Principles of Marketing All Chapters

Principles of Marketing, 2023 Department of Marketing Management
CHAPTER ONE: NATURE AND SCOPE OF MARKETING

Introduction
In todays competitive environment a lot of emphasis is laid on the marketing since marketing
deals with customers more than any other business function. We find every organization carrying
out a lot of marketing activities. This chapter deals with basic marketing concepts, its importance
and philosophies of marketing.
1.1. Definitions and core concepts of marketing

A. Definitions of Marketing
Many people think of marketing as only selling and advertising. But advertising and selling is
one part of marketing. So, marketing is defined as follows:
 Kotler and Armstrong (2010 defined Marketing as the social process by which
individuals and organizations obtain what they need and want through creating and
exchanging value with others.
 The chartered Institute of Marketing (2012) defines marketing as the management

process that identifies, anticipates and satisfies customer requirements profitably.
 American Marketing Association (2017) defined Marketing as the activity, set of

institutions, and processes for creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, partners, and society at large
Note that the definition of marketing focuses on the lifetime value of a customer. All the
functional areas have to take an "integrated marketing" approach and work towards the goal of
satisfying and delivering value to customers. If you do not truly care about your customers, you
are not a good marketer. Also, note the importance of all stakeholders and society at large. A
good marketer is not only concerned with making money.
So, the two fold goal of marketing is to attract new customers by promising superior value, and
keep and grow current customers by delivering satisfaction.
The concept of marketing lies on the idea of satisfying the needs of the customer by means of the
products as a solution to the customer's problem (needs).
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What is marketing management?

Marketing Management is:
 A process of planning, organizing, directing and controlling the activities of product
planning, pricing; promotion and distribution of products to create exchange that
satisfy individuals and organizational needs.
 Philip Kotler and Kevin Lane define marketing management as an art and science of
choosing target markets and building profitable relationships with them, then it
involves getting, keeping and growing customers through creating, delivering and
communications superior customer value.
In general, marketing management is a business discipline focused on the practical application of
marketing techniques and the management of a firm s marketing resources and activities.
Marketing managers are often responsible for influencing the level, timing, and composition of
customers demand in a manner that will achieve the companys objective.
B. Core concepts of marketing
To have more clear view about the marketing and to understand the marketing process first we
should discuss the basic concepts of marketing.
1. Needs, Wants, and Demands
i) Needs
The most basic concept underlying marketing is that of human needs. Human needs are a state of
felt deprivation of the basic human requirements such as food, air, water, clothing and shelter.
Humans beings have many complex needs such as:-
 Basic physical needs for food, clothing, warmth and safety;

 Social needs for belonging and affection; and
 Individual needs for knowledge and self-expression.
These needs are not invented by marketers; they are a basic part of the human make-up.
Marketers do not create needs but, they influence the demand by making the appropriate,
attractive, affordable and easily available product to target customers. Need is natural, It is not
affected by culture, and marketing has no influence in creating needs.
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ii) Wants
Wants are the form human needs take as they are shaped by culture and individual personality.
They are the forms by which people communicate their needs. They are assortments (bundles) of
products that people choose to satisfy their needs. When an Italian and an Ethiopian feel hungry
both have need for food but the (form) they choose to satisfy their need may be different. The
Ethiopian may prefer KITFO or Raw Meat but the Italian may prefer Spaghetti . Culture
and marketing can influence the wants of people. The closer that a product matches the
consumers want, the more successful the product will be.
iii) Demands
Demands are wants for specific products that are backed up by an ability and willingness to buy
product. Wants become demands when backed up by purchasing power. Companies must
therefore, measure not only how many people want their product but, more important, how many
would actually be willing and able to buy it. Two people may have the same need for example
need for food; and may have the same want for example Spaghetti; but one may not afford the
cost of spaghetti because he can not afford it and therefore shift his demand to a cheaper food
item.
2. Products
A product is anything that can be offered to a market for attention, acquisition, use or
consumption and that might satisfy a need or want. Products are solutions to the problems of the
customer. People buy products in order to solve their problems, because of the benefit they
desire from the product. Marketers market ten main types of entities: goods, services, events,
experiences, persons, places, properties, organizations, information, and ideas.
Goods: Goods are any tangible products that can be touched and seen. Example: table, chair,
refrigerators, televisions, machines, blackboard, chalk, and etc.
Services: Service is any activity or benefit that one party can offer to another which is essentially
intangible and does not result in ownership of anything. As economies advance, a growing
proportion of their activities focus on the production of services. Services include the work of
airlines, hotels, barbers and beauticians, maintenance and repair people, and accountants,
bankers, lawyers, engineers, doctors, software programmers, and management consultants.
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Events: Marketers promote time-based events, such as major trade shows, artistic performances,
and global sporting events such as the Olympics and the World Cup.
Experiences: By coordinating several services and goods, a firm can create stage, and market
experiences.
Persons: Persons are also a product and marketed themselves. Example: artists, musicians,
CEOs, physicians, football players, and other professionals. Some people have done a masterful
job of marketing themselves: Messy, Saladin Seid, Haile Gebreselasie and others.
Places: Cities, states, regions, and whole nations compete to attract tourists, residents, and
factories. Example: the obelisk of Axum, Dire Shekena Hussein, 11 Rock-Hewn Church
Properties: Properties are intangible rights of ownership to either real property (real estate) or
financial property (stocks and bonds). They are bought and sold, and these exchanges require
marketing. Real estate agents work for property owners or sellers, or they buy and sell residential
or commercial real estate. Investment companies and banks market securities to both institutional
and individual investors.
Organizations: Organizations work to build a strong, favorable, and unique image in the minds
of their target publics. Universities, museums, performing arts organizations, corporations, and
nonprofits all use marketing to boost their public images and compete for audiences and funds.
Information: The production, packaging, and distribution of information are a major industry in
a given society. Marketers of information may include school, and universities, publishers of
encyclopedias, nonfiction books, and specialized magazines, makers of CDs, and internet web
sites.
Ideas: Every market offering has a basic idea at its core concept. Products and services are
platforms for delivering some idea or benefit to satisfy a core need. Marketers marketed their
business idea to different organizations.
3. Customer value and satisfaction
Customer perceived value: - is the customers evaluation of the difference between all the
benefits and all the costs of a market offering relative to those of competing offers. It is the
satisfaction of customers requirements at the lowest possible cost of acquisition, ownership, and
use. It is the difference between the values that the customer gains from owning and using a
product and the costs of obtaining the product. It can also be defined as a ratio between what the
customer gets and what he gives.
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Value=Benefit = Functional Benefit + Emotional Benefit

Cost Monetary Costs + Time Costs + Energy Costs + Psychic Cost
The marketer can increase the value of the customer offering in several ways:
 Raise benefits
 Reduce costs
 Raise benefits and reduce costs
 Raise benefits by more than the raise in costs
In general, since customers prefer products that offer high value, therefore businesses need to
provide a high value product.
Customer satisfaction: - is the extent to which a products perceived performance matches a
buyers expectations. It depends on the products perceived performance relative to a buyer s
expectations. If the products performance falls short of expectations, the customer is dissatisfied.
If performance matches expectations, the customer is satisfied. If performance exceeds
expectations, the customer is highly satisfied or delighted.
Why is it important to satisfy a customer? It is more costly to attract new customers than to
retain current customers. Therefore, customer retention is more critical than customer attraction.
A satisfied customer is:-
 Stays loyal longer
 Buys more as the company introduces new products and upgrades
 Talks favorably about the company and its products
 Pays less attention to competing brands and is less sensitive to price
 Offers product /service ideas to the company
 Cost less to serve than new customers because transactions are take place on routine
bases
4. Exchange and Transaction
a) Exchange
Exchange is the act of obtaining a desired product from someone by offering something of value
in return. Marketing occurs when people decide to satisfy needs and wants through exchange. It
is the core concept of marketing.
For an exchange to take place, several conditions must be satisfied:
a. There are at least two parties must participate
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b. Each party must have something of value to the other party

c. Each party is capable of communication and delivery
d. Each party is free to accept or reject the exchange offer
e. Each party believes it is appropriate or desirable to deal with the other party
If these conditions exist there is potential for exchange, whether exchange actually takes place
depends on whether the two parties can agree on terms of the exchange that will leave them
better off before the exchange. This is the sense in which exchange is described as a value-
creating process that is; exchange normally leaves both parties better than before the exchange.
b) Transaction
Exchange must be seen as a process than an event whereas a transaction is marketing s unit of
measurement. The transactions are the basic unit of exchange. Transaction is a trade of value
between two parties. One party gives X to another party and gets Y in return.
A transaction involves at least two things of value, conditions that are agreed upon, a time of
agreement and a place of agreement.
5. Relationship marketing
Relationship marketing involves creating, maintaining and enhancing strong relationships with
customers and other stakeholders. Increasingly, marketing is moving away from a focus on
individual transactions and towards a focus on building value-laden relationships and marketing
networks. It is a marketing strategy to establish, maintain, and enhance long term relationships
with customers and other partners at a profit in the way that the objectives of the parties involved
are achieved through mutual exchange and fulfillment of promises. It concerned with the long-
term and not merely to sell a product or service to a customer one time. The goal is to have a
satisfied customer and establish an ongoing and long-term relationship with them.
6. Market
A market is the set of actual and potential buyers of a product. These buyers share a particular
need or want that can be satisfied through exchanges and relationships. The size of the market
depends on the number of people (1) who have the need, (2) have resources (money) for the
exchange and (3) want to spend these resources in the exchange.
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7. Marketing mix
The marketing mix is one of the dominant ideas in modern marketing. We define marketing
mix as the set of controllable tactical marketing tools that the firm blends to produce the
response it wants in the target market. It consists of everything the firm can do to influence the
demand for its product. The marketing mix includes the four P s of marketing i.e. product,
price, promotion and place.
a) Product: is anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need.
b) Price: is the amount of money charged for a product, or the sum of the values that
consumers exchange for the benefits of having or using the product.
c) Place: is all the company activities that make the product or service available to target
customers.
d) Promotion: is activities that communicate the product or service and its merits to target
customers and persuade them to buy.
4Ps 4Cs
Product Customer problem solution
Price Customer cost
Promotion Communication
Place Convenience
The Services Marketing Mix
 People
By people, we mean those people who are directly or indirectly involved in the delivery of the
service. This typically means employees of the company. But it can also mean subcontractors
with direct interaction with customers. It can even refer to existing and past customers of the
company. These customers represent the company through word of mouth.
People are a very important factor in the 7 Ps because services tend to be produced and
consumed at the same time. Because of this, the behavior of these people is very important in
determining the experience of the customer.
All service businesses should ensure that staffs are well trained and motivated. But there is
another way to adjust the people tactic. This can be done by adjusting customer experience to
meet the needs of individual customers.
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As an example, imagine a hotel guest tweets that they re at your hotel preparing for an important
meeting the next day. Then the next day while the guest is out, your staff place a handwritten
note in their room wishing them every success in their meeting. Alongside this, staff places some
complimentary chocolates in the guests room.
This tailoring of customer experience will tend to make the customer more satisfied in the short
term. It also makes them more likely to become a long-term customer. Furthermore, they are
more likely to tell their friends and colleagues about their great experience in your hotel.
 Physical Evidence
One of the distinguishing characteristics of service is intangibility. Despite this, their delivery
often involves tangible elements. Physical evidence is defined as both:
i) The environment or place where the service is delivered.
ii) Any tangible elements that facilitate the service or provide information about the service.
Based on this definition, physical evidence includes such things as:
- Equipment - The companys website
- Buildings - Business cards
- Logos and brochures
As an example, consider a potential customer who wishes to visit a hotel for the first time. The
physical evidence might include pictures of the hotel, past customer reviews, and the hotel s
proximity to the center of town.
 Process
Process refers to the procedures, mechanisms, and flow of activities that occur when the
customer and the business interact with each other. When, for example, a customer books a hotel
room a process is created. When the customer then checks into the hotel another process is
initiated, and when they check-out yet another process is generated.
All of these processes need to be tightly controlled to ensure consistent customer experience.
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1.2. Evolution and Philosophies of Marketing Management

There are six competing concepts under which organizations can choose to conduct their
marketing activities.
1. The production concept
Production concept holds that customers will favor products that are highly available and highly
affordable. Managers of production-oriented businesses concentrate on achieving high
production efficiency, and mass distribution.
The production concept is still a useful philosophy in some situations. However, although useful
in some situations, the production concept can lead to marketing myopia. Companies adopting
this orientation run a major risk of focusing too narrowly on their own operations and losing
sight of the real objective that is satisfying customer needs and building customer relationships.
The production concept is a useful philosophy in two types of situations:
 When demand for a product is greater than supply
 When the product cost is too high and improved productivity is needed to lower the
cost
2. The product concept
The product concept holds that consumers will favor products that offer the most quality,
performance and innovative (new) features. Under this concept, marketing strategy focuses on
making continuous product improvements. Product quality and improvement are important parts
of most marketing strategies. However, focusing only on the companys products can also lead to
marketing myopia. A new or improved product will not necessarily be successful unless it s
priced, distributed, advertised, and sold properly. They can end up focusing just on the product
and not seeing wider market trends that may affect demand.
3. The selling concept
The selling concept holds that consumers will not buy enough of the organization s products
unless the organization undertakes a large-scale selling and promotional efforts. Firms that
follow this philosophy focus on "pushing" the product using advertising and promotion. The
concept is largely practiced with unsold goods i.e. goods that consumers do not normally think
of buying such as insurance, or encyclopedia; and also practiced in the non-profit area like
political party that tries to get votes to support candidates.
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Companies practice the selling concept when they have overcapacity/excessive amount of
products. Their aim is to sell what they make rather than make what the market wants. Thus
marketing based on hard selling carries high risks. It focuses on short-term results: creating sales
transactions rather than on building long-term, profitable relationships with customers.
4. The marketing concept

The marketing concept holds that achieving organizational goals depends on determining the
needs and wants of target markets and delivering the desired satisfaction more effectively than
competitors. It is based on the satisfaction of customer s needs and wants. So, the company
should be more effective than its competitors in creating, delivering, and communicating
customer value to its chosen markets.
Slogans used in the marketing concept include:
 The customer is the King, Boss
 We are not satisfied until our customers are satisfied
What is the difference between selling concept and marketing concept?
The selling concept takes an in-out perspective. It starts with the factory, focuses on the
companys existing products, and calls for heavy selling and promotion to obtain profitable sales.
It focuses primarily on getting short-term sales with little concern about who buys or why. In
contrast, the marketing concept takes an outside-in perspective. The marketing concept starts
with a well-defined market, focuses on customer needs, and integrates all the marketing activities
that affect customers. In turn, it yields profits by creating long lasting relationships with the right
customers based on customer value and satisfaction.
5. The societal marketing concept
Societal marketing concept holds that the organization should determine the needs, wants, and
interests of target markets and deliver the desired satisfactions more effectively than
competitors in a way that maintains or improves the customer s and society s well-being. It
calls for sustainable marketing, socially and environmentally responsible marketing that meets
the present needs of consumers and businesses while also preserving or enhancing the ability
of future generations to meet their needs. According to societal marketing philosophy, the
marketing concept is not sufficient enough to cure the ills of the society. It only takes into
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account the short term benefits of the customers. So, there is a strong need for a new concept
that should tackle the major societal problems.
The company follows the societal concept for maintaining the equilibrium between the three
aspects, which are as follows:
 Profits of company
 Satisfaction of the customers
 Overall benefit of the society
6. Holistic Marketing Concept

