Summit Business - Reaching the Top
Chapter 3 : Fundamentals of Marketing
What is Marketing?
Marketing: A Comprehensive Overview
Marketing can be perceived as a dual-edged sword, serving both beneficial and detrimental purposes, contingent upon its application. There are four prevalent misconceptions regarding marketing:
1. It is a contemporary or "novel" business strategy.
2. It is merely a functional task.
3. It is focused on advertising and aggressive sales tactics.
4. It is insignificant or superfluous.
Historical Context and Development
While marketing emerged as an academic field in the late 19th century, notably with the establishment of the first marketing chair at Wharton Business School in the 1880s, its practical origins trace back to ancient times. The concepts of task specialization and exchange, which are fundamental to marketing, have been integral to human societies since their inception, facilitating enhanced productivity and improved living conditions. Pioneering techniques such as market segmentation, branding, and sales promotion were introduced by industrialists like Josiah Wedgwood long before the formal study of marketing took shape.
Marketing as a Discipline and Practice
Marketing embodies both a time-honored business practice and a relatively recent academic field. As a repository of knowledge, it offers theoretical frameworks for analyzing market dynamics and formulating strategic initiatives. Nevertheless, many practitioners contend that marketing is more effectively acquired through experiential learning rather than theoretical study.
The Marketing Iceberg Analogy
The overt elements of marketing, such as advertising and promotional activities, constitute only a minor fraction of the overall effort. The underlying processes involve recognizing opportunities, product design, resource management, and distribution coordination. These essential functions are vital for organizational success, as highlighted by Peter Drucker, who asserted that no level of promotion can rectify a poorly conceived product.
Figure 1.1 The marketing iceberg
The Historical Significance of Marketing
Marketing has played a pivotal role in human advancement, transitioning from subsistence economies to contemporary society. The emergence of specialization and trade facilitated the formation of markets, the invention of currency, and the expansion of economies. These foundational principles have been instrumental in shaping economic development.
Reference: Baker, M. J., & Hart, S. (Eds.). (2016). The Marketing Book (7th ed., pp. 1-25). Routledge.
Marketing Strategy
THE CENTRAL ROLE OF MARKETING IN THE Enterprise stems from the fact that marketing is the process via which a firm creates value for its chosen customers. Value is created by meeting customer needs. Thus, a firm must define itself not by the product it sells, but by the customer benefit provided. Having created value for its customers, the firm is then Ent entitled to capture portion of that value through pricing. To remain a viable concern, the firm must sustain this process of creating and capturing value over time. Within this framework, the plan by which value is created on a sustained basis is the firm's marketing strategy. Marketing strategy involves two major activities: (1) selecting a target market and determining the desired positioning of the product in target customers' minds and (2) specifying the plan for the marketing activities to achieve the desired positioning. In these activities, positioning is the unique selling proposition for the product. Figure 1-1 presents a schematic describing a general process of marketing strategy development.
The principal principles of Marketing
Despite being studied for around a hundred years, there are few true scientific principles in marketing (Bartels, 1944). By scientific principles, we mean natural rules of law around which a theory can be developed to explain observations (and predict future observations), which
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cannot be subsequently disproved. But Bartels (1951) stated, when discussing whether marketing is an art or science, that only two marketing generalizations exist.
1 As [a consumer's] income increases, the percentage of income spent for food decreases; for rent, fuel, and light remains the same; for clothing remains the same; and for sundries [miscellaneous items] increases (Engels' Law).
2 Two cities attract retail trade from an intermediary city or town in the vicinity of the breaking point (the 50% point) in direct proportion to the populations of the two cities and in inverse proportion to the square of the distance from these two cities to the intermediate town (Reilly's Law of Retail Gravitation).
Since Engels' 'Law', the concept of 'General Theory of Marketing' has evolved, with retailers now using complex mathematical formulae to determine site location decisions. Despite the lack of clear 'laws of marketing', academics have argued for a 'General Theory of Marketing'. To move closer to this theory, we need to understand the behavior of buyers, sellers, the institutional framework around selling/buying, and the consequences for society. Marketing involves complex interactions between individuals, organizations, society, and government. Although we have no 'laws' of marketing, we can make law-like generalizations, such as advertising having a direct and positive influence on total industry sales, selective advertising having a direct and positive influence on individual company sales, and the elasticity of selective advertising on company sales being low.
