the services or products they offer to external clients and
----------------------
customers. In a multi-discipline engineering consultancy, with a variety
---------------------- of departments and divisions, it is equally important for each department to
effectively market themselves to one another. The goals of internal marketing
---------------------- are similar to those of external marketing, to increase visibility and awareness
of the services or product available, and increase sales or orders. By increasing
----------------------
knowledge and awareness of the services that a department offers, the
---------------------- department can help to ensure that opportunities are not missed out due to a
lack of awareness in other parts of the business
----------------------
Background and Key Features
---------------------- This case study looks at the efforts of one department within a multi-
---------------------- discipline consultancy to market itself within its own company. The case
study outlines the key reasons to increase the internal marketing efforts, the
---------------------- methods used and the ways in which the success or otherwise of the strategies
are measured. The case study also identifies how internal marketing, as well as
---------------------- improving the individual department’s performance can improve the success of
---------------------- the company as a whole.
The key features of the case study are the stages which the department
---------------------- goes through in order to implement marketing strategies.
---------------------- Firstly, there is the initial identification of a need to market to internal
groups or individuals. Secondly, the department must decide which individuals
---------------------- or groups are to be targeted. Thirdly, there is the discussion and development
---------------------- of specific strategies to effectively target the groups identified. Finally, there
must be a way in which the success or failure of the marketing is measured
---------------------- and a way in which continuous improvement can be implemented to ensure the
effectiveness of the work undertaken.
----------------------
Learning Objectives
----------------------
The learning objectives of this case study are as follows:
---------------------- ●● The importance of internal marketing
---------------------- ●● How to implement an internal marketing strategy
●● How to effectively measure internal marketing efforts
----------------------
Issues
----------------------
Within a multi-discipline consultancy, which offers a variety of services
---------------------- (both engineering and management) to a diverse range of clients, the company
is split into separate and definite business units and departments. Although all
---------------------- the departments and business units operate under the same company name,

they are independent, can be different cost centres, and in some cases work for Notes
clients that are particular to certain departments. For all departments to optimise
the work that they win, it is vital that everybody undertakes effective cross ----------------------
selling with their clients in the organisation. This cross selling cannot take place
if staff in separate departments is unaware of the services that the company as a ----------------------
whole can offer, or have a lack of knowledge on the individual skills available. ----------------------
The problem can be exacerbated where it is not possible to locate all staff on
one floor plate; being on separate floors or even in remote buildings can lead to ----------------------
gradual separation and lack of contact. The department used for this case study
is a management services department offering project management, property ----------------------
and facilities management, cost consultancy, health and safety, and other high ----------------------
value services within the consulting group.
Through informal discussion, it became apparent that the engineering ----------------------
disciplines were working for clients who had a need for the services that the ----------------------
management services department offers. Owing to lack of awareness and
understanding, these disciplines believed that management services could ----------------------
not offer the appropriate services to their clients. In extreme, isolated cases,
services were bought in from competitors and potential fee income for the ----------------------
group was lost. This lack of awareness was more often the case than individual ----------------------
departments being protective of their own clients, though some examples of this
were found too. ----------------------
In large organisations, there is also a potential that different departments ----------------------
bid separately to the same client. This shows lack of coordination within
marketing departments, and can devalue the professionalism of the company in ----------------------
the eyes of the client.
----------------------
This lack of awareness is the first stage in the process, recognising the
need for an internal marketing strategy to raise awareness of the department’s ----------------------
activities; increase the visibility of the department internally; utilise a common
client base; contribute to the diversification into different market sectors; and ----------------------
demonstrate integrated multi-discipline working. ----------------------
It is clear that without a positive attitude to internal marketing and business
development some parts of the business could have remained isolated, not been ----------------------
able to grow organically, and remain stereotyped in its activities. ----------------------
Once the need for internal marketing was identified, the strategies were
established. The key objectives of the marketing were to raise awareness of the ----------------------
services that could be sold to clients and educate staff within other departments ----------------------
and also generally increase the visibility of key staff within the management
services department with other key staff in the business. ----------------------
The following strategies were adopted by the department to raise awareness: ----------------------
i. Internal seminars to all staff outlining the skills within the department, the
type of work undertaken and the department’s clients. ----------------------
ii. Improved integration, including the placement of key personnel within ----------------------
the office of the major (other) departments, close to the other departments
key personnel. ----------------------