Holistic marketing is a new addition to the business marketing management philosophies
which considers business and all its parts as one single entity and gives a shared purpose to
every activity and person related to that business. A business, like a human body, has different
parts, but its only able to function properly when all those parts work together towards the
same objective.
The starting point of holistic marketing is the target market, the focus is on consumers &
society, through internal, integrated, relationship, & performance marketing, and the last profit
is through social welfare. Holistic marketing concept enforces this interrelatedness and
believes that a broad and integrated perspective is essential to attain the best results.
1.3. Importance of marketing

Marketing have several importance for producers (sellers), for customers, for employees and for
the society as a whole.
As Producers or sellers marketing helps us to understand:
• Who are our customers • What promotion to use
• What are their needs • What distribution to select
• What are their behavior • How to keep customers Satisfied
• What products to offer • Improve relationships and become
• What price to charge profitable
As customers, marketing will help us:

• Satisfy our needs • What products to buy
• Solve our problems • What price to pay
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• What supplier to deal with • Improve relationship and lead

quality life
As employees, marketing:
• Provide us employment • Provides career opportunities
• Provide rewarding jobs (growth, development)
• Provides variety of jobs • Lead quality life
As a member of society, marketing:

• Provide employment to members of the society
• Improves product efficiency and reduces resource depletion
• Improves quality of life
• Participates in societies economic and social development
1.4. Marketing Management Tasks

The set of tasks necessary for successful marketing management includes
- Developing marketing strategies and - Building strong brands,
plans, - Shaping the market offerings,
- Capturing marketing insights, - Delivering and communicating value,
- Connecting with customers, - Creating long-term growth
In addition to this marketers also perform the task of managing the demand of their offerings and
building profitable customer relationships.
1.4.1. Building Profitable Customer Relationship

Managing demand means managing customers. A company's demand comes from two groups:
new customers and current customers. Traditional marketing theory and practice have focused on
attracting new customers and making the sale. Today, however, the emphasis is shifting. Beyond
designing strategies to attract new customers and create transactions with them, companies are
now going all out to retain current customers and build lasting customer relationships.
Attracting new customers remains an important marketing management task. However, the focus
today is shifting towards retaining current customers and building profitable, long-term
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relationships with them since the costs of attracting new customers costs are five times the costs
of keep a current customer.
* Customer relationship management is the overall process of building and maintaining

profitable customer relationships by delivering superior customer value and satisfaction.
It deals with all aspects of acquiring, keeping, and growing customers. The key to
building lasting customer relationships is to create superior customer value and
satisfaction. Satisfied customers are more likely to be loyal customers and give the
company a larger share of their business.
Customer Development Stages

i) Suspect: is everyone who might buy the product or who think or imagine in his mind.
ii) Prospect: Are people who have a strong potential interest in the product and the
ability to pay for it.
iii) First time customers:-are qualified prospects who are converted into trying the
product for the first time.
iv) Repeat customers: are satisfied first time customers converted into repeat purchase
v) Client-are people whom the company treats very specially and which goods or
services are provided and sold.
vi) Members: are clients who join the membership program that offer a whole set of
benefits or somebody belonging to a particular group.
vii) Advocates: - are customers who recommend the company and its products and
services to others or customers, and who support or speaks in favor of about the
companys product.
viii) Partners: are customers who work closely with company and who owns part of a
company or who share the asset, risk, profit etc.
1.4.2. Demand Management

The organization has a desired level of demand for its products. At any point in time, there may
be no demand, adequate demand, irregular demand or too much demand, and marketing
management must find ways to deal with these different demand states. So, marketers are
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responsible for demand management. They seek to influence the level, timing, and composition
of demand to meet the organizations objectives.
There are eight states of demand and the corresponding tasks facing managers:-
1. Negative demand
A market is in a state of negative demand if a major part of the market dislikes the product and
may even pay a price to avoid it. The marketing task is to analyze why the market dislikes the
product and whether a marketing program consisting of product redesign, lower prices, and
more positive promotion can change beliefs and attitudes.
2. No demand
No demand occurs when target markets unaware or uninterested in the product. For example:
farmers may not be interested in a new farming method, and college students may not be
interested in foreign-language courses. The marketing task is to find ways to connect the benefits
of the product with the person's natural needs and interests.
3. Latent demand
Latent demand occurs when market share a strong need that cannot be satisfied by any existing
product. For example: there is a strong latent demand for harmless cigarettes, safer
neighborhoods, and more fuel-efficient cars. The marketing tasks are to measure the size of the
potential market and develop goods and services to satisfy the demand.
4. Declining demand
Declining demand implies a substantial drop in the demand for products. It is when consumers
begin to buy the product less frequently or not at all. The marketer must analyze the causes of the
decline demand and determine whether the demand can be re- stimulated by new target markets,
by changing product features, or by effective communications. Then, the marketing task must be
reverse declining demand through creative remarketing.
5. Irregular demand
Irregular demand occurred when organizations face demand that varies on a seasonal, monthly,
daily, or even hourly. For example museums are under visited on weekdays and overcrowded on
weekends. The marketing task, called Synchro marketing, is to find ways to adjust the pattern
of demand through flexible pricing, promotion, and other incentives.
6. Full demand
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Organizations face full demand when they are pleased with their volume of business. The
marketing task is to maintain the current level of demand in the face of changing consumer
preferences and increasing competition. The organization must maintain or improve its quality
and continually measure consumer satisfaction.
7. Overfull demand
Some organization faces a demand level that is higher than they can handle. The marketing task,
called de-marketing, requires finding ways to reduce demand temporarily or permanently. De-
marketing seeks to discourage overall demand by the use of raising prices, and reduce promotion
and service. Selective de-marketing consists of trying to reduce demand from those parts of the
market that are less profitable.
8. Unwholesome demand
When production, distribution, and consumption of the product are not desirable for customers
or society at large, demand of such products can be said as unwholesome demand. It is the
state of the unhealthy demand. Here, there is demand, but product is, for any of the ways,
harmful for consumers and society. Unwholesome products will attract organized efforts to
discourage their consumption. The use of products has adverse effect on welfare of consumers.
There are some products, which have unwholesome demand such as, cigarettes, alcohol, hard
drugs, and handguns, etc. leading to provocation of communal sentiments, and many other
such products.
Marketing management tasks relevant to this demand situation can be called as Counter
Marketing. Counter marketing consists of curbing or restricting production, distribution, and
consumption of such products. Counter marketing tries to eliminate production and use of
products. It includes getting people who like something to give it up, using such tools as fear
messages, price hikes, and reduced availability.
In general, marketers must identify the underlying cause(s) of the demand state and determine
a plan of action to shift demand to a more desired state.
CHAPTER TWO: MARKETING ENVIRONMENT
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Introduction
Marketing does not occur in a vacuum; rather marketing operates in a complex and changing
environment. The environment of marketing affects its growth, development, existence and
success. So, companies to succeed as long as they have to match their products to today's
marketing environment. This chapter addresses the key forces in the firm's marketing
environment and how they affect its ability to maintain satisfying relationships with target
customers.
What is marketing environment?
Marketing environment consists of the actors and forces outside marketing that affect marketing
managements ability to build and maintain successful relationships with target customers.
Changes in the marketing environment are often quick and unpredictable which offers both
opportunities and threats to the company. A company uses environmental scanning to monitor
what is going on and to determine environmental changes and predicts future changes in the
environment. By conducting systematic environmental scanning, marketers are able to revise
and adapt marketing strategies to meet new challenges and opportunities in the marketplace.
Marketers have two methods (marketing research and marketing intelligence system) for
collecting information about the marketing environment.
 Marketing research is the systematic design, collection, analysis, and reporting of data
relevant to a specific marketing situation facing an organization.
 Marketing intelligence system is the way in which marketing managers obtain
everyday information about developments in the external marketing environment
from books, news papers, trade publication, suppliers etc.
The marketing environment consists:-
 Micro-environment
 Macro-environment
2.1. Micro-environment
The micro environment consists of the forces close to the company that affect its ability to serve
its customers. Marketing management's job is to attract and build relationships with customers
by creating customer value and satisfaction. However, marketing managers cannot accomplish
this task alone. Their success will depend on other actors in the company's microenvironment
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which combine to make up the company's value delivery system. The micro environment
consists of six actors: the company, suppliers, marketing intermediaries, customer markets,
competitors, and publics.
1. The company
In designing marketing plans, marketing management should take other company groups, such
as top management, finance, research and development, purchasing, manufacturing and
accounting, into consideration. All these interrelated groups form the internal environment.
Top management sets the company's mission, objectives, brand strategies, and policies.
Marketing managers make decisions within the plans made by top management, and marketing
plans must be approved by top management before they can be implemented.
Finance is concerned with finding and using funds to carry out the marketing plan. The R&D
department focuses on designing safe and attractive products. Purchasing worries about getting
supplies and materials whereas, manufacturing is responsible for producing the desired quality
and quantity of products. Accounting has to measure revenues and costs to help marketing know
how well it is achieving its objectives. Since all of these departments have an impact on the
marketing department's plans and actions, marketers must work in harmony with other company
departments to create customer value and relationships.
2. Suppliers
Suppliers are organizations that provide resources needed by the organizations to produce goods
and services. Supplier problems can seriously affect marketing. Marketing managers must watch
supply availability and costs. Supply shortages or delays, labor strikes, and other events can cost
sales in the short run and damage customer satisfaction in the long run. They also monitor the
price trends of their key inputs since rising supply costs may force price increases that can harm
the companys sales volume.
Most marketers today treat their suppliers as partners in creating and delivering customer value.
One of the skills required in managing suppliers is supply chain management. Supply chain
management refers to managing upstream and downstream value-added flows of materials, final
goods, and related information among suppliers, the company, resellers, and final consumers.
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3. Marketing intermediaries
Marketing intermediaries are firms that help the company to promote, sell, and distribute its
products to final buyers. They include resellers, physical distribution firms, marketing service
agencies, and financial intermediaries.
Resellers: - are distribution channel firms that help the company find customers or make sales
to them. These include wholesalers and retailers, who buy and resell merchandise.
Physical distribution firms: - are firms that help the company to stock and move goods from
their points of origin to their destinations. By working with warehouse and transportation
firms, a company must determine the best way to store and ship goods, and balancing factors
such as cost, deliver, speed, and safety.
Marketing services agencies: - are the marketing research firms, advertising agencies, media
firms and marketing consultancies that help the company target and promote its products to the
right markets. When the company decides to use one of these agencies, it must choose carefully
because the firms vary in creativity, quality, service and price. The company has to review the
performance of these firms regularly and consider replacing those that no longer perform well.
Financial intermediaries: - are banks, credit companies, insurance companies, and other
businesses that help finance transactions or insure against the risks associated with the buying
and selling of goods.
Marketing intermediaries form an important component of the company s overall value delivery
network, so the company must do more than just optimize its own performance. Thus, today s
marketers recognize the importance of working with their intermediaries as partners rather than
simply as channels through which they sell their products.
4. Customer markets
Customers are the most important actors in the company s microenvironment. The aim of the
entire value delivery system is to serve target customers and create strong relationships with
them. Customer markets are markets that pay money to acquire an organizations products. The
company might target any or all five types of customer markets.
Consumer markets: - are markets that consist of individuals and households that buy goods and
services for personal consumption.
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Business markets: -are markets that buy goods and services for further processing or use in their
production processes.
Reseller markets: - are markets that buy goods and services to resell at a profit.
Government markets: - are markets that consist of government agencies that buy goods and
services to produce public services or transfer the goods and services to others who need them.
International markets: - are markets that consist of those buyers in other countries, including
consumers, producers, resellers, and governments. Each market type has special characteristics
that call for careful study by the seller.
5. Competitors
Competitors are a wide range of organizations that compete with other organizations through
adding greater customer value. The marketing concept states that, to be successful, a company
must provide greater customer value and satisfaction than its competitors do. Thus, marketers
must do more than simply adapt to the needs of target consumers. They also must gain strategic
advantage by positioning their offerings strongly against competitors offerings in the minds of
consumers.
No single competitive marketing strategy is best for all companies. Each firm should consider its
own size and industry position compared to those of its competitors. Large firms with dominant
positions in an industry can use certain strategies that smaller firms cannot afford. But being
large is not enough. There are winning strategies for large firms, but there are also losing ones.
And small firms can develop strategies that give them better rates of return than large firms
enjoy.
Knowing competitors is critical for marketing planning and operations. Marketing should know
the following about competitors:-
 Who are our competitors?  What are their strengths and
 What are their strategies? weaknesses?
 What are their objectives?  What are their reaction patterns?
6. Publics
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A public is any group that has an actual or potential interest in or impact on an organization s
ability to achieve its objectives. There are seven types of publics in which the company s
marketing environment includes:-
Financial publics: - this group influences the companys ability to obtain funds. Banks,
investment analysts, and stockholders are the major financial publics.
Media publics: - this group carries news, features, and editorial opinion. It includes
newspapers, magazines, television stations, and blogs and other Internet media.
Government publics: - management must take government developments into account.
Marketers must often consult the companys lawyers on issues of product safety, truth in
advertising, and other matters.
Citizen-action publics: - a companys marketing decisions may be questioned by consumer
organizations, environmental groups, minority groups, and others. Its public relations department
can help it stay in touch with consumer and citizen groups.
Local publics: - this group includes neighborhood residents and community organizations.
Large companies usually create departments and programs that deal with local community issues
and provide community support.
General public: - a company needs to be concerned about the general public s attitude toward
its products and activities. The publics image of the company affects its buying.
Internal publics: - this group includes workers, managers, volunteers, and the board of
directors. Large companies use newsletters and other means to inform and motivate their internal
publics. When employees feel good about the companies they work for, this positive attitude
spills over to the external publics.
2.2. Macro-environment
The macro-environment consists of the larger societal forces that affect the microenvironment. It
includes, demographic, economic, natural, technological, political, and cultural environment.
1. Demographic environment
Demography is the study of human populations in terms of size, density, location, age, gender,
race, occupation, and other statistics. The demographic environment is of major interest to
marketers because it involves people, and people make up markets.
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The most important demographic factors and trends in the largest world markets that marketers
need to consider includes:-
 Changing Age Structure of a Population
 Geographic Shifts in Population
 Rising Number of Educated People
 Increasing Diversity
Thus, marketers keep a close eye on demographic trends and developments in their market. They
need to analyze changing age and family structures, geographic population shifts, educational
characteristics, and population diversity.
2. Economic environment
The economic environment consists of economic factors that affect consumer purchasing power
and spending patterns. The major factors that affect purchasing power include: Income, saving,
and credit facilities. Nations vary greatly in their levels and distribution of income. Some
countries have subsistence economies - they consume most of their own agricultural and
industrial output. These countries offer few market opportunities. Marketers must pay close
attention to major trends and consumer spending patterns both across and within their world
markets.
3. Natural environment
The natural environment involves the natural resources that are needed as inputs by marketers
or that are affected by marketing activities. Marketers should be aware of several trends in the
natural environment such as:
1. Growing shortages of raw materials.

