Importance of Distribution Channels

Importance of Distribution Channels

As noted, distribution channels often require the assistance of others in order for the marketer to reach its target market. But why exactly does a company need others to help with the distribution of their product? Wouldn’t a company that handles its own distribution functions be in a better position to exercise control over product sales and potentially earn higher profits? Also, doesn’t the Internet make it much easier to distribute products thus lessening the need for others to be involved in selling a company’s product?

While on the surface it may seem to make sense for a company to operate its own distribution channel (i.e., handling all aspects of distribution) there are many factors preventing companies from doing so. While companies can do without the assistance of certain channel members, for many marketers some level of channel partnership is needed. For example, marketers who are successful without utilizing resellers to sell their product (e.g., Dell Computers sells mostly through the Internet and not in retail stores) may still need assistance with certain parts of the distribution process (e.g., Dell uses parcel post shippers such as FedEx and UPS). In Dell’s case creating their own transportation system makes little sense given how large such a system would need to be in order to service Dell’s customer base. Thus, by using shipping companies Dell is taking advantage of the benefits these services offer to Dell and to Dell’s customers.

When choosing a distribution strategy a marketer must determine what value a channel member adds to the firm’s products. Remember, as we discussed in the Product Decisions Tutorial, customers assess a product’s value by looking at many factors including those that surround the product (i.e., augmented product). Several surrounding features can be directly influenced by channel members, such as customer service, delivery, and availability. Consequently, for the marketer selecting a channel partner involves a value analysis in the same way customers make purchase decisions. That is, the marketer must assess the benefits received from utilizing a channel partner versus the cost incurred for using the services.

Benefits Offered by Channel Members

• Cost Savings in Specialization – Members of the distribution channel are specialists in what they do and can often perform tasks better and at lower cost than companies who do not have distribution experience. Marketers attempting to handle too many aspects of distribution may end up exhausting company resources as they learn how to distribute, resulting in the company being “a jack of all trades but master of none.”
• Reduce Exchange Time – Not only are channel members able to reduce distribution costs by being experienced at what they do, they often perform their job more rapidly resulting in faster product delivery. For instance, consider what would happen if a grocery store received direct shipment from EVERY manufacturer that sells products in the store. This delivery system would be chaotic as hundreds of trucks line up each day to make deliveries, many of which would consist of only a few boxes. On a busy day a truck may sit for hours waiting for space so they can unload their products. Instead, a better distribution scheme may have the grocery store purchasing its supplies from a grocery wholesaler that has its own warehouse for handling simultaneous shipments from a large number of suppliers. The wholesaler will distributes to the store in the quantities the store needs, on a schedule that works for the store, and often in a single truck, all of which speeds up the time it takes to get the product on the store’s shelves.
• Customers Want to Conveniently Shop for Variety – Marketers have to understand what customers want in their shopping experience. Referring back to our grocery store example, consider a world without grocery stores and instead each marketer of grocery products sells through their own stores. As it is now, shopping is time consuming, but consider what would happen if customers had to visit multiple retailers each week to satisfy their grocery needs. Hence, resellers within the channel of distribution serve two very important needs: 1) they give customers the products they want by purchasing from many suppliers (termed accumulating and assortment services), and 2) they make it convenient to purchase by making products available in single location.
• Resellers Sell Smaller Quantities – Not only do resellers allow customers to purchase products from a variety of suppliers, they also allow customers to purchase in quantities that work for them. Suppliers though like to ship products they produce in large quantities since this is more cost effective than shipping smaller amounts. For instance, consider what it costs to drive a truck a long distance. In terms of operational expenses for the truck (e.g., fuel, truck driver’s cost) let’s assume it costs (US) $1,000 to go from point A to point B. Yet in most cases, with the exception of a little decrease in fuel efficiency, it does not cost that much more to drive the truck whether it is filled with 1000 boxes containing the product or whether it only has 100 boxes. But when transportation costs are considered on a per product basis ($1 per box vs. $10 per box) the cost is much less for a full truck. The ability of intermediaries to purchase large quantities but to resell them in smaller quantities (referred to as bulk breaking) not only makes these products available to those wanting smaller quantities but the reseller is able to pass along to their customers a significant portion of the cost savings gained by purchasing in large volume.
• Create Sales – Resellers are at the front line when it comes to creating demand for the marketer’s product. In some cases resellers perform an active selling role using persuasive techniques to encourage customers to purchase a marketer’s product. In other cases they encourage sales of the product through their own advertising efforts and using other promotional means such as special product displays.
• Offer Financial Support – Resellers often provide programs that enable customers to more easily purchase products by offering financial programs that ease payment requirements. These programs include allowing customers to: purchase on credit; purchase using a payment plan; delay the start of payments; and allowing trade-in or exchange options.
• Provide Information – Companies utilizing resellers for selling their products depend on distributors to provide information that can help improve the product. High-level intermediaries may offer their suppliers real-time access to sales data including information showing how products are selling by such characteristics as geographic location, type of customer, and product location (e.g., where located within a store, where found on a website). If high-level information is not available, marketers can often count on resellers to provide feedback as to how customers are responding to products. This feedback can occur either through surveys or interviews with reseller’s employees or by requesting the reseller allow the marketer to survey customers.