Notes iii. An increased involvement in other offices business development activities
and key client meetings and corporate hospitality events.
---------------------- iv. Monthly business development seminars.
---------------------- Evidence of Success or Otherwise
---------------------- In order to measure the effectiveness of the Internal Marketing, Key Performance
Indicators were identified at the outset. These were as follows:
----------------------
●● Greater involvement in pan discipline activities arranged through business
---------------------- development managers;
●● Introduction to new and existing clients as an essential part of the ‘normal’
----------------------
multidiscipline team;
---------------------- ●● New sales or orders from new clients in different market sectors;
---------------------- ●● The development of bespoke marketing and promotional material.
This transformation of approach has been progressively introduced over
---------------------- a three year period. The rate of change has been increased in the last two years
---------------------- as a result of two factors: release of senior staff from some office based duties
allowing more time for marketing and development; and the coincident winning
---------------------- of a multi-discipline framework requiring closer interdepartmental working.
The evidence of successful integration is as follows:
----------------------
i. Internal seminars delivered by management services to all staff outlining
---------------------- the skills within the department, its structure, the type of work undertaken
and its client base;
----------------------
ii. Improved integration, including the placement of a senior management
---------------------- services director within the offices of the other departments, close to the
senior management team and business development staff;
----------------------
iii. Increased involvement and appearances in pan discipline business
---------------------- development activities, key client business to business meetings and
corporate hospitality events;
----------------------
iv. Invited attendance at monthly business development seminars/lunches;
----------------------
v. Increased prominence by management services as leader for internal
---------------------- training and development programmes;
vi. The development and issue of new departmental and work stream
----------------------
brochures.
---------------------- Also, the success was measured by the department’s involvement in more
companywide business development incentives and organised events.
----------------------
Reflections and Future Development
----------------------
The success of the internal marketing strategy can be measured as
---------------------- identified above. It is also important to recognise the success of the internal
marketing campaign from a companywide point of view.
----------------------
By ensuring that there is a sharing of knowledge, expertise, and skills
---------------------- across departments and that there is a process by which departments can be

educated in the areas of work and skills of others, the opportunity for cross Notes
selling services is increased. This is particularly relevant with a staff roll of
approx 2500 people - each of whom can be a marketing representative. ----------------------
Maintaining and increasing the work carried out for existing clients is an ----------------------
effective way for a business to ensure a constant supply of work. By encouraging
staff and educating them to understand the roles and skills of their peers and to ----------------------
be proactive in picking up on a client’s wider needs, broader joined up services
----------------------
can be promoted. This will raise the profile of the company as a whole and help
in marketing new and growing types of services. ----------------------
By offering this complete range of professional services, reflecting a
----------------------
philosophy of whole life cycle support, the company can maximise the work
that can be won from the client. ----------------------
Summary ----------------------
----------------------
●● Every businessman earnestly attempts to maximise his profits. To attain
this goal he has to maximise sales of his goods or services. In order to ----------------------
ensure sustained profit, he employs various marketing techniques. The
most important among them are advertisement, personal selling, and ----------------------
sales promotional activities like window display, samples, premiums,
----------------------
exhibitions, etc.
●● Advertisement is the most commonly used sales technique by all business ----------------------
people. It is used to communicate to consumers the introduction of a
product, policy, price, message, etc. In a modern market, consumers are ----------------------
offered numerous identical products supplied by different manufacturers. ----------------------
Mixers, grinders, television sets, toothpastes etc. are examples.
Advertisement enables the consumers to know which type of products are ----------------------
available and when and from where to buy them. Therefore, advertisement
is advantageous to both producers and consumers. ----------------------
●● “Advertising consists of all activities involved in presenting to a group, ----------------------

a non-personal, oral or visual, openly-sponsored message regarding a
product, services or idea. This message, called as an advertisement, is ----------------------
disseminated through one or more media and is paid for by the identified ----------------------
sponsor.” - British Institute of Management. In the words of the late
American President, Roosevelt, “Advertising brings to the greatest ----------------------
number of people actual knowledge concerning useful things.” The
American Marketing Association (AMA) defines advertising as “Any ----------------------
paid form of non-personal presentation and promotion of ideas, goods and ----------------------
services by an identified sponsor.” Advertising, therefore, is a message
communication paid for by the sponsor about a product service or idea. ----------------------
----------------------
----------------------
----------------------

Notes Keywords
----------------------
●● Transition: Movement, passage, or change from one position, state, stage,
---------------------- subject, concept, etc., to another; change: the transition from adolescence
to adulthood.
---------------------- ●● Touch points: The point of contact, esp. when products or services come
---------------------- into contact with a customer
●● Stakeholders: One who has a share or an interest, as in an enterprise
----------------------
●● Integrated: Combining or coordinating separate elements so as to provide
---------------------- a harmonious, interrelated whole: an integrated plot; an integrated course
of study.
----------------------
●● Theorists: One who theorises; a theoretician
---------------------- ●● Niche: A distinct segment of a market
---------------------- ●● Disproportionate: Out of proportion, as in size, shape, or amount
●● Casualness: Without definite or serious intention; careless or offhand;
----------------------
passing: a casual remark
---------------------- ●● Choked: To fill chock-full: The storeroom was choked with furniture.
---------------------- ●● Pioneer: A person who is among those who first enter or settle a region,
thus opening it for occupation and development by others
---------------------- ●● Launch: To set going; initiate: to launch a scheme
---------------------- ●● Numerous: Very many; being or existing in great quantity: numerous
visits; numerous fish
----------------------
●● Demographic: A portion of a population, especially considered as
---------------------- consumers.
---------------------- ●● Attitudes: A position of the body or manner of carrying oneself: stood in

a graceful attitude
---------------------- ●● Ethics: The rules of conduct recognised in respect to a particular class
of human actions or a particular group, culture, etc.: medical ethics;
----------------------
Christian ethics
---------------------- ●● Appropriate: Suitable or fitting for a particular purpose, person, occasion,
etc.: an appropriate example; an appropriate dress
----------------------
●● Coincident: Occupying the same area in space or happening at the same
---------------------- time: a series of coincident events
---------------------- ●● Integration: The organisation of the constituent elements of the
personality into a coordinated, harmonious whole.
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Explain how management should formulate communication strategy.
2. How does a company’s financial position affect its communication ----------------------
strategy?
----------------------
3. What are the ethics of advertising?
----------------------
4. Explain different methods of measuring an effective communication.
5. What are the qualities of a good advertising media? ----------------------
6. What are the qualities of good advertisement copy? ----------------------