2. Increased pollution. Industry will almost always damage the quality of the natural
environment. Industrial damage to the environment has become very serious.
3. Government intervention in natural resource management has caused environmental
concerns to be more practical and necessary in business and industry. Instead of opposing
regulation, marketers should help develop solutions to the material and energy problems
facing the world.
4. Technological environment
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The technological environment includes forces that create new technologies, creating new
product and market opportunities. The technological environment is perhaps the most dramatic
force now shaping our destiny. The technological environment changes rapidly. New
technologies create new markets and opportunities. However, every new technology replaces
an older technology. Companies that do not keep up with technological change soon will find
their products outdated. They will miss new product and market opportunities. Thus,
marketers should watch the technological environment closely. The following trends are
worth watching:
 Faster rate of technological change. Products are being technologically outdated at a rapid
pace.
 There seems to be almost unlimited opportunities being developed daily. The challenge is
not only technical but also commercial - to make affordable versions of products.
 Higher research and development budgets.
 Increased regulation. Marketers should be aware of the regulations concerning product
safety, individual privacy, and other areas that affect technological changes.
5. Political environment
Marketing decisions are strongly affected by developments in the political environment. The
political environment consists of laws, government agencies, and pressure groups that
influence and limit various organizations and individuals in a given society. Business is
regulated by various forms of legislation such as:
1. Governments develop public policy to guide commerce - sets of laws and regulations
limiting business for the good of society as a whole.
2. Increasing legislation to:
 Protect companies from each other.

 Protect consumers from unfair business practices.
 Protecting interests of society against unrestrained business behavior.
3. Growth of public interest groups. The number and power of public interest groups have
increased during the past two decades.
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4. Increased emphasis on ethics and socially responsible actions. Socially responsible firms
actively seek out ways to protect the long-run interests of their consumers and the environment.
6. Cultural environment
The cultural environment is made up of institutions and other forces that affect society s basic
values, perceptions, and behaviors. Certain cultural characteristics can affect marketing
decision making. Among the most dynamic cultural characteristics are:
1. Persistence of cultural values. Peoples core beliefs and values have a high degree of
persistence. Core beliefs and values are passed on from parents to children and are
reinforced by schools, churches, business, and government. Secondary beliefs and values
are more open to change.
2. Shifts in secondary cultural values. Since secondary cultural values and beliefs are open to
change, marketers want to spot them and be able to capitalize on the change potential.
Societys major cultural views are expressed in:
1. Peoples view of themselves. People vary in their emphasis on serving themselves versus
serving others.
2. Peoples views of others. Observers have noted a shift from a me-society to a we-
society. Consumers are spending more on products and services that will improve their
lives rather than their image.
3. Peoples views of organizations. People are willing to work for large organizations but
expect them to become increasingly socially responsible
4. Peoples views of society. This orientation influences consumption patterns. Buy Ethiopian
products versus buying abroad is an issue that will continue
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CHAPTER THREE: UNDERSTANDING THE MARKET
3.1. What is a market?
The concept of exchange leads to the concept of a market. A market is the set of actual and
potential buyers of a product. These buyers share a particular need or want that can be satisfied
through exchange. Thus, the size of a market depends on the number of people who exhibit the
need, have resources to engage in exchange, and are willing to offer these resources in exchange
for what they want.
Originally the term market stood for the place where buyers and sellers gathered to exchange
their goods, such as a village square. Marketers, however, see the sellers as constituting an
industry and the buyers as constituting a market. The sellers and the buyers are connected by
four flows. The sellers send products or services and communications to the market; in return,
they receive money and information.
The relationship between the industry and the market
Types of market
There are several types of markets that marketers provide their offerings. This includes:
consumer markets (markets that consist of individuals and households that buy goods and
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services for personal consumption), business markets (markets that buy goods and services for
further processing or use in their production processes), reseller markets (markets that buy goods
and services to resell at a profit), government markets (markets that consist of government
agencies that buy goods and services to produce public services or transfer the goods and
services to others who need them), and international markets (markets that consist of those
buyers in other countries, including consumers, producers, resellers, and governments). In this
chapter we focus more on consumer markets and its buying behavior, and business markets and
its buying behavior.
3.2. Consumer market and consumer buying behavior

The aim of marketing is to meet and satisfy target customers needs and wants better than
competitors. Marketers must have a thorough understanding of how consumers think, feel, and
act and offer clear value to each and every target consumer.
Consumer buyer behavior refers to the buying behavior of final consumers (individuals and
households that buy goods and services for personal consumption). Buying behavior is never
simple, yet understanding it is an essential task of marketing management. All of these final
consumers combine to make up the consumer market. Consumer market is a market that
consists of all the individuals and households that buy or acquire goods and services for personal
consumption.
3.2.1. Factors affecting consumer behavior

A consumers buying behavior is influenced by cultural, social, personal and Psychological
factors. For the most part, marketers cannot control such factors, but they must take them into
account.
1. Cultural factors
Cultural factors exert a broad and deep influence on consumer behavior. Marketers need to
understand the role played by these cultural factors which includes buyer s culture, subculture,
and social class.
A. Culture
Culture is the set of basic values, perceptions, wants, and behaviors learned by a member of
society from family and other important institutions. It is the most basic cause of a person s
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wants and behavior. Every group or society has a culture, and cultural influences on buying
behavior may vary greatly from country to country. A failure to adjust to these differences can
result in ineffective marketing or embarrassing mistakes.
B. Subculture
Each culture contains smaller subcultures. Subculture is group of people with shared value
systems based on common life experiences and situations. It includes nationalities, religions,
racial groups, and geographic regions. Many subcultures make up important market segments,
and marketers often design products and marketing programs tailored to their needs.
C. Social class
Almost every society has some form of social class structure. Social classes are societys
relatively permanent and ordered divisions whose members share similar values, interests, and
behaviors. Social class is measured as a combination of occupation, income, education, wealth,
and other variables. Marketers are interested in social class because people within a given social
class tend to exhibit similar buying behavior.
2. Social factors
A consumers behavior also is influenced by social factors such as reference groups, family, and
social roles and status.
A. Reference groups
Reference groups are all the groups that have a direct or indirect influence on their attitudes or
behavior. Groups having a direct influence are called membership groups. Some of these are
primary groups with whom the person interacts fairly continuously and informally, such as
family, friends, neighbors, and coworkers. People also belong to secondary groups, such as
religious, professional, and trade-union groups, which tend to be more formal and require less
continuous interaction.
People are also influenced by groups to which they do not belong. Aspirational groups are
those a person hopes to join; dissociative groups are those whose values or behavior an
individual rejects. Where reference group influence is strong, marketers must determine how to
reach and influence the groups opinion leaders.
B. Family
Family members can strongly influence buyer behavior. The family is the most important
consumer buying organization in society, and it has been researched extensively. Marketers are
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interested in the roles and influence of the husband, wife, and children on the purchase of
different products and services.
C. Social roles and status
The persons position in each group can be defined in terms of both role and status. A role
consists of the activities people are expected to perform according to the people around them.
Each role carries a status reflecting the general esteem given to it by society. People usually
choose products appropriate to their roles and status.
3. Personal factors
A buyers decisions also are influenced by personal characteristics such as the buyer s age and
life-cycle stage, occupation, economic situation, lifestyle, and personality and self-concept.
A. Age and life-cycle stage
People change the goods and services they buy over their lifetimes. Tastes in food, clothes,
furniture, and recreation are often age related. Buying is also shaped by the stage of the family
life cycle: the stages through which families might pass as they mature over time. Life stage
changes usually result from demographics and life-changing events: marriage, having children,
purchasing a home, divorce, children going to college, changes in personal income, moving out
of the house, and retirement. Marketers often define their target markets in terms of life-cycle
stage and develop appropriate products and marketing plans for each stage.
B. Occupation
A persons occupation affects the goods and services bought. Marketers try to identify the
occupational groups that have an above-average interest in their products and services. A
company can even specialize in making products needed by a given occupational group.
C. Lifestyle
People coming from the same subculture, social class, and occupation may have quite different
lifestyles. Lifestyle is a persons pattern of living as expressed in his or her psychographics. The
lifestyle concept can help marketers understand changing consumer values and how they affect
buying behavior. Consumers dont just buy products; they buy the values and lifestyles those
products represent.
D. Personality and self-concept
Personality refers to the unique psychological characteristics that distinguish a person.
Personality is usually described in terms of traits such as self-confidence, dominance, sociability,
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autonomy, defensiveness, adaptability, and aggressiveness. Personality can be useful in

analyzing consumer behavior for certain product or brand choices.
4. Psychological factors
A persons buying choices are further influenced by four major psychological factors:
motivation, perception, learning, and beliefs and attitudes.
A. Motivation
A person has many needs at any given time. Some are biological, arising from states of tension
such as hunger, thirst, or discomfort. Others are psychological, arising from the need for
recognition, esteem, or belonging. A need becomes a motive when it is aroused to a sufficient
level of intensity. A motive is a need that is sufficiently pressing to direct the person to seek
satisfaction.
B. Perception
A motivated person is ready to act. How the person acts is influenced by his or her own
perception of the situation. All of us learn by the flow of information through our five senses:
sight, hearing, smell, touch, and taste. However, each of us receives, organizes, and interprets
this sensory information in an individual way. Perception is the process by which people select,
organize, and interpret information to form a meaningful picture of the world.
C. Learning
When people act, they learn. Learning describes changes in an individuals behavior arising
from experience. Learning theorists say that most human behavior is learned. Learning can
influence a consumers response to his or her interest in buying the product.
D. Beliefs and attitudes
A belief is a descriptive thought that a person has about something. Beliefs may be based on real
knowledge, opinion, or faith and may or may not carry an emotional charge. Marketers are
interested in the beliefs that people formulate about specific products and services because these
beliefs make up product and brand images that affect buying behavior. If some of the beliefs are
wrong and prevent purchase, the marketer will want to launch a campaign to correct them.
People have attitudes regarding religion, politics, clothes, music, food, and almost everything
else. Attitude describes a persons relatively consistent evaluations, feelings, and tendencies
toward an object or idea. Attitudes put people into a frame of mind of liking or disliking things,
of moving toward or away from them.
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5. Economic Factors
The purchasing quirks and decisions of the consumer largely rely upon the market or nation s
economic circumstances. The more that a nation is prosperous and its economy stable, the larger
will be the money supply of the market and the consumer s purchasing power. A strong, healthy
economy brings purchasing confidence while a weak economy reveals a strained market, marked
by a weakened purchasing power and unemployment.
Some significant economic factors include:
a) Personal Income
Our personal income is the criteria that dictate the level of money we will spend on buying goods
or services. There are primarily two kinds of personal incomes that a consumer has namely
disposable income and discretionary income. Our disposable income is mainly the income that
remains in hand after removing all necessary payments such as taxes. The greater the disposable
personal income the greater would be the expenditure on several products, and the same would
be the case when it is the other way round.
Meanwhile, our discretionary personal income would be the income that remains after managing
all the basic life necessities. This income is also used when it comes to purchasing shopping
goods, durables, luxury items, etc. An escalation in this income leads to an improvement in the
standard of living which in turn leads to greater expenditure on shopping goods.
b) Family Income
Our family income is actually an aggregate of the sum total of the income of all our family
members. This income also plays a considerable role in driving consumer behavior. The income
that remains after meeting all the basic life necessities is what is then used for buying various
goods, branded items, luxuries, durables, etc.
c) Income Expectations
It's not just our personal and family income that impacts our buying behavior, our future income
expectations also have a role to play. For instance, if we expect our income to rise in the future,
we would naturally spend a greater amount of money in purchasing items. And of course, in case
we expect our income to take a plunge in the near future, it would have a negative influence on
our expenditure.
d) Consumer Credit
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The credit facilities at our behest also impact our purchasing behavior. This credit is normally
provided by sellers, either directly or indirectly via banks or financial institutions. If we have
flexible credit terms as well as accessible EMI schemes, our expenditure on items is likely to
increase and in less flexible credit terms would result in the opposite.
e) Liquid Assets
Even the liquid assets weve maintained influence our purchasing behavior. In case you are
wondering, these are the assets that get promptly converted into cash such as stocks, mutual
funds, our savings or current accounts. If we have more liquid assets, there is a greater likelihood
of us spending more on luxuries and shopping items. Lesser liquid assets meanwhile result in
lesser expenditure on these items.
f) Savings
The savings generated from our personal income are also regulating our buying behavior. For
instance, if we take the decision of saving more from our income for a certain period of time, our
expenditure on goods and services would be lesser and for that period and if we wish to save
less, our expenditure on such items would increase.
We undertake purchase decisions nearly every day, be it big or small. For every buying decision
made, we think of fulfilling a need. This need can be steered by a range of factors, which have
been elaborately highlighted over here.
3.2.2. Types of consumer buying decision behavior

Consumer decision making varies with the type of buying decision. More complex decisions
usually involve more buying participants and more buyer deliberation. The consumer buying
decision behavior is classified into four types based on the degree of buyer involvement and the
degree of differences among brands. This are: complex buying behavior, dissonance-reducing
buying behavior, habitual buying behavior, and variety-seeking buying behavior.
1. Complex buying behavior

Complex buying behavior is a consumer buying behavior in situations characterized by high
consumer involvement in a purchase and significant perceived differences among brands.
Consumers involve in complex buying behavior when the product is expensive, risky, purchased
infrequently, and highly self-expressive. This buyer will pass through a learning process, first
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developing beliefs about the product, then attitudes, and then making a thoughtful purchase
choice. Marketers of high involvement products must understand the information-gathering and
evaluation behavior of high-involvement consumers and help buyers to learn about product-class
attributes and their relative importance by differentiate their brand s features. Marketers need to
influence the consumers final brand choice.
2. Dissonance-reducing buying behavior

Dissonance-reducing buying behavior occurs when consumers are highly involved with an
expensive, infrequent, or risky purchase but see little difference among brands. In this case,
because perceived brand differences are not large, buyers may shop around to learn what is
available but buy relatively quickly. They may respond primarily to a good price or purchase
convenience. After the purchase, consumers might experience post purchase dissonance (after-
sale discomfort) when they notice certain disadvantages of the purchased brand or hear favorable
things about brands not purchased. To counter such dissonance, the marketer s after-sale
communications should provide evidence and support to help consumers feel good about their
brand choices.
3. Habitual buying behavior

Habitual buying behavior occurs under conditions of low-consumer involvement and little
difference among brands. For example, take table salt. Consumers have little involvement in this
product categorythey simply go to the store and reach for a brand. If they keep reaching for the
same brand, it is out of habit rather than strong brand loyalty. Consumers appear to have low
involvement with most low-cost, frequently purchased products.
4. Variety-seeking buying behavior

Variety-seeking buying behavior is a consumer buying behavior in situations characterized by
low consumer involvement but significant perceived brand differences. In such cases, consumers
often do a lot of brand switching. In such product categories, the marketing strategy may differ
for the market leader and minor brands. The market leader will try to encourage habitual buying
behavior by dominating shelf space, keeping shelves fully stocked, and running frequent
reminder advertising. Challenger firms will encourage variety seeking by offering lower prices,
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special deals, coupons, free samples, and advertising that presents reasons for trying something
new.
3.2.3. The buyer decision process in consumer market