Costs of Utilizing Channel Members

• Loss of Revenue – Resellers are not likely to offer services to a marketer unless they see financial gain in doing so. They obtain payment for their services as either direct payment (e.g., marketer pays for shipping costs) or, in the case of resellers, by charging their customers more than what they paid the marketer for acquiring the product (termed markup). For the latter, marketers have a good idea of what the final customer will pay for their product which means the marketer must charge less when selling the product to resellers. In these situations marketers are not reaping the full sale price by using resellers, which they may be able to do if they sold directly to the customer.
• Loss of Communication Control – Marketers not only give up revenue when using resellers, they may also give up control of the message being conveyed to customers. If the reseller engages in communication activities, such as personal selling in order to get customers to purchase the product, the marketer is no longer controlling what is being said about the product. This can lead to miscommunication problems with customers, especially if the reseller embellishes the benefits the product provides to the customer. While marketers can influence what is being said by training reseller’s salespeople, they lack ultimate control of the message.
• Loss of Product Importance – Once a product is out of the marketer’s hands the importance of that product is left up to channel members. If there are pressing issues in the channel, such as transportation problems, or if a competitor is using promotional incentives in an effort to push their product through resellers, the marketer’s product may not get the attention the marketer feels it should receive.

Type of Channel Members

Type of Channel Members

Channel activities may be carried out by the marketer or the marketer may seek specialist organizations to assist with certain functions. We can classify specialist organizations into two broad categories: resellers and specialty service firms.

Resellers

These organizations, also known within some industries as intermediaries, distributors or dealers, generally purchase or take ownership of products from the marketing company with the intention of selling to others. If a marketer utilizes multiple resellers within its distribution channel strategy the collection of resellers is termed a Reseller Network. These organizations can be classified into several sub-categories including:

• Retailers – Organizations that sell products directly to final consumers.
• Wholesalers – Organizations that purchase products from suppliers, such as manufacturers or other wholesalers, and in turn sell these to other resellers, such as retailers or other wholesalers.
• Industrial Distributors – Firms that work mainly in the business-to-business market selling products obtained from industrial suppliers.

Specialty Service Firms

These are organizations that provide additional services to help with the exchange of products but generally do not purchase the product (i.e., do not take ownership of the product):

• Agents and Brokers – Organizations that mainly work to bring suppliers and buyers together in exchange for a fee.
• Distribution Service Firms – Offer services aiding in the movement of products such as assistance with transportation, storage, and order processing.
• Others – This category includes firms that provide additional services to aid in the distribution process such as insurance companies and firms offering transportation routing assistance.

What are Channels of Distribution?

In the Business Buying Behavior Tutorial, we describe a supply chain as consisting of all parties and their supplied activities that help a marketer create and deliver products to the final customer. For marketers, the distribution decision is primarily concerned with the supply chain’s front-end or channels of distribution that are designed to move the product (goods or services) from the hands of the company to the hands of the customer. Obviously when we talk about intangible services the use of the word “hands” is a figurative way to describe the exchange that takes place. But the idea is the same as with tangible goods. All activities and organizations helping with the exchange are part of the marketer’s channels of distribution.

Activities involved in the channel are wide and varied though the basic activities revolve around these general tasks:

• Ordering
• Handling and shipping
• Storage
• Display
• Promotion
• Selling
• Information feedback

Distribution Decisions

Our discussions in the tutorials Product Decisions and Managing Products indicate product decisions may be the most important of all marketing decisions since these lead directly to the reasons (i.e., offer benefits that satisfy needs) why customers decide to make a purchase. But having a strong product does little good if customers are not able to easily and conveniently obtain it. With this in mind we turn to the second major marketing decision area – distribution.