Marketing techniques are still developing in the scientific sense, but in the age of the Internet and big data analytics, companies can describe and predict consumer, customer, and producer behavior. Marketers still need to make use of trial and error, experimentation, and readjustment processes. Gordon and Perrey (2015) argue that we are entering a golden age in marketing, with advances in data analysis and statistical modeling allowing us to measure the returns made on marketing investments and assess and predict customer behavior more accurately than ever before.
Target Market Selection and Product Positioning
Marketing strategy development starts with the customer and specifies target markets. Marketers are moving from mass markets to smaller segments with customized programs. Modern technologies enable firms to practice customized marketing economically, allowing for "markets of one" campaigns tailored to individual consumers.
The two key questions are:
Which potential buyers should the firm attempt to serve? To answer this, the firm must first determine the most appropriate way to describe and differentiate customers. This is the process of segmentation.
How much customization should the firm offer in its programs—that is, at which point on the continuum from Mass Market – Market Segments – Market Niches – Individuals will the firm construct plans?
Markets can be segmented in a variety of ways. ⁵ Among the most widely used bases are:
Demographic (e.g., age, income, gender, occupation)
Geographic (e.g., nation, region of country, urban vs. rural)
Lifestyle (e.g., hedonistic vs. value oriented)
These three types of bases—demographic, geographic, and lifestyle—are general descriptors of consumers. Often, a useful segmentation of the market is derived by using segmentation bases that describe a customer’s behavior or relationship to a product. See table 1-1 for an example.
Consider a personal computer manufacturer segmenting the market based on user status. One might choose to target first-time home-use computer buyers; another may target those who already own but wish to trade up. The firms’ explicit choice of
Figure: 1
Example of segmentation based on customer behavior
User status Nonuser vs. User
Usage rate Light, medium, heavy user
Benefits sought Performance oriented vs. price oriented
Loyalty status None, moderate, strong, loyal
Attitude toward product Unsatisfied, satisfied, delighted
Target markets significantly impact computer features and communications efforts. Segmentation schemes are useful for marketing, but not for defining groups. Selecting the right segments is crucial as customers dictate the rules of the marketing game. Firms should consider this when selecting target markets.
• The firm's comparative strengths and weaknesses vis-à-vis competition given the target market's purchase criteria
• The firm's corporate goals and the fit of the segment with these goals
• The resources necessary to market successfully to the target segment
• The need for/availability of appropriate collaborators to market successfully
• The financial returns from the segment
FIGURE 1-2
Fill-in-the-blank positioning statement
Our product/brand (single most important claim)
among all (competitive frame)
Because (single most important support)
In the segmentation and target market selection process, firms must consider scenarios, approach, and target customers' perceptions. A positioning statement should be formalized to specify the firm's position in the target customers' minds. An explicit statement is crucial, even if the positioning isn't well captured through a single claim. Addressing the positioning problem helps solve the marketing mix problem, which includes product, price, place, and promotion.
The Marketing Mix
Neil Borden of Harvard Business School used the term marketing mix to describe the set of activities comprising a firm’s marketing program. ⁸ He noted how firms blend mix elements into a program and how even firms competing in each product category can have dramatically different mixes at work. He specified twelve mix elements:
Over time, aggregation and regrouping of these elements has become popular. As shown in figure 1-1, the four Ps of product, price, promotion, and place are often used to set out the marketing mix in an easy-to-recall way. The discussion will now turn to the major issues in setting the four Ps in the following sequence:
N. H. Borden, "The Concept of the Marketing Mix," reprinted in Strategic Marketing Management, ed. R. J. Dolan (Boston: Harvard Business School Press, 1991).
Key Topics Pertaining to Product and Pricing Strategies
1. Product Differentiation
Kotler highlights the necessity of distinguishing products in competitive environments through several key aspects:
- Quality: Developing superior quality to not only meet but also surpass customer expectations.
- Design and Features: Providing innovative and distinctive characteristics.
- Customer Experience: Improving user satisfaction by offering services or advantages that extend beyond the product itself.
For instance, Apple’s differentiation strategy is centered on exceptional design, seamless device integration, and ecosystem services such as iCloud.
2. Pricing Strategies
Kotler offers a comprehensive examination of pricing as an essential marketing instrument:
- Penetration Pricing: Establishing a low introductory price to draw in a substantial customer base and facilitate market entry. This approach is particularly effective in markets sensitive to price or when launching in an unfamiliar territory.