There are five stages that buyers pass through to reach a buying decision. Clearly, the buying
process starts long before the actual purchase and continues long after. This encourages the
marketer to focus on the entire buying process rather than just the purchase decision since
consumers pass through all five stages with every purchase.
Stage 1 Need recognition

It is the first stage of the buyer decision process in which the consumer recognizes a problem or
need. The need can be triggered both by internal stimuli and external stimuli. The marketer can
identify the stimuli that most often trigger interest in the product and can develop marketing
strategies that involve these stimuli.
Stage 2 Information search

It is the stage of the buyer decision process in which the consumer is aroused to search for more
information. The consumer may simply have heightened attention or may go into an active
information search. The consumer can obtain information from any of several sources: personal
sources (family, friends, and neighbors), commercial sources (advertising, salespeople, dealers,
packaging, and displays), public sources (mass media, consumer-rating organization) and
experiential sources (handling, examining, and using the product). The marketer should identify
consumers' sources of information and design its marketing mix to make prospects aware of and
knowledgeable about its brand.
Stage 3 Evaluation of alternatives

It is the stage of the buyer decision process in which the consumer uses information to evaluate
alternative brands in the choice set. The consumer ranks brands and forms purchase intentions.
Marketers should study buyers to find out how they actually evaluate brand alternatives. If
marketers know what evaluative processes go on, they can take steps to influence the buyer s
decision.
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Stage 4 Purchase decision

It is the stage of the buyer decision process in which the consumer actually buys the product. A
consumer's decision to change, postpone or avoid a purchase decision is influenced heavily by
perceived risk. Many purchases involve some risk taking. The marketer must understand the
factors that provoke feelings of risk in consumers and must provide information and support that
will reduce the perceived risk.
Stage 5 Post purchase behavior

It is the stage of the buyer decision process in which consumers take further action after purchase
based on their satisfaction or dissatisfaction with a purchase. If the product falls short of
expectations, the consumer is disappointed; if it meets expectations, the consumer is satisfied; if
it exceeds expectations, the consumer is delighted. This suggests that sellers should promise only
what their brands can deliver so that buyers are satisfied.
3.3. Business markets and business buying behavior

The business marketer needs to know: who are the major participants? In what decisions do they
exercise influence? What is their relative degree of influence? What evaluation criteria does each
decision participant use? The business marketer also needs to understand the major
environmental, interpersonal, and individual influences on the buying process.
Business buyer behavior refers to the buying behavior of the organizations that buy goods and
services for use in the production of other products and services that are sold, rented, or supplied
to others. Business market is a market that comprises all the organizations that buy goods and
services for use in the production of other products and services that are sold, rented, or supplied
to others.
3.3.1. Characteristics of business markets

In some ways, business markets are similar to consumer markets. Both involve people who
assume buying roles and make purchase decisions to satisfy needs. However, business markets
differ in many ways from consumer markets. The main differences include:
A. Market structure and demand
The business marketer normally deals with far fewer but far larger buyers than the consumer
marketer does. Business demand is derived demand: it is ultimately derived from the demand for
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consumer goods. Many business markets have inelastic demand; that is, the total demand for
many business products is not much affected by price changes, especially in the short run.
Finally, business markets have more fluctuating demand. The demand for many business goods
and services tends to change more and more quickly than the demand for consumer goods and a
service does. A small percentage increase in consumer demand can cause large increases in
business demand.
B. Nature of the Buying Unit
Compared with consumer purchases, a business purchase usually involves more decision
participants and a more professional purchasing effort. Often, business buying is done by trained
purchasing agents who spend their working lives learning how to buy better. Therefore,
companies must have well-trained marketers and salespeople to deal with these well-trained
buyers.
C. Types of Decisions and the Decision Process
Business buyers usually face more complex buying decisions than do consumer buyers. Because
the purchases are more complex, business buyers may take longer to make their decisions. The
business buying process also tends to be more formalized than the consumer buying process.
Large business purchases usually call for detailed product specifications, written purchase
orders, careful supplier searches, and formal approval.
3.3.2. Major types of business buying situations

There are three major types of business buying situations. This are:
i) Straight rebuy situation

A business buying situation in which the buyer routinely reorders something without any
modifications. It is usually handled on a routine basis by the purchasing department.
ii) Modified rebuy situation
A business buying situation in which the buyer wants to modify product specifications, prices,
terms, or suppliers.
iii) New task situation
A business buying situation in which the buyer purchases a product or service for the first time.
In such cases, the greater the cost or risk, the larger the number of decision participants and the
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greater the companys efforts to collect information.
iii.3.3. Participants in the Business Buying Process

a) Users: - are members of the buying organization who will actually use the purchased
product or service.
b) Influencers: - are people in an organizations buying center who affect the buying
decision. They often help define specifications and also provide information for
evaluating alternatives.
c) Buyers: - are people in an organizations buying center who make an actual purchase.
d) Deciders: - are people in an organizations buying center who have formal or informal
power to select or approve the final suppliers.
e) Gatekeepers: - are people in an organizations buying center who control the flow of
information to others.
iii.3.4. Major Influences on Business Buyers

Business buyers are subject to many influences when they make their buying decisions. They
affected by environmental, organizational, interpersonal, and individual factors.
Environmental Organizational Interpersonal Individual
The economy Objectives Influence Age/education
Supply condition Strategies Expertise Job position
Technology Structure Authority Motives
Politics/regulation Systems Dynamics Personality
Competition Procedures Preferences
Culture and customs Buying style
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iii.3.5. The Business Buying Process

There are eight stages of the business buying process. Buyers who face a new-task buying
situation usually go through all stages of the buying process. Buyers making modified or straight
rebuys may skip some of the stages.
Stage 1 Problem recognition: The first stage of the business buying process in which someone
in the company recognizes a problem or need that can be met by acquiring a good or a service.
Stage 2 General need descriptions: It is the stage in the business buying process in which a
buyer describes the general characteristics and quantity of a needed item.
Stage 3 Product specification: It is the stage of the business buying process in which the buying
organization decides on and specifies the best technical product characteristics for a needed item.
Stage 4 Supplier search: It is the stage of the business buying process in which the buyer tries
to find the best vendors.
Stage 5 Proposal solicitation: The stage of the business buying process in which the buyer
invites qualified suppliers to submit proposals.
Stage 6 Supplier selection: It is the stage of the business buying process in which the buyer
reviews proposals and selects a supplier or suppliers.
Stage 7 Order-routine specifications
The stage of the business buying process in which the buyer writes the final order with the
chosen supplier(s), listing the technical specifications, quantity needed, expected time of
delivery, return policies, and warranties.
Stage 8 Performance review
The stage of the business buying process in which the buyer assesses the performance of the
supplier and decides to continue, modify, or drop the arrangement.
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CHAPTER FOUR: MARKET SEGMENTATION, TARGETING AND POSITIONING
Introduction
A market can be seen as people or organizations with needs to satisfy, and the willingness to
spend money. However, within a total market, there is always some diversity among the buyers.
For example, not all consumers want the product at the same time. What we are seeing here is
that within the general market, there are groups of customers with different wants, buying
preferences, or product use behavior. This chapter deals with market segmentation, market
targeting and positioning.
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4.1. Market segmentation

Markets consist of buyers, and buyers differ in one or more ways. They may differ in their
wants, resources, locations, buying attitudes and buying practices. Companies today recognize
that they cannot appeal to all buyers in the market place in the same way because, buyers are
too numerous, widely scattered, varied in their needs and companies also vary widely in their
abilities to serve different segments of the market. This needs the company to design strategies
to build the right relationships with the right customers. This can be done by identifying bases
for segmenting the market and develop segment profiles. Market segmentation is dividing a
market into smaller groups of buyers with distinct needs, or behaviors who might require
separate marketing mixes. Through market segmentation, companies divide large,
heterogeneous markets into smaller segments that can be reached more efficiently with
products and services that match their unique needs. A market segment consists of a group of
customers who share a similar set of needs and wants.
4.1.1. Levels of market segmentation

Market segmentation can be carried out at many different levels. Companies can practice no
segmentation (mass marketing), complete segmentation (micromarketing) or something in
between (segment marketing or niche marketing).
1. Mass marketing (undifferentiated marketing)

Here a firm attempts to serve all customers groups with all the products that they might need.
Mass marketing is a plan of action under which an organization treats its total market as a single
segment that is, as one market whose members are considered to be similar with respect to
demand for the product and thus develops a single marketing mix to reach most of the customers
in the entire market. Single marketing mix consists of:
 One pricing strategy
 One promotional program aimed at everybody
 One type of product with little/no variation
 One distribution system aimed at entire market
2. Segmented/differentiated/ marketing
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Segmented marketing is a market coverage strategy in which a firm decides to target several
groups of market segments and designs separate offers for each. Here the firm selects a number
of segments, each objectively attractive and appropriate, given the firm s objectives and
resources. There may be little or no synergy (interaction, agreement, cooperation) among the
segments, but each segment promises to be a moneymaker. These multi segment coverage
strategies have the advantage of diversifying the firms risk, even if one segment becomes
unattractive, the firm can continue to earn money in other segments. Developing a stronger
position within several segments creates more total sales than mass marketing across all
segments. But segmented marketing also increases the cost of doing business. Developing
separate marketing plans for the separate segments requires extra marketing research,
forecasting, sales analysis, promotion planning, and channel management. Segment marketing
offers several benefits over mass marketing. The company can market more efficiently, targeting
its products or services, channels and communications programmed towards only consumers that
it can serve best. The company can also market more effectively by fine-tuning its products,
prices and programs to the needs of carefully defined segments.
3. Niche marketing
Market segments are normally large, identifiable groups within a market. Niche marketing
focuses on subgroups within segments. A niche is a more narrowly defined group, usually
identified by dividing a segment into sub segments or by defining a group with a distinctive set
of traits that may seek a special combination of benefits. Niche marketers aim to understand their
customers needs so well that customers willingly pay a premium. an attractive niche involves:
customers that have a distinct set of needs; they will pay a premium to the firm that best satisfies
them; the niche is fairly small but has size, profit, and growth potential and is unlikely to attract
many competitors; and the niche gains certain economies through specialization.
4. Micro marketing
Micro marketing is the practice of tailoring products and marketing programs to suit the tastes of
specific individuals and locations. Micromarketing includes local marketing and individual
marketing. Local marketing involves tailoring brands and promotions to the needs and wants of
local customer groups - cities, neighborhoods and even specific stores. Individual marketing
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involves tailoring products and marketing programs to the needs and preferences of individual
customers. Individual marketing has also been called markets-of-one marketing, customized
marketing and one-to-one marketing.
4.1.2. Segmenting consumer markets

There is no single way to segment a market. A marketer has to try different segmentation
variables alone and in combination. The major variables used in segmenting consumer markets
include geographic, demographic, psychographic and behavioral variables.
i) Geographic segmentation
Geographic segmentation is dividing a market into different geographical units such as
nations, countries, state, cities, density, climate etc. A company may decide to operate in one
or a few geographic areas or operate in all areas but pay attention to geographic difference in
needs and wants.
ii) Demographic segmentation
Demographic segmentation divides the market into groups based on variables such as age,
gender, family size, family life cycle, income, occupation, education, religion, race, and
nationality. Demographic factors are the most popular bases for segmenting customer groups
because consumer needs and wants often vary closely with demographic variables and
demographic variables are easier to measure than most other types of variables. Even when
market segments are first defined using other bases, such as benefits sought or behavior, their
demographic characteristics must be known in order to assess the size of the target market and to
reach it efficiently.
Some of demographic segmentations are:
A. Age and life cycle segmentation
Age and life cycle segmentation consists of offering different products or using different
marketing approaches for different age and life-cycle groups. Consumer needs and wants change
with age. The marketer must identify these age and life cycle stages to know their interest toward
the product they buy. Some companies use age and life cycle segmentation, offering different
products or using different marketing approaches for different age and life-cycle groups.
B. Gender segmentation
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Gender segmentation divides a market into different groups based on sex. Men and women have
different attitudes and behave differently, based partly on genetic makeup and partly on
socialization. This segmentation form has long been used for clothing, cosmetics, toiletries, and
magazines.
C. Income segmentation
Income segmentation divides a market into different income groups. Marketers must remember
that they do not always have to target the affluent. Other income groups are also viable and
profitable market segments.
D. Occupation segmentation
Occupation segmentation refers to dividing a market based on the activities of the customers,
such as professional and technical, managers, officials, clerical, supervisors, sellers, operatives,
students, craft people, farmers, home makers, etc
1. Psychographic segmentation
Psychographic segmentation divides a market into different groups based on social class,
lifestyle, or personality characteristics. People in the same demographic class can exhibit very
different psychographics characteristics. It includes social class segmentation, lifestyle
segmentation, and personality segmentation. As previously seen in, lifestyle also affects peoples
interest in various goods, and the goods they buy express those lifestyles. Personality variables
can also be used to segment markets. Marketers will give their products personalities that
correspond to consumer personalities.
2. Behavioral segmentation
Behavioral segmentation refers to dividing a market into groups based on consumer knowledge,
attitudes, uses, or responses to a product. Many marketers believe that behavioral variables can
include: Occasions, Benefits, User status, User rates, Loyalty status, and Readiness stage
segmentations.
A. Occasion segmentation
Occasion segmentation consists of dividing the market into groups according to occasions when
buyers get the idea to buy, actually make their purchase, or use the purchased item. Occasion
segmentation can help firms build up product usage.
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B. Benefit segmentation
Benefit segmentation involves dividing the market into groups according to the different benefits
the consumers seek from the product. It requires finding the main benefits people look for in the
product class, the kinds of people who look for each benefit and the major brands that deliver
each benefit.
C. User status segmentation
User status segmentation divides the market into non-users, ex-users, potential users, first-time
users and regular users of a product. Potential users and regular users may require different kinds
of marketing appeal.
D. Usage rate segmentation
Markets can be segmented into light, medium, and heavy product users. Heavy users are often a
small percentage of the market but account for a high percentage of total consumption.
Marketers usually prefer to attract one heavy user rather than several light users, and they vary
their promotional efforts accordingly. Product users were divided into two halves, a light-user
and a heavy-user half, according to their buying rates for the specific products.
E. Loyalty status segmentation
A market can be segmented by consumer loyalty patterns. According to loyalty, buyers can be
divided into four groups: Hard-core loyal (consumers who buy one brand all the time), Split
loyal (consumers who are loyal to two or three brands), Shifting loyal (consumers who shift
from favoring one brand to another), and Switchers (consumers who show no loyalty to any
brand).
F. Buyer-readiness stage segmentation
A market consists of people in different stages of readiness to buy a product: Some are unaware
of the product, some are aware, some are informed, some are interested, some desire the product,
and some intend to buy. The relative numbers make a big difference in designing the marketing
program. Marketers segment the market by taking into consideration this stage of buyer-
readiness.
4.1.3. Segmenting business market

We can segment business markets with some of the same variables we use in consumer markets,
such as geography, benefits sought, and usage rate, but business marketers also use other
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variables. Major segmentation variables for business markets include:
A. Business customer demographic variables