7. What is the significance of advertising spending pattern? ----------------------
Answers to Check your Progress ----------------------
----------------------
1. Decision about the frequency of message duplication to the same audience ----------------------
is another problem related to timing strategy.
----------------------
2. Under the survey method, the advertiser conducts a survey for measuring
the reader’s recall of magazine advertisement. ----------------------
Fill in the blanks.
----------------------
1. Allocation of expenditure to different media markets and sales areas
based on productivity of the unit of expenditure on each is a management ----------------------
problem.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Suggested Reading
----------------------
1. Brosius, Hans Bernd and Weimann, Gabriel. Who sets the agenda?:
---------------------- agenda setting as a two-step flow.
2. Crispell, Diane. The Influential. Consumers who influence America.
----------------------
3. Glock, Charles Y. The comparative study of communications and opinion
---------------------- formation.
---------------------- 4. Goeke, Joseph R. The two-step flow of communication-the theory re-
examined.
----------------------
5. Huges, David. Marketing Management.
----------------------
6. Katz, Elihu. The two-step flow of communication: an up-to-date report of
---------------------- an hypothesis.
7. Leiss, Julie. Print Ads top TV in reaching influential’s.
----------------------
8. Merton, Robert. Patterns of Influence: a study of interpersonal influence
---------------------- and of communications behaviour in a local community.
---------------------- 9. Poltrack, Terence. Influencing the Influential’s.
---------------------- 10. Schewe, Charles D. and Reuben M. Smith. Marketing.

----------------------
12. Wright , Winter and Zeigler. Advertising.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

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B2B MARKETS AND CRM

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2019 Symbiosis Open Education Society

Unit No. TITLE Page No.

Introduction to Business Marketing 1

2 B2B Markets and CRM

Introduction to Business Marketing 3

---------------------- Analysis current Persuade

---------------------- Market Analysis Quantitative Analysis Product

---------------------- Market Segmentation Qualitative Analysis Price

---------------------- Fig. 1.1: Key Elements of Marketing and their Relationships

4 B2B Markets and CRM

Introduction to Business Marketing 5

---------------------- Implementation and Control

---------------------- State True or False.

6 B2B Markets and CRM

3. The selling concept ----------------------

Introduction to Business Marketing 7

---------------------- • All marketing activities in a firm should be organisationally

8 B2B Markets and CRM

1.5 ROLE OF MARKETING ----------------------

Introduction to Business Marketing 9

---------------------- Check your Progress 2

10 B2B Markets and CRM

Concept of market share Concept of opportunity share ----------------------

State True or False. ----------------------

Introduction to Business Marketing 11

---------------------- One of Amway’s main values is to be a caring company. It has developed a

12 B2B Markets and CRM

•  arketing is the means by which your business identifies, anticipates and

Introduction to Business Marketing 13

---------------------- Self-Assessment Questions

---------------------- 3. Discuss the role of Marketing in business management.

14 B2B Markets and CRM

Check your Progress 1 ----------------------

State True or False. ----------------------

State True or False. ----------------------

8. Cohen, Herb. You can negotiate anything. ----------------------

12. Kurtz & Boone. Marketing. ----------------------

Introduction to Business Marketing 15

16 B2B Markets and CRM

18 B2B Markets and CRM

---------------------- B2B Markets

20 B2B Markets and CRM

Promotions emphasis is on personal selling. ----------------------

---------------------- The mission of business-to-business marketing can be described as follows:

22 B2B Markets and CRM

2.4 FACTORS INFLUENCING ORGANISATIONAL ----------------------

---------------------- Position (Factors) Background (Factors)

----------------------  Time in Organisation

---------------------- Implementation of the Purchase

---------------------- Fig. 2.2: Person in Organisational Markets

24 B2B Markets and CRM

---------------------- State True or False.

---------------------- 2.5 BUYING PROCESS

26 B2B Markets and CRM

28 B2B Markets and CRM

---------------------- Check your Progress 2

---------------------- 2.7 POSITIONING AND COMPETITION

30 B2B Markets and CRM

2.8 IMAGE AND IDENTITY ----------------------

Image marketing is connected to the company’s business idea, which ----------------------

---------------------- • All marketing activities in a firm should be organisationally

• arketing is the means by which your business identifies, anticipates and

• Humongous: Extremely large; enormous ----------------------

---------------------- • A strategy of market segmentation must be supported at the very top of