- Price Skimming: Launching products at a premium price to maximize revenue from early adopters, with subsequent price reductions to attract more price-conscious consumers.
- Value-Based Pricing: Setting prices based on the perceived value to the customer rather than solely on production costs.
Focus: Ensuring that pricing aligns with customer perceptions of the product's value.
Application: This strategy is frequently employed in the luxury goods sector, where branding and exclusivity are crucial.
3. The Product Life Cycle (PLC)
Kotler’s model for the Product Life Cycle delineates the stages that products typically experience, with strategies adapted for each phase:
- Introduction: Involves high promotional expenses, with an emphasis on raising awareness and generating demand.
- Growth: Focuses on increasing market share, enhancing product features, and fostering brand loyalty.
- Maturity: Characterized by market saturation, heightened competition, and the necessity for differentiation or price modifications to sustain market share.
- Decline: Involves cost reduction, contemplating product revitalization, or potentially exiting the market.
Reference: Kotler, P., & Keller, K. L. (2016). Marketing management (15th ed.). Pearson Education.
Marketing as Exchange
Marketing is a two-way exchange process, involving both the marketing organization and customers. In the mid-1970s, marketing centered on the economic and social exchange relationships between buyers and sellers, leading to the 'broadening' of marketing and the relationship marketing school of marketing.
There are numerous types of buyer-seller exchanges in marketing. Figure 1.3 illustrates some examples of two-way (dyadic) exchanges as follows.
1 In the first exchange type, the exchange takes place between the police who protect the general public from crime and terrorism, and public disorder more generally, and the public who support them, sometimes even through signing petitions to keep police stations in service in a particular locale, and especially through their national and local taxes, depending on the country concerned (see Chapter 16 for a more detailed discussion of the use of marketing by the City of London Police).
2 In the second exchange type, we have a retailer and a customer, say entering a shop (e.g. Albert Hejn-the Dutch supermarket retailer) to purchase groceries, and paying for these with cash or by credit/debit card (see Chapter 14).
3 In the third type of exchange, we have a manufacturer and a retailer. Here, the retailer (e.g. London's Harrods) purchases goods from the manufacturer (e.g. Burberry) through a credit facility (e.g. payment in 30 days), expects any damaged goods to be returnable, and wants the goods delivered in a certain way within a particular time limit. In return, the retailer undertakes to pay a wholesale (i.e. trade discounted) price.
4 In the fourth exchange type, the exchange takes place between a charity and its donors whereby the donors provide funds (by legacy or regular or one-off donation) and the charity makes products and services available to third parties, e.g. Oxfam supporting famine relief in Africa (see Chapter 16).
5 In the fifth exchange type, we have a not-for-profit organization, in this case a theatre, which provides a range of productions designed to entertain and educate its audiences in return for payment.
6 In the sixth type of exchange, we have a manufacturer dealing directly with its customers. An example here would be Dell, the computer manufacturer.
Marketing exchanges are complex and often involve multiple transactions and combinations. For instance, insurance companies provide underwriting services, banks and brokers sell house insurance policies directly to the public.
Marketing's Positive Impact on Society
So far, we have considered how marketing can be characterized as operating in either the consumer, business-to-business, or services domains. What is common to all these marketing contexts is that the marketer works to satisfy customers. However, more recently, as discussed earlier, there has been a realization that marketing impacts both positively and negatively on society. Let's consider how much the marketing industry contributes positively to society (we consider the negative societal impacts and sustainable marketing considerations in Chapter 18). For example, Wilkie and Moore (1999) describe the complexities of what they call the 'aggregate marketing system'. We can use the example of how marketing brings together the ingredients of an average European 'continental' breakfast. Consider the individual ingredients-for exam-ple, coffee or tea, together with Danish pastries, cold cuts of meat, salad and cheese, muesli and cereals, various fruits, the cups/plates and glasses, the oven to cook the pastries, etc. The distributive capacity of the aggregate marketing system is amazing, especially when we consider that there were around 514m people in the EU in 2015, each of whom is brought their own unique mixture of breakfast offerings each morning (see CIA, 2015). Broadly, the aggregate marketing system in most countries works well. We're not all starving and we don't have to ration our food to preserve the amount we eat. Of course, there are parts of certain countries in Africa, North Korea, and parts of China where people are dying of hunger, but these countries often experience imperfections in supply and demand because of political (e.g. war, dictatorship, famine) and environmental (e.g. drought) circumstances. Therefore, marketing plays a significant role in developing and transforming society
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