 Industry: Which industries should we serve?
 Company size: What size companies should we serve?
 Location: What geographical areas should we serve?
B. Operating Variables
 Technology: What customer technologies should we focus on?
 User or nonuser status: Should we serve heavy, medium, and light users, or nonusers?
 Customer capabilities: Should we serve customers needing many or few services?
C. Purchasing Approaches
 Purchasing-function organization: Should we serve companies with highly
centralized or decentralized purchasing organizations?
 Power structure: Should we serve companies that are engineering dominated,
financially dominated, and so on?
 Nature of existing relationships: Should we serve companies with which we have
strong relationships or simply go after the most desirable companies?
 General purchase policies: Should we serve companies that prefer leasing? Service
contracts? Systems purchases? Sealed bidding?
 Purchasing criteria: Should we serve companies that are seeking quality? Service?
Price?
D. Situational Factors
 Urgency: Should we serve companies that need quick and sudden delivery or service?
 Specific application: Should we focus on certain applications of our product rather than
all applications?
 Size of order: Should we focus on large or small orders?
E. Personal Characteristics
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 Buyer-seller similarity: Should we serve companies whose people and values are
similar to ours?
 Attitudes toward risk: Should we serve risk-taking or risk-avoiding customers?
 Loyalty: Should we serve companies that show high loyalty to their suppliers?
4.1.4. Requirements for effective segmentation

Even after applying segmentation variables to a consumer or business market, marketers must
realize that not all segmentations are useful. To be useful, market segments must be:
1. Measurable: The size, purchasing power, and characteristics of the segments can be
measured.
2. Substantial: The segments are large and profitable enough to serve. A segment should be the
largest possible homogeneous group worth going after with a tailored marketing program.
3. Accessible: The segments can be effectively reached and served.
4. Differentiable: The segments are conceptually distinguishable and respond differently to
different marketing mixes. If two segments respond identically to a particular offer, they do
not constitute separate segments.
5. Actionable: Effective programs can be formulated for attracting and serving the segments.
4.2. Market targeting

Market targeting is the process of evaluating each market segment s attractiveness and
selecting one or more segment to enter the market. Once the firm has identified its market-
segment opportunities, it has to decide how many and which ones to target.
There are two steps in the market targeting: evaluating market segments and selecting target
market segments.
1. Evaluating market segments
In evaluating different market segments, the firm must look at two factors: Segments overall
attractiveness and companys objectives and resources.
A. Segments overall attractiveness
Segment attractiveness must be in the size, growth, profitability, scale economies, low risk
and so on. The company should target consumers who will spend a lot on the category, stay
loyal and influence others. Does it have characteristics that make it generally attractive, such
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as size, growth, profitability, scale economies, and low risk? So the company must first collect
and analyze data on current segment sales, growth rates, and expected profitability for various
segments.
B. Companys objectives and resources
Even if a segment has the right size and growth and is structurally attractive, the company must
consider its objectives and resources for that segment. Companys objectives may be in the short
time or long time based on the companys purpose toward the given activities. Even if the
segment fits the companys objectives, the company must consider whether it possesses the skills
and resources it needs to succeed in that segment.
2. Selecting and entering market segments

Having evaluated different segments, the company must decide which and how many
segments to serve. In other words, it must decide which segments to target. After evaluating
different segments, the company can consider the following five patterns of target market
selection.
1. Single segment concentration
With single-segment concentration, the firm markets to only one particular segment. Through
concentrated marketing, the firm gains a strong knowledge of the segment's needs and achieves a
strong market presence. Furthermore, the firm enjoys operating economies through specializing
its production, distribution, and promotion. If it captures segment leadership, the firm can earn a
high return on its investment. However, there are risks. A particular market segment can turn
sour or a competitor may invade the segment. For these reasons, many companies prefer to
operate in more than one segment.
2. Selective specialization
A firm selects a number of segments, each objectively attractive and appropriate. There may
be little or no synergy among the segments, but each promises to be a moneymaker. This
coverage strategy has the advantage of diversifying the firm s risk, even if one segment
becomes unattractive, the firm can continue to earn money in other segments. However,
segmented marketing also increases the cost of doing business. Developing separate marketing
plans for the separate segments requires extra marketing research, forecasting, sales analysis,
promotion planning, and channel management. Trying to reach different market segments with
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different advertising effort increases promotion costs. Thus, the company must weigh
increased sales against increased costs when deciding on a differentiated marketing strategy.
3. Product specialization
The firm makes a certain product that it sells to several different market segments. An example
would be a microscope manufacturer who sells to university, government, and commercial
laboratories. The firm makes microscopes for the different customer groups and builds a strong
reputation in the specific product area. The downside risk is that the product may be
supplanted by an entirely new technology.
4. Market specialization
The firm concentrates on serving many needs of a particular customer group. An example
would be a firm that sells an assortment of products only to university laboratories. The firm
gains a strong reputation in serving this customer group and becomes a channel for additional
products the customer group can use. The downside risk is that the customer group may suffer
budget cuts or shrink in size.
5. Full market coverage

The firm attempts to serve all customer groups with all the products they might need. Only
very large firms can undertake a full market coverage strategy. Large firms can cover a whole
market in two broad ways: through-undifferentiated marketing or differentiated marketing.
A. Undifferentiated marketing
The firm ignores segment differences and goes after the whole market with one offer. It designs
a marketing program for a product with a superior image that can be sold to the broadest number
of buyers via mass distribution and mass communications. Undifferentiated marketing is
appropriate when all consumers have roughly the same preferences and the market shows no
natural segments.
B. Differentiated marketing
The firm sells different products to all the different segments of the market. Differentiated
marketing typically creates more total sales than undifferentiated marketing. However, it also
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increases the costs of doing business. Because differentiated marketing leads to both higher sales
and higher costs, no generalizations about its profitability are valid.
4.3. Positioning
All marketing strategy is built on STP Segmentation, Targeting, and Positioning. A company
discovers different needs and groups in the marketplace, targets those needs and groups that it
can satisfy in a superior way, and then positions its offering so that the target market
recognizes the company's distinctive offering and image. In marketing, positioning has come
to mean the process by which marketers try to create an image or identity in the minds of their
target market for their product, brand, or organization. Positioning is the battle for your mind.
It is the act of designing the company's offering and image to occupy a distinctive place in the
mind of the target market.
The positioning task consists of the following steps:

1. Identifying a set of possible competitive advantages upon which to build a position,
2. Choosing the right competitive advantages,
3. Selecting an overall positioning strategy, and
4. Communicating and Delivering the Chosen Position
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CHAPTER FIVE: PRODUCT

Introduction
In this chapter we will be concentrating on one of marketing mix product. The main focus of
discussion will be product. Initially, we will start with the meaning of product and then moving
on to different levels of product, classification of product, new product development, product life
cycle and finally it will be followed by product attributes and brands. So, in this chapter, well
study how companies develop and manage products and brands.
5.1. What is product?
Product is anything that offered to a market for attention, acquisition, use, or consumption that
might satisfy a want or need. It is a bundle of physical and intangible attributes that have the
potential to satisfy present and potential customer wants. Broadly defined, products can include
physical goods, information, experiences, events, services, places, properties, organizations,
persons and ideas. Product is a complex concept that must be carefully defined. As the first of
the four marketing mix variables, it is often where strategic planning begins. Product strategy
calls for making coordinated decisions on individual products, product lines, and the product
mix.
5.2. Levels of product
Products have five levels. Marketer needs to address five product levels since each level adds
more customer value, and the five constitute a customer-value hierarchy. These are:
Level 1, Core benefit: It is the fundamental level of a product. Core benefit is the service or
benefit that the customer is really buying. A hotel guest is buying rest and sleep. Marketers must
see themselves as benefit providers.
Level 2, Basic product: It is product parts that deliver the core benefit. For example bed,
restroom etc. to generate sleep & rest.
Level 3, Expected product: It is a set of attributes and conditions that buyers normally expect
when they purchase this product. Hotel guests minimally expect a clean bed, working lamps, and
a relative degree of quiet.
Level 4, Augmented product: At this stage the competition is around after sales service,
warranties, delivery and so on. For example, Feyisa a retail departmental store offers free five
year guarantee on purchases of his Television sets, this gives their customers the additional
benefit over five years.
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Level 5, Potential product: Encompasses all the possible augmentations and transformations
the product or offering might undergo in the future. Here is where companies search for new
ways to satisfy customers and distinguish their offering.
5.3. Classification of product
I. Product Classification Based on Tangibility and Intangibility
A. Durable goods: Durable goods are tangible goods that normally survive for many years.
Durable products normally require more personal selling and service, and require more seller
guarantees. Examples include refrigerators, machine tools, and clothing.
B. Non-durable goods: None-durable goods are tangible goods that normally consumed in
one or a few uses. Since these goods are consumed quickly and purchased frequently, the
appropriate strategy is to make them available in many locations, charge only a small markup,
and advertise heavily to induce trial and build preference. Examples are soap, food etc.
C. Services: Service is any act or performance that one party can offer to another that is
essentially intangible and does not result in the ownership of anything. A service business is one
that provides an intangible product for its consumers. As a result, they normally require more
quality control, supplier credibility, and adaptability. Examples: include haircuts and repairs.
Characteristics of Service: Services are intangible, inseparable, variable, and perishable.
Intangibility is a major characteristic of services they cannot be seen, tasted, felt, heard, or
smelled before they are bought. Inseparability refers to services are produced and consumed at
the same time and cannot be separated from their provider. Variability refers quality in service
may vary greatly depending on who provides them and when, where & how. Perishability refers
services cannot be stored for latter sales or use.
II. Product Classification Based on use:
Based on use product can be classified into consumer and industrial product.
a. Consumer product Classification
Consumer products are products bought by final consumers for personal consumption. Marketers
usually classify these products further based on how consumers go about buying them. Based on
the shopping habit of consumers consumer products are classified into four groups: convenience,
shopping, specialty and unsought products.
1. Convenience product
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Convenience products are consumer products that customers usually buy frequently,
immediately, and with minimal comparison and buying effort. Example includes laundry
detergent, candy, magazines, and fast food. Convenience products are usually low priced, and
marketers place them in many locations to make them readily available when customers need or
want them. They are widely available at many outlets and purchased with a minimum effort.
Convenience goods can be divided into staples, impulse, and emergency goods.
A. Staple goods:
Staple goods are goods that consumers purchase on a regular basis and include milk, bread, eggs,
soap, pasta, butter which are bought routinely because the family regularly consumes them. The
decision to buy these products is programmed after the first time when the consumer puts them
on his list of regular items.
B. Impulse goods:
Purchases of Impulse products are absolutely unplanned exposure to the product triggers they
want. Examples are chewing gums, lottery, and magazines. They are widely distributed and
displayed because shoppers may not have thought of buying them until they spot them.
C. Emergency goods:
Purchases of emergency products result from urgent and compelling needs. Emergency goods
are purchased when a need is urgent. For example umbrella bought during a rainstorm and
candles during blackouts. Manufacturers of emergency goods will place them in many outlets to
capture the sale, when the customer needs them.
2. Shopping product
Shopping products are less frequently purchased consumer products that customers compare
carefully on suitability, quality, price, and style. When buying shopping products, consumers
spend much time and effort in gathering information and making comparisons. Examples include
furniture, clothing, etc. Shopping products marketers usually distribute their products through
fewer outlets but provide deeper sales support to help customers in their comparison efforts.
3. Specialty product
Specialty products are consumer products and services with unique characteristics or brand
identification for which a significant group of buyers is willing to make a special purchase effort.
Consumer will make a special effort to buy these products and have strong convictions as to
brand, style, or type. Examples include specific brands cars, photographic equipment etc.
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4. Unsought product
Unsought products are consumer goods that the consumer either does not know about or knows
about but does not normally think of buying. Most major innovations are unsought until the
consumer becomes aware of them through advertising. Other examples of known but unsought
goods are life insurance, home security systems etc. By their very nature, unsought goods require
a lot of advertising, personal selling and other marketing efforts.
In general, marketers use widespread distribution for convenience products, selective distribution
in fewer outlets for shopping products, exclusive distribution in only one or few outlets per
market area, and vary distribution system for unsought products.
b. Industrial product classification
Industrial products are those products purchased for further processing or for use in conducting a
business. Thus, the distinction between a consumer product and an industrial product is based on
the purpose for which the product is purchased. We classify industrial goods in terms of their
relative cost and how they enter the production process into three groups: materials and parts,
capital items, and supplies and business services.
1. Materials and parts
Materials and parts are goods that enter the manufacturers product completely. They fall into
two classes: raw materials and manufactured materials and parts.
A. Raw materials includes farm products (wheat, cotton, livestock, fruits, and vegetables)
and natural products (fish, lumber, crude petroleum, iron ore).
B. Manufactured materials and parts include component materials and component parts.
Component materials are usually fabricated further-for example, pig iron is made into steel,
and yarn is woven into cloth.
Component parts enter the finished product with no further change in form, as when small
motor are put into vacuum cleaners, and tires are put on automobiles.
2. Capital items
Capital items are long-lasting goods that facilitate developing or managing the finished product.
They include installations and equipment:
A. Installations consist of major purchases such as buildings (factories, offices) and fixed
equipment (big generators, large computer systems, elevators).
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B. Equipment includes portable factory equipment and tools (hand tools, lift trucks) and
office equipment (computers, fax machines, desks). They have a shorter life than
installations but a longer life than operating supplies. It simply aid in the production
process.
3. Supplies and business service
Supplies and services are short-lasting goods and services that facilitate developing or managing
the finished product.
A. Supplies include operating supplies (lubricants, coal, paper, pencils) and repair and
maintenance items (paint, nails, brooms). Supplies are the convenience products of the
industrial field because they are usually purchased with a minimum of effort or
comparison.
B. Business service includes maintenance and repair services (e.g. car repair, computer
repair) and business advisory services (e.g. legal, management consulting, and
advertising). Such services are usually supplied under contract.
5.4. New products
Given the rapid changes in consumer tastes, technology, and competition, companies must
develop a steady stream of new products. By new products we mean the development of original
products, product modification, and new brands that the firm develops through its own research
and development efforts. New products are the lifeblood of an organization. Once a company has
carefully segmented the market, chosen its target market, identified their needs and determined
its market positioning, it is better able to develop new products. Marketers play a key role in the
new product development process, by identifying and evaluating new product idea and working
with R&D and others in every stage of development. New product development shapes the
companys future.
A firm can obtain new products in two ways. One is through acquisition: by buying a whole
company, a patent, or a license to produce someone else's product. The other is through new
product development in the company's own research and development department.
New products are important to both customers and the marketers who serve them. For customers,
they bring new solutions and variety to their lives. For companies, new products are a key source
of growth. Even in a down economy, companies must continue to innovate. New products
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provide new ways to connect with customers as they adapt their buying to changing economic
times.
Why do new products fail?
There are several reasons for the failure of new products. These are:
 The idea may be good, but the company may overestimate market size
 The actual product may be poorly designed
 The product might be incorrectly positioned, launched at the wrong time, priced too high,
or poorly advertised
 A high-level executive might push a favorite idea despite poor marketing research
findings
 Sometimes the costs of product development are higher than expected
 Sometimes competitors fight back harder than expected
What can a company do to develop successful new products?
To develop successful new products a company needs to have:
1. a better understanding of customer needs;
2. a higher performance-to-cost ratio;
3. a head-start in introducing the product before competitors;
4. a higher expected contribution margin;
5. a higher budget for promoting and launching the product; more use of cross-functional
teamwork; and stronger top-management support.
5.4.1. New product development process