Distribution decisions focus on establishing a system that, at its basic level, allows customers to gain access and purchase a marketer’s product. However, marketers may find that getting to the point at which a customer can acquire a product is complicated, time consuming, and expensive. The bottom line is a marketer’s distribution system must be both effective (i.e., delivers a good or service to the right place, in the right amount, in the right condition) and efficient (i.e., delivers at the right time and for the right cost). Yet, as we will see, achieving these goals takes considerable effort.

Distribution decisions are relevant for nearly all types of products. While it is easy to see how distribution decisions impact physical goods, such as laundry detergent or truck parts, distribution is equally important for digital goods (e.g., television programming, downloadable music) and services (e.g., income tax services). In fact, while the Internet is playing a major role in changing product distribution and is perceived to offer more opportunities for reaching customers, online marketers still face the same distribution issues and obstacles as those faced by offline marketers.

In order to facilitate an effective and efficient distribution system many decisions must be made including (but certainly not limited to):

• Assessing the best distribution channels for getting products to customers
• Determining whether a reseller network is needed to assist in the distribution process
• Arranging a reliable ordering system that allows customers to place orders
• Creating a delivery system for transporting the product to the customer
• For tangible and digital goods, establishing facilities for product storage

In this part of our highly detailed Principles of Marketing Tutorials we cover the basics of distribution including defining what channels of distribution are and why these are important. We will also introduce the key parties in a distribution system, such as the reseller network, though much greater coverage will be given to channel partners and to technical aspects of distribution (e.g., ordering, delivery, storage, etc.) in our next tutorial.

Pricing Decisions

What do the following words have in common? Fare, dues, tuition, interest, rent, and fee. The answer is that each of these is a term used to describe what one must pay to acquire benefits from another party. More commonly, most people simply use the word price to indicate what it costs to acquire a product.

The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell.

In this part of our highly detailed Principles of Marketing Tutorials we begin a two-part discussion of the fourth marketing mix variable - price. For some marketers more time is spent agonizing over price than any other marketing decision. In this tutorial we look at why price is important and what factors influence the pricing decision.

What is Price?

In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange:

• Buyers’ View – For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up. Sometimes in a barter situation a buyer may acquire a product by giving up their own product. For instance, two farmers may exchange cattle for crops. Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product).
• Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions. For example, most retailers highlight product pricing in their advertising campaigns.

Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction.

Finally, while product pricing is a main topic for discussion when a company is examining its overall profitability, pricing decisions are not limited to for-profit companies. Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not as apparent . For instance, charities seeking to raise money may set different “target” levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits. While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value.

Price vs. Value

For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value.

As we discussed back in the What is Marketing? Tutorial, value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:

Value = perceived benefits received
perceived price paid

For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, close down current operations while a product is installed or incur other expenses. However, for the purpose of this tutorial we will limit our discussion to how the marketer sets the financial price of a transaction.

Importance of Pricing

When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job.

Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include:

• Most Flexible Marketing Mix Variable – For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons.
• Setting the Right Price – Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options.
• Trigger of First Impressions - Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is important for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price.
• Important Part of Sales Promotion – Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in the Sales Promotion Tutorial, marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.

Factors Affecting Pricing Decision

For the remainder of this tutorial we look at factors that affect how marketers set price. The final price for a product may be influenced by many factors which can be categorized into two main groups:

• Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time.
• External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market.

Below we provide a detailed discussion of both internal and external factors.

Internal Factors

The pricing decision can be affected by factors that are controlled by the marketing organization. These factors include:

Company and Marketing Objectives

Marketing decisions are guided by the overall objectives of the company. While we will discuss this in more detail when we cover marketing strategy in a later tutorial, for now it is important to understand that all marketing decisions, including price, work to help achieve company objectives.