To create successful new products, a company must understand its consumers, markets, and
competitors and develop products that deliver superior value to customers. It must carry out
strong new-product planning and set up a systematic, customer-driven new product development
process for finding and growing new products. There are eight steps of new product
development: Idea generation, idea screening, concept development and testing, marketing
strategy] development, business analysis, product development, test marketing &
commercialization.
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1. Idea generation
New-product development starts with idea generation. Idea generation is the systematic search
for new product ideas. A company typically has to generate many ideas in order to find a few
good ones. Major sources of new-product ideas include internal sources and external sources.
 Internal idea sources: Many new-product ideas come from internal sources within the
company. The company can find new ideas through formal research and development. It
can also pick the brains of its scientists, executives, engineers, designers and
manufacturing people. The company's salespeople are another good source of ideas
because they are in daily contact with customers.
 External idea sources: Companies can also obtain good new-product ideas from any of
a number of external sources. It includes:
 Customers
The most important source of new-product ideas is customers themselves. The company can
conduct surveys to learn about consumer needs and wants. The company can analyze customer
questions and complaints to find new products that better solve consumer problems. It can invite
customers to share suggestions and ideas.
 Competitors
Competitors are important source. Companies watch competitors advertising to get clues about
their new products. They buy competing new products, take them apart to see how they work,
analyze their sales, and decide whether they should bring out a new product of their own.
 Distributors, suppliers and others
Distributors and suppliers can contribute ideas. Distributors are close to the market and can pass
along information about consumer problems and new-product possibilities. Suppliers can tell the
company about new concepts, techniques, and materials that can be used to develop new
products. Other idea sources include trade shows, magazines, seminars; government agencies;
advertising agencies; marketing research firms; university and commercial laboratories; and
inventors.
2. Idea screening
Idea screening is a new product development stage which helps to spot good ideas and drop poor
ones as soon as possible. Product development costs rise greatly in later stages, so the company
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wants to go ahead only with those product ideas that will turn into profitable products. Most
companies require new-product ideas to be described on a standard form that can be reviewed by
a new-product committee. The new-product committee then reviews each idea against criteria
such as: Does the product meet a need? Would it offer superior value? Will the new product
deliver the expected sales volume, sales growth, and profit? The ideas that survive this screening
move on to the concept development stage.
3. Concept development and testing

Concept development: An attractive idea must be developed in to a product concept. It is
important to distinguish between a product idea, product concept and a product image. A product
idea is an idea for a possible product that the company can see itself offering to the market. A
product concept is a detailed version of the idea stated in the meaningful consumer terms. A
product image is the way consumers perceive an actual or potential product.
Concept testing: Concept testing involves presenting the product concept to appropriate target
consumers to find out if the concepts have strong consumer appeal and getting their reactions.
The concepts may be presented to consumers symbolically or physically. In the past, creating
physical prototypes was costly and time consuming, but computer aided design and
manufacturing programs have changed that. Today firms can design a number of prototypes via
computer and then create plastic models to obtain feedback from potential consumers.
4. Marketing strategy development

Following a successful concept test the new product manager that develops a preliminary
marketing strategy plan for introducing the new product into the market. The plan consists of
three parts. The first part describes the target markets size, structure, and behavior; the planned
product positioning and the sales, market share, and profit goals sought in the first few years.
The second part outlines the planned price, distribution strategy, and market budget for the first
year. The third part of the marketing strategy plan describes the long-run sales and profit goals
and marketing mix strategy over time.
5. Business analysis
Business analysis involves a review of the sales, costs, and profit projections for a new product
to find out whether they satisfy the company s objectives. It can evaluate the proposals business
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attractiveness. If they do, the product can move to the product development stage. To estimate
sales, the company might look at the sales history of similar products and conduct market
surveys. It can then estimate minimum and maximum sales to assess the range of risk. After
preparing the sales forecast, management can estimate the expected costs and profits for the
product, including marketing, R&D, operations, accounting, and finance costs. The company
then uses the sales and costs figures to analyze the new products financial attractiveness.
6. Product development
Up to now, the product has existed only as a word description, a drawing, or a prototype. It is a
product development stage in which companies develop the product concept into a physical
product to ensure that the product idea can be turned into a workable market offering.
7. Test marketing
Test marketing is the stage at which the product and its proposed marketing program are
introduced into realistic market settings. Test marketing gives the marketer experience with
marketing a product before going to the great expense of full introduction. It lets the company
test the product and its entire marketing program i.e. targeting and positioning strategy,
advertising, distribution, pricing, branding and packaging, and budget levels. Test marketing
gives management the information needed to make a final decision about whether to launch the
new product.
8. Commercialization
Commercialization is introducing a new product into the market. Here, markets fully promote,
distribute, and sell their new products. The company launching a new product must first decide
on introduction timing. Next, the company must decide where to launch the new product i.e. in a
single location, a region, the national market, or the international market.
5.4.2. Product lifecycle stage

After launching the new product, management wants the product to enjoy .a long and healthy
life. Although it does not expect the product to sell forever, the company wants to earn a decent
profit to cover all the effort and risk that went into launching it. Management is aware that each
product will have a life cycle, although the exact shape and length is not known in advance.
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Product life cycle is the course of a products sales and profits over its lifetime. It is a generalized
model of profit and sales trends for a product class or category over a period of time. It involves
four distinct stages: introduction, growth, maturity, and decline. A company s products are born,
grow, mature, and then decline, just as living things do. To remain vital, the firm must
continually develop new products and manage them effectively through their life cycles.
1. Introduction stage
Introduction stage is the PLC stage in which a new product is first distributed and made available
for purchase. Introduction takes time, and sales growth is to be slow. In this stage, as compared
to other stages, profits are negative or low because of the low sales and high distribution and
promotion expenses.
Marketing strategies marketers may use at introduction stage:
i. Rapid skimming strategy
It involves launching the new product with a high price and high promotion spending. It helps
the firm to skim rapidly the price-insensitive end of the market in the early stages of the new
product's launch.
ii. Slow skimming strategy
It involves launching the new product with a high price and low promotion spending. The high
price helps recover as much gross profit per unit as possible, while the low promotion spending
keeps marketing spending down.
iii. Rapid penetration strategy
A company might introduce its new product with a low price and heavy promotion spending. It
makes sense when the market is large, potential buyers are price sensitive and unaware of the
product.
iv. Slow penetration strategy
A company might introduce its new product with a low price and low promotion spending.
2. Growth stage
Growth stage is the PLC stage in which a product s sales start climbing quickly. It is a period of
rapid market acceptance and increasing profits. Attracted by the opportunities for profit, new
competitors will enter the market. Profits increase during the growth stage as promotion costs are
spread over a large volume and as unit manufacturing costs decrease.
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Marketing strategies marketers may use at growth stage:

 Improves product quality and adds new product features and models
 Enters new market segments and new distribution channels
 Shifts some advertising from building product awareness to building product preference and
purchase
 Lowers prices at the right time to attract more buyers
3. Maturity stage
Maturity stage is the PLC stage in which a product s sales growth slows or levels off. It is a
period of slowdown in sales growth because the product has achieved acceptance by most
potential buyers. Competitors begin marking down prices, increasing their advertising and sales
promotions, and upping their product development budgets to find better versions of the product.
These steps lead to a drop in profit. Some of the weaker competitors start dropping out, and the
industry eventually contains only well-established competitors.
Marketing strategies marketers may use at maturity stage:
i. Modifying the market
The company tries to increase consumption by finding new users and new market segments for
its brands. The manager may also look for ways to increase usage among present customers and
convert the non-users to users.
ii. Modifying the product
The company might also try changing product characteristics such as quality, features, style, or
packaging to attract new users and inspire more usage. It can improve the products styling and
attractiveness. It might improve the products quality and performance like its durability,
reliability, speed, and taste.
iii. Modifying the marketing mix
Product managers can try to stimulate sales by modifying other marketing-mix elements such as
prices, distribution, advertising, sales promotion, personal selling, and services.
4. Decline stage
Decline stage is the PLC stage in which a products sales decline. The sales of most products
eventually decline for a number of reasons, including technological advances, shifts in consumer
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tastes, and increased domestic and foreign competition. All of these factors lead ultimately to
overcapacity, increased price-cutting, and profit erosion. As sales and profits decline, some firms
withdraw from the market. Those remaining may reduce the number of products they offer. They
may withdraw from smaller market segments and weaker trade channels, and they may cut their
promotion budget and reduce their prices further.
Marketing strategies marketers may use at decline stage:

 Increasing the firms investment (to dominate the market or strengthen its competitive
position);
 Maintaining the firms investment level until the uncertainties about the industry are
resolved;
 Decreasing the firms investment level selectively, by dropping unprofitable customer
groups, while simultaneously strengthening the firms investment in lucrative niches;
 Harvesting (milking) the firms investment to recover cash quickly and
 Divesting the business quickly by disposing of its assets as advantageously as possible
5.4.3. Target market assessment for new products

Target market is the group of potential customers selected for marketing. If you are looking to
segment the market, you need to determine the different target markets for each segment. For
new products, there is a theory that you will have different groups of people each class has
different risk tolerances. Different classes of prospects are grouped into five groups: innovators,
early adopters, early majority, late majority, and laggards based on adoption of innovation.
1. Innovators
Innovators are adventurous: they try new ideas at some risk. Genuine innovators are those who
are prepared to take risks and like having new products simply because they are new. These
groups account for a very small proportion of the population.
2. Early adopters
Early adopters are guided by respect: they are opinion leaders in their community and adopt new
ideas early but carefully. These groups are purchasers to take off the new product into growth
stage. Even though prices are too high, early adopters buy new products, as there are new
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features either from competitors or the same marketer. In addition, early adopters own such
products bearing in mind they are still fashionable, socially acceptable and, successful.
3. Early majority
The early majority is deliberate: although they are rarely leaders, they adopt new ideas before the
average person. These groups share behavior of early majority but at later points of the growth
stage. They want to be fashionable but are followers rather than leaders.
4. Late majority
The late majority is skeptical: they adopt an innovation only after most people have tried it. They
think that they tend to be old fashioned and skeptical. They are deliberate pragmatists who adopt
the new technology when its benefits are proven and a lot of adoption has already taken place.
5. Laggards
Laggards are tradition hound: they are suspicious of changes and adopt the innovation only when
it has become something of a tradition itself. At last stage of maturity and decline stage, some
consumer, buy in bulk and old-fashioned products as the goods and services are out of the
markets majority preference. These groups might be acquired at lowest price and everywhere.
5.5. Product mix decisions

Product mix is the set of all products and items a particular seller offers for sale. It is also known
as a product assortment. It includes various product lines. Product line is a group of products that
are closely related because they function in a similar manner, are sold to the same customer
groups, marketed through the same types of outlets, or fall within given price ranges. The major
product line decision involves product line lengththe number of items in the product line.
A companys product mix has four important dimensions: width, length, depth, and consistency.
 The width of a product mix refers to how many different product lines the company carries.
 The length of a product mix refers to the total number of items in the mix.
 The depth of a product mix refers to how many variants are offered of each product in the
line.
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 The consistency of the product mix describes how closely related the various product lines
are in end use, production requirements, distribution channels, or some other way.
These four product mix dimensions permit the company to expand its business in four ways. It
can add new product lines, thus widening its product mix. It can lengthen each product line. It
can add more product variants to each product and deepen its product mix. Finally, a company
can pursue more product line consistency.
5.6. Product branding, packaging, and labeling
A. Brand
Brand is a name, term, sign, symbol or special design or some combination of these elements
that is intended to identify the goods or services of one seller or a group of sellers. A brand
differentiates these products from those of competitors.
A brand includes:
- Brand name is that part that can be spoken, including letters, words and numbers
- Brand mark is elements of the brand that cannot be spoken
- Trade mark is legal designation that the owner has exclusive rights to the brand or part
of a brand. After companies identify their trademark, they entail a term TM or R.
- Trade name is the full legal name of the organization.
Requirements of a good brand

A good brand must be:-
- Easy to pronounce - Distinctive
- Legally protectable - Suggest product benefit and attract
- Easy to remember attention
- Easy to recognize
B. Packaging
Packaging is a marketing activities concerned with the design and production of the container or
wrapper for a product. The container or wrapper is called the package. In the recent times
packaging has become a potential marketing tool because it can create convenience value for the
consumer and promotional value for the producer or seller.
Importance of packaging
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 Packaging serves several safety

 It is an important method of communication with the customer
 Well-packaged product may increase profit possibilities
 It stimulates customers to pay more just to get the special package.
 Can increase ease of handling or reduction in damage or losses.
C. Labeling
Labeling is a part of a product that carries verbal information about the product of a seller. It
expresses some features of the product such as ingredients, weight, measure, size, warning,
performance and sometimes if also includes advertising messages. The label may be a simple
teamed to the product or an elaborately designed graphic that is part of the package.
Functions of label
 It identifies the product or brand
 It might grade the product
 It might describe the product, which made it, where it was made, when it was made, what
it contains, how it is to be used, and how to use it safely.
 It might promote the product through its attractive graphics.
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CHAPTER SIX: PRODUCT PRICING STRATEGIES

Introduction
According to one pricing expert, pricing involves harvesting your profit potential. The effective development
of product, promotion, and distribution show the seeds of business success, effective pricing is the harvest.
Price is one element of marketing mix that produces revenue while the other elements produce costs.
6.1 Definition of Pricing
In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is
the sum of all the values that consumers exchange for the benefits of having or using the product or service.
6.2 Setting Price
A firm must set a price for the first time when it develops a new product, when it introduces its regular
product into a new distribution channel or geographical area, and when it enters bids on new contract work.
The firm must decide where to position its product on quality and price.
There are six steps in setting a price:
1. Selecting the Pricing Objective;
2. Determining Demand;
3. Estimating Costs;
4. Analyzing Competitors Costs, Prices, And Offers;
5. Selecting A Pricing Method;
6. Selecting The Final Price
Step 1: Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The clearer a firm s objectives, the
easier it is to set price. Five major objectives are: survival, maximum current profit, maximum market share,
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maximum market skimming, and product-quality leadership.