Corporate objectives can be wide-ranging and include different objectives for different functional areas (e.g., objectives for production, human resources, etc). While pricing decisions are influenced by many types of objectives set up for the marketing functional area, there are four key objectives in which price plays a central role. In most situations only one of these objectives will be followed, though the marketer may have different objectives for different products. The four main marketing objectives affecting price include:

• Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. This level of return along with an estimate of sales will help determine appropriate pricing levels needed to meet the ROI objective.
• Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs. This is most likely to occur with new products where the organizational objectives allow a new product to simply meet its expenses while efforts are made to establish the product in the market. This objective allows the marketer to worry less about product profitability and instead directs energies to building a market for the product.
• Market Share – The pricing decision may be important when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market (we will discuss this marketing strategy in further detail in our next tutorial). For existing products, firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are willing to compete on price.
• Maximize Profits – Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that optimizes profits. This is often the case when the marketer has little incentive to introduce improvements to the product (e.g., demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy.

Marketing Strategy

Marketing strategy concerns the decisions marketers make to help the company satisfy its target market and attain its business and marketing objectives. Price, of course, is one of the key marketing mix decisions and since all marketing mix decisions must work together, the final price will be impacted by how other marketing decisions are made. For instance, marketers selling high quality products would be expected to price their products in a range that will add to the perception of the product being at a high-level.

It should be noted that not all companies view price as a key selling feature. Some firms, for example those seeking to be viewed as market leaders in product quality, will deemphasize price and concentrate on a strategy that highlights non-price benefits (e.g., quality, durability, service, etc.). Such non-price competition can help the company avoid potential price wars that often break out between competitive firms that follow a market share objective and use price as a key selling feature.

Costs

For many for-profit companies, the starting point for setting a product’s price is to first determine how much it will cost to get the product to their customers. Obviously, whatever price customers pay must exceed the cost of producing a good or delivering a service otherwise the company will lose money.

When analyzing cost, the marketer will consider all costs needed to get the product to market including those associated with production, marketing, distribution and company administration (e.g., office expense). These costs can be divided into two main categories:

• Fixed Costs - Also referred to as overhead costs, these represent costs the marketing organization incurs that are not affected by level of production or sales. For example, for a manufacturer of writing instruments that has just built a new production facility, whether they produce one pen or one million they will still need to pay the monthly mortgage for the building. From the marketing side, fixed costs may also exist in the form of expenditure for fielding a sales force, carrying out an advertising campaign and paying a service to host the company’s website. These costs are fixed because there is a level of commitment to spending that is largely not affected by production or sales levels.
• Variable Costs – These costs are directly associated with the production and sales of products and, consequently, may change as the level of production or sales changes. Typically variable costs are evaluated on a per-unit basis since the cost is directly associated with individual items. Most variable costs involve costs of items that are either components of the product (e.g., parts, packaging) or are directly associated with creating the product (e.g., electricity to run an assembly line). However, there are also marketing variable costs such as coupons, which are likely to cost the company more as sales increase (i.e., customers using the coupon). Variable costs, especially for tangible products, tend to decline as more units are produced. This is due to the producing company’s ability to purchase product components for lower prices since component suppliers often provide discounted pricing for large quantity purchases.

Determining individual unit cost can be a complicated process. While variable costs are often determined on a per-unit basis, applying fixed costs to individual products is less straightforward. For example, if a company manufactures five different products in one manufacturing plant how would it distribute the plant’s fixed costs (e.g., mortgage, production workers’ cost) over the five products? In general, a company will assign fixed cost to individual products if the company can clearly associate the cost with the product, such as assigning the cost of operating production machines based on how much time it takes to produce each item. Alternatively, if it is too difficult to associate to specific products the company may simply divide the total fixed cost by production of each item and assign it on percentage basis.

External Market Factors

The pricing decision can be affected by factors that are not directly controlled by the marketing organization. These factors include:

Elasticity of Demand

Marketers should never rest on their marketing decisions. They must continually use market research and their own judgment to determine whether marketing decisions need to be adjusted. When it comes to adjusting price, the marketer must understand what effect a change in price is likely to have on target market demand for a product.

Understanding how price changes impact the market requires the marketer have a firm understanding of the concept economists call elasticity of demand, which relates to how purchase quantity changes as prices change. Elasticity is evaluated under the assumption that no other changes are being made (i.e., “all things being equal”) and only price is adjusted. The logic is to see how price by itself will affect overall demand. Obviously, the chance of nothing else changing in the market but the price of one product is often unrealistic. For example, competitors may react to the marketer’s price change by changing the price on their product. Despite this, elasticity analysis does serve as a useful tool for estimating market reaction.

Elasticity deals with three types of demand scenarios:

• Elastic Demand – Products are considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by greater than 10%.
• Inelastic Demand – Products are considered to exist in an inelastic market when a certain percentage change in price results in a smaller and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by less than 10%.
• Unitary Demand – This demand occurs when a percentage change in price results in an equal and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by 10%.

For marketers the important issue with elasticity of demand is to understand how it impacts company revenue. In general the following scenarios apply to making price changes for a given type of market demand:

• For elastic markets – increasing price lowers total revenue while decreasing price increases total revenue.
• For inelastic markets – increasing price raises total revenue while decreasing price lowers total revenue.
• For unitary markets – there is no change in revenue when price is changed.

Customer and Channel Partner Expectations

Possibly the most obvious external factors that influence price setting are the expectations of customers and channel partners. As we discussed, when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. Pricing beyond these price points could discourage customers from purchasing.

Firms within the marketer’s channels of distribution also must be considered when determining price. Distribution partners expect to receive financial compensation for their efforts, which usually means they will receive a percentage of the final selling price. This percentage or margin between what they pay the marketer to acquire the product and the price they charge their customers must be sufficient for the distributor to cover their costs and also earn a desired profit.

Competitive and Related Products

Marketers will undoubtedly look to market competitors for indications of how price should be set. For many marketers of consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used. Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price.

Analysis of competition will include pricing by direct competitors, related products and primary products.

• Direct Competitor Pricing – Almost all marketing decisions, including pricing, will include an evaluation of competitors’ offerings. The impact of this information on the actual setting of price will depend on the competitive nature of the market. For instance, products that dominate markets and are viewed as market leaders may not be heavily influenced by competitor pricing since they are in a commanding position to set prices as they see fit. On the other hand in markets where a clear leader does not exist, the pricing of competitive products will be carefully considered. Marketers must not only research competitive prices but must also pay close attention to how these companies will respond to the marketer’s pricing decisions. For instance, in highly competitive industries, such as gasoline or airline travel, competitors may respond quickly to competitors’ price adjustments thus reducing the effect of such changes.
• Related Product Pricing - Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors. For example, a marketer of a new online golf instruction service that allows customers to access golf instruction via their computer may look at prices charged by local golf professionals for in-person instruction to gauge where to set their price. While on the surface online golf instruction may not be a direct competitor to a golf instructor, marketers for the online service can use the cost of in-person instruction as a reference point for setting price.
• Primary Product Pricing - As we discussed in the Product Decisions Tutorial, marketers may sell products viewed as complementary to a primary product. For example, Bluetooth headsets are considered complementary to the primary product cellphones. The pricing of complementary products may be affected by pricing changes made to the primary product since customers may compare the price for complementary products based on the primary product price. For example, companies that sell accessory products for the Apple iPod may do so at a cost that is only 10% of the purchase price of the iPod. However, if Apple were to dramatically drop the price, for instance by 50%, the accessory at its present price would now be 20% of the of iPod price. This may be perceived by the market as a doubling of the accessory’s price. To maintain its perceived value the accessory marketer may need to respond to the iPod price drop by also lowering the price of the accessory.

Government Regulation

Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements. For instance, in some industries, government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). Additional areas of potential regulation include: deceptive pricing, price discrimination, predatory pricing and price fixing.

Finally, when selling beyond their home market, marketers must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently marketers must have a clear understanding of regulations in each market they serve.

There are also additional legal concerns when it comes to price which we will discuss in a future tutorial.

Types of Promotion – Promotion Mix

Types of Promotion – Promotion Mix

Marketers have at their disposal four major methods of promotion. Taken together these comprise the promotion mix. In this section a basic definition of each method is offered while in the next section a comparison of each method based on the characteristics of promotion is presented.

• Advertising – Involves non-personal, mostly paid promotions often using mass media outlets to deliver the marketer’s message. While historically advertising has involved one-way communication with little feedback opportunity for the customer experiencing the advertisement, the advent of computer technology and, in particular, the Internet has increased the options that allow customers to provide quick feedback.
• Sales Promotion – Involves the use of special short-term techniques, often in the form of incentives, to encourage customers to respond or undertake some activity. For instance, the use of retail coupons with expiration dates requires customers to act while the incentive is still valid.
• Public Relations – Also referred to as publicity, this type of promotion uses third-party sources, and particularly the news media, to offer a favorable mention of the marketer’s company or product without direct payment to the publisher of the information.
• Personal Selling – As the name implies, this form of promotion involves personal contact between company representatives and those who have a role in purchase decisions (e.g., make the decision, such as consumers, or have an influence on a decision, such as members of a company buying center). Often this occurs face-to-face or via telephone, though newer technologies allow this to occur online via video conferencing or text chat.