 Survival
This is a short-term objective that is appropriate only for companies that are plagued with overcapacity,
intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed
costs, the company will be able to remain in business.
 Maximum Current Profit
Many companies try to set a price that will maximize current profits. They estimate the demand and costs
associated with alternative prices and choose the price that produces maximum current profit, cash flow, or
rate of return on investment. This strategy assumes the firm knows its demand and cost functions; in reality,
these are difficult to estimate. In emphasizing current performance, the company may sacrifice long-run
performance by ignoring the effects of other marketing variables, competitors reactions, and legal restraints
on price.
 Maximum Market Share (Market-Penetration Pricing)
Some companies want to maximize their market share. They believe a higher sales volume will lead to lower
unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive.
The following conditions favor adopting a market-penetration pricing strategy:
(1) The market is highly price sensitive and a low price stimulates market growth;
(2) Production and distribution costs fall with accumulated production experience;
(3) A low price discourages actual and potential competition.
 Maximum Market Skimming:
Many companies favor setting high prices to skim the market.
This objective makes sense under the following conditions:
(1) A sufficient number of buyers have a high current demand;
(2) The unit costs of producing a small volume are not so high that they cancel the advantage of charging
what the traffic will bear;
(3) The high initial price does not attract more competitors to the market; and
(4) The high price communicates the image of a superior product.
 Product-Quality Leadership:
Companies that aim to be product-quality leaders will offer premium products at premium prices. Because
they offer top quality plus innovative features that deliver wanted benefits, these firms can charge more.
 Others:
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Nonprofit and public organizations may adopt other pricing objectives. A university aims for partial cost
recovery, knowing that it must rely on private gifts and public grants to cover the remaining costs, while a
nonprofit theater company prices its productions to fill the maximum number of seats. As another example, a
social services agency may set prices geared to the varying incomes of clients.
Step 2: Determining Demand
Each price will lead to a different level of demand and therefore price have a different impact on company s
marketing objectives. Customers are more price-sensitive to products that cost a lot and they are less price-
sensitive to low costs items or items. Demand determines the upper limit of the price. Marketers need to
know how responsive demand would be to change in price. If demand hardly changes with a small change in
price, we say the demand is inelastic. If demand changes considerably then demand is elastic.
The following lists of factors are associated with lower price sensitive or make demand less elastic. The
products are no/few substitute. Buyers are less aware of substitutes. Buyers cannot easily compare the quality
of substitutes. The expenditure is a small part of the buyers total income. The product is used in conjunction
with assets previously bought. Switching cost is high. Customer assumes price is justifying compare with
product quality.
Step 3: Estimating Costs
Demand sets an upper limit on the price the company can charge for its product. Costs set the floor. The
company wants to charge a price that covers its cost of producing, distributing, and selling the product,
including a fair return for its effort and risk. Yet, when companies price products to cover full costs, the net
result is not always profitability.
Types of Costs: A company's costs take two forms, Fixed and Variable. Fixed costs (also known as
overhead) are costs that do not vary with production or sales revenue. A company must pay bills each month
for rent, heat, interest, salaries, and so on, regardless of output. Variable Costs vary directly with the level of
production. These costs tend to be constant per unit produced. They are called variable because their total
varies with the number of units produced. Total costs consist of the sum of the fixed and variable costs for
any given level of production. Total cost = Fixed cost + Variable cost
Step 4: Analyzing Competitors' Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company costs, the firm must take
competitors' costs, prices, and possible price reactions into account. The firm should first consider the nearest
competitor's price. If the firm's offer contains features not offered by the nearest competitor, their worth to
the customer should be evaluated and added to the competitor's price. If the competitor's offer contains some
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features not offered by the firm, their worth to the customer should be evaluated and subtracted from the
firm's price. Now the firm can decide whether it can charge more, the same, or less than the competitor can.
However, competitors can change their prices in reaction to the price set by the firm.
Step 5: Selecting a Pricing Method
Given the three Cs (customers demand schedule, cost function, and competitors' prices) the company is now
ready to select a price. Costs set a floor to the price. Competitors' prices and the price of substitutes provide
an orienting point. Customers' assessment of unique features establishes the price upper limit. Companies
select a pricing method that includes one or more of these three considerations.
There are a number of pricing methods that marketers may use. These are:
1. Markup Pricing: The most elementary pricing method is to add a standard markup to the product's cost.
Construction companies submit job bids by estimating the total project cost and adding a standard markup
for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs.
Suppose a manufacturer has the following costs and sales expectations:
2. Target-Return Pricing: In target-return pricing, the firm determines the price that would yield its target
rate of return on investment (ROI). Target pricing is used by General Motors, which prices its automobiles to
achieve a 15 to 20 percent ROI. This method is also used by public utilities, which need to make a fair return
on investment. Suppose the manufacturer has invested $1 million in the business and wants to set a price to
earn a 20 percent ROI, specifically $200,000. The target-return price is given by the following formula:
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Target-return price = Unit Cost + Desired Return X Invested Capital

Unit Sales
= $16+ .20 X $1.000.000 = $20
50,000
The manufacturer will realize this 20 percent ROI provided its costs and estimated sales turn out to be
accurate.
3. Value Pricing: In recent years, several companies have adopted value pricing: They win loyal customers
by charging a fairly low price for a high-quality offering. Value pricing is not a matter of simply setting
lower prices; it is a matter of reengineering the company's operations to become a low-cost producer without
sacrificing quality, and lowering prices significantly to attract a large number of value-conscious customers.
4. Going Rate Pricing: It bases its price largely on competitors prices. The firm might change the same,
more or less than major competitor(s).Response is uncertain; firms feel that going price is a good solution
because it is thought to reflect the industrys collective wisdom.
5. Auction: The use of auctions is to dispose of excess inventories or used goods while they are functional or
can be recycled. There are three types of auctions: Ascending bids (English auctions): the seller puts up an
item and set a minimum price and bidders raise the offer price until the top price is reached. Descending bids
(Dutch auctions): one seller and many buyers, or one buyer and many sellers. An auctioneer announces a
higher price for a product and then slowly decreases the price until a bidder accepts the price. Buyer
announce the product he want to buy & set the price that he want to purchase then the seller compete to get
sales by offering the lowest price. Sealed bid auctions: would be suppliers can submit only one bid and
cannot know the other bids. The best bid select that is the highest offered.
6. Geographical pricing: involves the company in deciding how to price its products to different customers
in different locations and countries should the company charge higher prices to distant customers to cover the
higher shipping costs.
7. Discount pricing: most companies will adjust their list price and give discounts and allowances for
different reasons. The following lists are included under this topic.
Cash discount: a price reduction to buyers who pay promptly. example 2/10, net 30 which means that
payment in due within 30 days and that the buyer can deduct 2 percent by paying the bill within 10 days.
Quantity discount: a price reduction to those who buy large Volumes.
Example: 10 birr per unit for less than 100 units; 9 birr unit for 100 or more units. Quantity discounts must
be offered equally to all customers and must exceed the costs savings to the seller.
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Functional Discount: also called trade discount is discount offered by a manufacturer to trade channel
members if they will perform certain functions such as selling, storing, and other.
8. Discriminatory pricing: it occurs when a company sells a product or service at two or more prices that do
not reflect a proportional difference in costs. Lists of such types of pricing are:
 Customer segment pricing: Different customer groups are charged different prices for the same
products or service. E.g. Museums often charge a lower admission fee to students than workers.
 Product form pricing: different versions of the product are priced differently but not proportionately
to their respective costs.
 Channel pricing: a product might be priced different in different channels differently. Ambo water
might be priced differently in local outlets, restaurants and hotels.
 Time Pricing: prices are varied by season, day or hour.
9. New Product Pricing: These circumstances or conditions are best illustrated by describing the extreme
pricing strategies of price skimming (a very high introductory price) and market penetration (a very low
introductory price).
Price skimming - In price skimming the new product is priced close to the upper limit of value of utility as
perceive by the industrial customer.
Conditions:
 The buyer is an innovator or early adopter, a risk taker who welcomes new products.
 The supplier has a patent or hard-to-copy innovation,
 Variable costs are a high proportion of total costs.
 The usage of the market is limited.
Market Penetration: In market penetrating pricing, the business marketer recognizes the following
conditions
 Many close substitutes are available; thus, a low price discourages competitive entry.
 In this market, the customers are very conservatives and traditional, and are unwilling to take risks.
 The product is easy to copy and there are few barriers to entry by the companys competitors.
 The market exhibits a high price elasticity of demand.
 The size of the potential market justifies the risk of an extended period during which fixed costs must be
recaptured.
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10. Product Line Pricing: Most firms sell a range of products within each product line. These products are
related to one another, marketed together, used together, and provide variations on the same general benefits
required by the customer.
Step 6: Selecting the Final Price
In selecting the final price, the company must consider additional factors like:
1. Influence of others marketing mix elements:
The final price must take into account the brands quality and advertising relative to completion.
2. Company pricing policies: the price must be consistent with company pricing policies. At the same
time, companies are not averse to establishing pricing penalties under certain circumstances.
3. The impact of price on other parties: how will distributors fell about it? Will the sales force be
willing to sell at that price? How will competitors react? Will suppliers raise their prices when they
see the companys price? One of the most important and complex, decisions a firm has to make
relates to pricing its products or services. If consumers or organizational buyers perceive a price to be
too high, they may purchase competitive brands or substitute products, leading to a loss of sales and
profits for the firm. If the price is too low, sales might increase, but profitability may suffer. Thus,
pricing decisions must be given careful consideration when a firm is introducing a new product or
planning a short-or long-term price change.
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CHAPTER SEVEN: DISTRIBUTION STRATEGY/ MARKETING CHANNELS

Introduction
Successful value creation needs successful value delivery. The purpose of all production activities, in
business, is to sell the goods produced and make profit thereof. To this end, the manufacturer must make the
necessary steps to bring its products to the attention of the customers. Therefore, distribution of goods is
essential so that they can reach the final consumption point. In short, the goods must move from the point of
production to the point of consumption. Good distribution strategies can contribute strongly to customer
value and create competitive advantage for a firm. But firms cannot bring value to customers by themselves.
Instead, they must work closely with other firms in a larger value delivery network.
8.1. Marketing channel and its importance
Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries
performing a variety of functions. These intermediaries constitute a marketing channel (also called a
distribution channel). Marketing channels are sets of interdependent organizations participating in the
process of making a product or service available for use or consumption. They are the set of pathways a
product or service follows after production, culminating in purchase and consumption by the final end user.
Importance of marketing channel

Producers use intermediaries because they create greater efficiency in making goods available to target
markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually
offer the firm more than it can achieve on its own.
From the economic systems point of view, the role of marketing intermediaries is to transform the
assortments of products made by producers into the assortments wanted by consumers. Producers make
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narrow assortments of products in large quantities, but consumers want broad assortments of products in
small quantities. Marketing channel members buy large quantities from many producers and break them
down into the smaller quantities and broader assortments desired by consumers.
In making products and services available to consumers, channel members add value by bridging the major
time, place, and possession gaps that separate goods and services from those who use them. Time utility
refers to having a product or service when you want it. Place utility means having a product or service
available where consumers want it. Form utility involves enhancing a product or service to make it more
appealing to buyers. Possession utility entails efforts by intermediaries to help buyers take possession of a
product or service, such as having airline tickets delivered by a travel agency.
8.2. Marketing channel functions
Intermediaries make possible the flow of products from producers to buyers by performing three basic
functions. Most prominently, intermediaries perform a transactional function that involves buying, selling,
and risk taking. Intermediaries also perform a logistical function evident in the gathering, storing, and
dispersing of products. Finally, intermediaries perform facilitating functions, which assist producers in
making goods and services more attractive to buyers.
Types of function Activities related to function
 Buying: Purchasing products for resale or as an agent for supply of a product.
 Selling: Contracting potential customers promoting products, and soliciting
Transactional orders.
function  Risk taking: Assuming business risks in the ownership of inventory that can
become obsolete or deteriorate.
 Assorting: Creating product assortments from several sources to serve customers.
 Storing: Assembling and protecting products at a convenient location to offer
Logistical better customer service.
function  Sorting: Purchasing in large quantities and breaking into smaller amounts desired
by customers.
 Transporting: Physically moving a product to customers.
 Financing: Extending credit to customers.
 Grading: Inspecting, testing, or judging products, and assigning them quality
Facilitating grades.
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functions  Marketing information and research: Providing information to customers and

suppliers, including competitive conditions and trends.
8.3. Flows in marketing channels

When a marketing channel has been developed, a series of flows emerges. The term flow is descriptive of
movement and it provides the links that tie channel members and other agencies together in the distribution
of goods and services. The following are the major flows in marketing channels.
1. Physical flow: Refers to the actual physical movement of the product from the manufacturer through all
of the parties who take the physical possession of the product; that is, from its point of production to final
consumers. Here transportation companies are involved in shipping the product from the manufacturer to the
wholesalers.
2. Title flow: Represents the interplay of the buying and selling function associated with the transfer of title
to the manufacturers products. It shows the movement of the ownership title to the product as it passed
along from the manufacturer to final consumers. Here again, the transportation company is excluded because
it does not take title to the product nor is it actively involved in facilitating its transfer.
3. Payment flow: Refers to the buyers payment of their bills to the sellers through banks. In this flow,
banks are included because they play an important intermediary role in facilitating payment transfer between
buyers and sellers.
4. Information flow: Refers to the exchange of information by all parties that participate in the marketing
channel. The transportation company reappeared in this flow since the manufacturer may obtain information
about shipping schedules and rates, and the transportation company may in turn seek information from the
manufacturer about when and in what quantities it plans to ship the product.
5. Promotion flow: Refers to the flow of persuasive communication in the form of advertising, personal
selling, sales promotion, and publicity. Here, advertising agency is included in the flow because it is actively
involved in providing information flow. The manufacturer and the advertising agency may work together
closely to develop promotional strategies.
8.4. Direct Vs Indirect channel
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Marketing channels can broadly be divided into two as direct and indirect channel. Under direct channel of
distribution the manufacturer sells directly to consumers without using any intermediaries whereas under
indirect channel of distribution the producer sells its products through the use of intermediaries.
1. Direct Channel: Direct channel is a shortest channel a producer uses to distribute its product to the
market. Here, the products move from the producer directly to the consumer without involvement of any
intermediary. For this reason direct channel is also known as zero-level channel. The most commonly used
methods of direct channel are the following:
a. Door-to-door selling: The manufacturer employees its own salesmen to approach the customers and
convince them to buy the products. These salesmen usually go door-to-door in order to sell the product.
That is, they bring the products to the door steps of the customers. Dairy farms usually distribute milk in
such manner.
b. Manufacturers Sales Branches: Manufacturers open sales branches to sell their products directly to
customers. The sales branches may be opened at different locations where customers might be found.
C. Direct Mail: This is a means of directly distribution products to customers by dispatching them through
the post. Unlike door-to-door and sales branches, personal contact between the seller and the buyer is
avoided since the product is mailed through the post. All types of products are not suitable for mail order.
For example, the products should not be too heavy or bulky. Direct mail most commonly used to distribute
such products as newspapers and magazines. For example Media Communication Center (MCC) dispatches
its newspaper Reporter to its subscribers by mail.
2 Indirect Channels: Under indirect channel of distribution, the producer sells its products through the use
of intermediaries such as wholesalers, retailers, and agents.
a. Wholesalers: Wholesalers are merchants who act as intermediaries between the producers and retailers or
other industrial buyers. They buy products in larger quantities from producers for the purpose of reselling
them in smaller quantities to the retailers. Wholesalers do not sell their products to individual consumers.
b. Retailers: Retailers are businesses that are involved in selling goods directly to final consumers for their
personal use. They usually buy products from the wholesalers or sometimes from producers to sell to the
consumers either in retail stores or in streets.
c. Agents: Agents represent manufacturers on a relatively permanent basis to perform selling and other
facilitating functions. They differ from wholesalers and retailers in that they do not take titles to goods; that
is, they do not own the goods they sell since the manufacturer retains the titles. Agents are common in
import and export trade.
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8.5. Channel structure

Channel structure refers to the group of channel members to which a set of distribution tasks has been
allocated. Given a set of distribution tasks that must be performed to accomplish a firm s distribution
objectives, the channel manager must divided how to allocate or structure the tasks. Thus, the structure of
the channel will reflect the manner in which the channel manger has allocated these tasks among member of
the channel. Channel structure involves two dimensions: channel length and channel intensity.
A. Channel length
The most typically mentioned dimension of channel structure is channel length. Channel length is the
number of flows of intermediaries in the channel. Market channels grouped into four based on the length of
channel. These are:
1. Zero-Level Channel (M C): This is a direct channel where a producer uses no intermediaries. Such
channel may be used by manufacturers of heavy installations like airplanes, ships, or generators where
buyers need many services form manufacturers. It is not commonly used in consumers market.
2. One-Level Channel (M R C)
Under this channel, an intermediary is used. It contains one selling intermediary, such as a retailer.
Therefore, it is an indirect channel of distribution. Although it is not common, retailers may sometimes avoid
wholesalers to buy products directly from producers. Emergence of retail chains or supermarkets led to the
use of this channel.
3. Two-Level Channel (M W R C)
This is the traditional channel of distribution, which is most commonly used in consumer goods market. It
contains two intermediaries i.e. wholesalers and retailers. Consumer convenience good such as sugar, soap,
soft drinks and so on are normally distributed through such cannels.
4. Three-Level Channel (M A W R C)
This is the longest channel of distribution where several levels of intermediaries are involved. It is common
in import and export trade.
B. Channel intensity
Channel intensity refers to the number of intermediaries used at each channel level. The intensity of
distribution dimension is a very important aspect in structuring distribution channel because it is often a key
factor in the companys basic marketing strategy and it also reflects the company s overall corporate
objectives and strategies. This intensity of distribution is categorized into three: exclusive, selective and
intensive distribution.
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1. Exclusive Distribution:
Exclusive distribution involves severely limiting the number of intermediaries that handle the company s
goods or only one intermediary is used in a particular market area. It is used when the producer wants to
maintain a great deal of control over the service level and service outputs offered by the resellers. Often,
exclusive distribution involves exclusive dealing arrangement, in which the intermediaries agree not to carry
the products or brands of competitors.
By granting exclusive distribution, the producer hopes to obtain more aggressive and knowledgeable selling.
Such strategy of distribution requires greater partnership between the producer and the intermediary. This
strategy is used in the distribution of new automobiles.
2. Selective Distribution:
Selective distribution strategy involves the use of more than a few but less than all of the intermediaries who
are willing to carry a particular product. It relies on only some of the intermediaries willing to carry a
particular product. Such strategy is used both by new companies and already established ones that are
looking for distributors. The company does not attempt to obtain as many intermediaries as possible, rather,
it tries to develop good business relations with selected intermediaries and expect better than average selling
effort. Selective distribution enables the producer to gain adequate market coverage with better control and
lesser cost than intensive distribution.
3. Intensive Distribution:
Intensive distribution places the goods or services in as many outlets as possible. When the consumer
requires a great deal of location convenience, it is important for the manufacturer to offer greater intensity of
distribution. This strategy is generally used for consumer convenience goods such as tobacco products, soap,
and so on. Producers move from exclusive to more intensive distribution to increase the coverage sales.
A marketing strategy that wants to flood the market with a product requires a channel that stresses a very
high level of distribution intensity. Manufacturers of chewing gum, for example, have used an intensive
distribution channel to make their product available at virtually every retail outlet where consumers could
buy chewing gum. On the other hand, a marketing strategy that focuses on carefully chosen target markets,
such as producers of Wrist Watches, require a high degree of selective in their channel of distribution.
In general, if a companys basic marketing strategy emphasizes mass market for its products, it will most
likely have to develop a channel structure that stresses intensive distribution. On the other hand, a marketing
strategy that stresses narrow segmented marketing will most probably require an exclusive distribution
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channel. The relationship between the intensity of distribution dimension and the number of intermediaries
used in a given market can be depicted in the following diagram.
Intensity of Dimension Intensive Selective Exclusive
No. of Intermediaries Many Few One
8.6. Variables affecting channel structure

There are a number of variables that affect channel structure. These variables can be grouped into four:
market variables, product variables, company variables and intermediary variables.
1. Market variables
Market variables are the most fundamental variables that affect the channel structure. It includes:
Market geography:
General Rule: for the greater distance between producer and market, use more intermediaries (indirect
channel) that are less expensive than direct distribution.
Market sizes the number of customers making up a market. The market could be consumer or industrial
market. General Rule: - If the market is large use intermediaries and if the market is small use direct channel
Market density: refers to the number of buying units per-unit of land are determines the density of the
market. General Rule:-If more dense (the buyers are closely located) use direct channel or eliminate
intermediaries. If less dense (buyers are widely scattered) use more intermediaries (indirect channel).
Market behavior: The type of buying behavior, how customers buy, when customers buy, where customers
buy, and how does customers buy, can affect channel structure.
General Rule: Design the channel according to customers need and want to satisfy their needs.
2. Product variables
Product variables include:
Bulk and Weight: General Rule: For heavy and bulk products use direct channel to minimize transportation
cost.
Perishability: General Rule:-For products that can be perishable in short time use shorter channel or direct
channel for rapidly delivery from producer to consumers.
Degree of standardizations: Products are can be standardized (uniform) or custom made (according to
customer order): General Rule: For uniform products use indirect channels and for custom made products use
direct channels.
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Technical Vs Non- Technical products: Technical products refer to products that want more information or
knowledge about its use, services to customers before and after purchase. General Rule: For highly technical
products use direct channel. For non-technical products use long channel (indirect channels)
New product /Newness/: General Rule: For new products use direct channel or short channels.
3. Company variables
Company variables include:
Financial capacity: General Rule: If the company has more financial capacity must use direct channel (by
using its own branch or its own sales force).
Managerial expertise refers to whether or not the managerial skills necessary to perform distribution tasks
available in the company. General Rule: When the company has expertise must use direct channel /reduce
the dependence of the company on intermediary/.When the company has less expertise must use more
intermediaries or its dependency on intermediaries or indirect channels.
Objectives and Strategies: Marketing objectives and strategies may limit the use of intermediaries. General
Rule:-The Company who wants to control its product must use direct channel.
4. Intermediary variables
Intermediary variables include:
Intermediary availability: General Rule: If there is a lack of intermediary use direct channel. If there are a
number of intermediary use indirect channel.
Cost of intermediary: General Rule: If the cost of intermediary is too high use direct channel. If the cost
of intermediary is low use indirect channels.
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CHAPTER EIGHT: PROMOTION

8.1. Definition of promotion
Promotion is the activities the companies use to communicate with others about their product or
service and to convince them to use it or is decision/activities to motivate customers to buy
companys offerings. Companies must also communicate with their present and potential
customers, retailers, suppliers, other stakeholders, & the public.
8.2. Promotional Tools
Promotional mix is the tools used to accomplish an organizations communication objective. The
marketing communication mix (also called the promotion mix) consists of five major
promotional mix elements. This are:
1. Advertising
Advertising is any paid form of non- personal communication about an organization s, product,
service, or idea by an identified sponsor. The paid aspect of this definition reflects the fact that
the space or time for an advertising message generally must be bought. The Non-Personal
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component reflects advertising involves mass media (TV, Radio, magazines, newspaper etc) that
can transmit a message to large groups or individuals, often at the same time.
Advertising Objectives: Advertising objectives can be classified according to whether their aim
is to inform, persuade, or remind.
A. Informative advertising: The aim is to create awareness and knowledge of new product or
new features of existing products
B. Persuasive advertising: It becomes important in the competitive stage, where a company s
objective is to build selective demand for a particular brand. The aim is to create liking,
preference, confidence and purchase of a product or service.
C. Reminder advertising: It is highly important with mature products. The aim is to stimulate
repeat purchase of a product or service.
2. Sales Promotions:
Sales Promotion, a key ingredient in many marketing campaigns, consists of a diverse collection
of incentive tools; its mostly short-term incentives to encourage the purchase or sales of a
product or service. Whereas advertising offers a reason to buy, sales promotion offers an
incentive to buy.
Major Sales Promotion Tools:

1. Consumer Promotions: Consumer promotions include :
Ü Samples are offers of a trial amount of a product. It is the effective to introduce a new
product or create new excitement for an existing one. Some samples are free.
Ü Coupons are certificates that give buyers a saving when they purchase specified products.
Coupons can promote early trial of a new brand or stimulate sales of a mature brand.
Ü Premiums are goods offered either free or at low cost as an incentive to buy a product.
2. Retailers & Wholesalers (Trade Promotions):
Ü The manufacturer may offer discount off the list price on each case purchased during a
stated period of time (also called a price-off, off-invoice, or off-list).
Ü Manufacturers also may offer an allowance in return for the retailers agreement to feature
the manufacturers products in some way.
3. Personal selling:
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Personal selling is face-to-face interaction with one or more prospective purchasers for the
purpose of making presentations, answering questions, and procuring orders. It is one of the
oldest forms of promotion. It involves the use of a sales force who orally communicates about
the companys products or services to the potential buyers with an intention to make a sale. It is
the most cost-effective tool.
Personal Selling Process: The steps that salespeople follow when selling, which include:-
1. Prospecting & Qualifying: It is identifying qualified potential customers. Approaching the
right potential customers is crucial to the selling success.
2. Pre-approach: It is the stage in which professionals try to understand the prospect s current
needs, current use of brands& feelings about all available brands, as well as identify key
decision makers, review account histories assess product needs, plan/create a sales
presentation.
3. Approach: The approach is the actual contact the sales professional with the prospect.
4. Sales Presentation: During presentation, the sales professional tells that product story in a
way that speaks directly to the identified needs & wants of the prospect.
5. Handling Objections: Professional salespeople seek out prospect objections in order to try
to address & overcome them.
6. Closing Sale: Closing sale happens when products or services are delivered to the customer
& payment is received, & in addition asking for the order, it could be asking the prospect
how many they would like, what color they would prefer, when they would like to take
delivery, etc.
7. Follow -Up: After an order is received, it is in the best interest of everyone involved for the
salesperson to follow-up with the prospect to make sure the product was received in the
proper condition, at the right time, installed properly, proper training delivered, & that the
entire process was acceptable to the customer. This is a critical step in creating customer
satisfaction & building long-term relationships with customers.
4. Publicity /public relation:
Publicity is the non-personal stimulation of demand that is not paid for by a sponsor which has
released news to the media.
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Advertising and publicity are quite similar in the sense that both require media for a non-
personal presentation of the promotional message. One difference between the two is that,
publicity is presumed to be free in the sense that the media are not paid for presentation of the
message to the public.
Public relations are the deliberate, planned and sustained effort to establish and maintain mutual
understanding between an organization and its public. Public relations are broader in scope than
publicity. It is aimed not only at present and potential customers but also government,
stakeholders, employees, voters, and other such groups.
PR departments responsibilities:
Ü Press relations/press agency/conference: Creating & placing newsworthy information in the
news media to attract attention to a person, product, or service.
Ü Product publicity: Publicizing specific products.
Ü Public affairs: Building & maintaining national or local community relationships.
Ü Lobbying: Creating& maintaining good relation with government officials and legislations.
Ü Investor relations: Maintaining relations with shareholders & others in the financial
community.
5. Direct Marketing:
It is the use of consumer-direct channels to reach and deliver goods and services to customers
without using marketing middlemen. These channels include direct mail, catalogues,
telemarketing, interactive TV, kiosks, Web sites, and mobile devices. Direct marketers seek a
measurable response, typically a customer order. This is sometimes called direct-order
marketing. Today, many direct marketers use direct marketing to build a long-term relationship
with the customer. Direct marketing is one of the fastest-growing avenues for serving customers.
Forms of Direct Marketing:
1. Direct-mail marketing: It involves sending an offer, announcement, reminder, or other item
to a person at a particular physical or virtual address.
2. Catalog Marketing: Advances in technology, along with the move toward personalized,
one-to-one marketing, have resulted in exciting changes in catalog marketing.
3. Telephone marketing: It involves using the telephone to sell directly to consumers &
business customers.
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4. Direct-Response Television Marketing: Direct marketers air television spots, which

persuasively describe a product & give customers a toll-free number or a Web site for
ordering.
5. Kiosk Marketing: Many companies are placing information & ordering machines called
kiosks (good old-fashion vending machines but so much more)in stores, airports, hotels,
college campuses, & other locations.
Online Marketing: The Internet, a vast public web of computer networks, connects users of all
types all around the world to each other & an amazingly large information repository.
Page | 82

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Principles of Marketing, 2023 Department of Marketing Management

CHAPTER ONE: NATURE AND SCOPE OF MARKETING

1.1. Definitions and core concepts of marketing

 The chartered Institute of Marketing (2012) defines marketing as the management

 American Marketing Association (2017) defined Marketing as the activity, set of

What is marketing management?

 Basic physical needs for food, clothing, warmth and safety;

Value=Benefit = Functional Benefit + Emotional Benefit

b. Each party must have something of value to the other party

1.2. Evolution and Philosophies of Marketing Management

4. The marketing concept

6. Holistic Marketing Concept

1.3. Importance of marketing

As customers, marketing will help us:

• What supplier to deal with • Improve relationship and lead

As a member of society, marketing:

1.4. Marketing Management Tasks

1.4.1. Building Profitable Customer Relationship

* Customer relationship management is the overall process of building and maintaining

Customer Development Stages

1.4.2. Demand Management

CHAPTER TWO: MARKETING ENVIRONMENT

1. Growing shortages of raw materials.

2. Increasing legislation to:

 Protect companies from each other.

CHAPTER THREE: UNDERSTANDING THE MARKET

3.1. What is a market?

The relationship between the industry and the market

3.2. Consumer market and consumer buying behavior

3.2.1. Factors affecting consumer behavior

autonomy, defensiveness, adaptability, and aggressiveness. Personality can be useful in

3.2.2. Types of consumer buying decision behavior

1. Complex buying behavior

2. Dissonance-reducing buying behavior

3. Habitual buying behavior

4. Variety-seeking buying behavior

3.2.3. The buyer decision process in consumer market

Stage 1 Need recognition

Stage 2 Information search

Stage 3 Evaluation of alternatives

Stage 4 Purchase decision

Stage 5 Post purchase behavior

3.3. Business markets and business buying behavior

3.3.1. Characteristics of business markets

3.3.2. Major types of business buying situations

i) Straight rebuy situation

greater the companys efforts to collect information.

iii.3.3. Participants in the Business Buying Process

iii.3.4. Major Influences on Business Buyers

iii.3.5. The Business Buying Process

CHAPTER FOUR: MARKET SEGMENTATION, TARGETING AND POSITIONING

4.1. Market segmentation

4.1.1. Levels of market segmentation

1. Mass marketing (undifferentiated marketing)

4.1.2. Segmenting consumer markets

4.1.3. Segmenting business market

variables. Major segmentation variables for business markets include:

A. Business customer demographic variables

4.1.4. Requirements for effective segmentation

4.2. Market targeting

2. Selecting and entering market segments

5. Full market coverage

The positioning task consists of the following steps:

CHAPTER FIVE: PRODUCT

greater the companys efforts to collect information.