Each of these methods will be covered in much greater detail in later tutorials.

Promotion Summary Table

The table below compares each of the promotion mix options on the eight key promotional characteristics. The summary should be viewed only as a general guide since promotion techniques are continually evolving and how each technique is compared on a characteristic is subject to change.

Characteristics	Advertising	Sales Promotion	Public Relations	Personal Selling
Directed Coverage	mass & targeted	mass & targeted	mass	targeted
Message Flow	one & two-way	one & two-way	one-way	two-way
Payment Model	paid limited non-paid	paid	non-paid	paid
Interaction Type	non-personal	personal & non-personal	non-personal	personal
Demand Stimulation	lagging	quick	lagging	quick
Message Control	good	good	poor	very good
Message Credibility	low-medium	low-medium	high	medium-high
Cost of Promotion	CPI - Low CPTI - Varies CPA - Varies	CPI - Medium CPTI - Varies CPA - Varies	CPI - None CPTI - None CPA - None	CPI - High CPTI - High CPA - High

Factors Affecting Promotions Choice

With four promotional methods to choose from how does the marketer determine which ones to use? The selection can be complicated by company and marketing decision issues.

Company Issues:

• Promotional Objective – As we discussed, there are several different objectives a marketer may pursue with their promotional strategy. Each type of promotion offers different advantages in terms of helping the marketer reach their objectives. For instance, if the objective of a software manufacturer is to get customers to try a product, the use of sales promotion, such as offering the software in a free downloadable form, may yield better results than promoting through Internet advertising.

• Availability of Resources – The amount of money and other resources that can be directed to promotion affects the marketer’s choice of promotional methods. Marketers with large promotional budgets may be able to spread spending among all promotion options while marketers with limited funds must be more selective on the promotion techniques they use.
• Company Philosophy – Some companies follow a philosophy that dictates where most promotional spending occurs. For instance, some companies follow the approach that all promotion should be done through salespeople while other companies prefer to focus attention on product development and hope word-of-mouth communication by satisfied customers helps to create interest in their product.

Marketing Decision Issues:

• Target Market – As one might expect, customer characteristics dictate how promotion is determined. Characteristics such as size, location and type of target markets affect how the marketer communicates with customers. For instance, for a small marketer serving business markets with customers widely dispersed, it may be very expensive to utilize a sales force versus using advertising.
• Product – Different products require different promotional approaches. For the consumer market, products falling into the convenience and shopping goods categories are likely to use mass market promotional approaches while higher-end specialty goods are likely to use personalized selling. Thus, products that are complex and take customers extended time to make a purchase decision may require personal selling rather than advertising. This is often the case with products targeted to the business market. Additionally, as we briefly discussed in the Managing Products Tutorial and will later see in the Planning and Strategy Tutorial, products pass through different stages in the Product Life Cycle. As a product moves through these stages the product itself may evolve and also promotional objectives will change. This leads to different promotional mix decisions from one stage to the next.
• Distribution –Marketing organizations selling through channel partners can reach the final customer either directly using a pull promotion strategy or indirectly using a push promotional strategy. The pull strategy is so named since it creates demand for a product by promoting directly to the final customer in the hopes that their interest in the product will help “pull” more product through the distribution channel. This approach can be used when channel partners are hesitant about stocking a product unless they are assured of sufficient customer interest. The push strategy uses promotion to encourage channel partners to stock and promote the product to their customers. The idea is that by offering incentives to channel members the marketer is encouraging their partners (e.g., wholesalers, retailers) to “push” the product down the channel and into customer’s hands. Most large consumer products companies will use both approaches while smaller firm may find one approach works better.
• Price – The higher the price of a product the more likely a marketer will need to engage in personalized promotion compared to lower priced products that can be marketed using mass promotion.

Characteristics of Different Promotions

Characteristics of Different Promotions

Before we discuss the different types of promotion options available to a marketer, it is useful to gain an understanding of the features that set different options apart. For our discussion we isolate seven characteristics on which each promotional option can be judged. While these characteristics are widely understood as being important in evaluating the effectiveness of each type of promotion, they are by no means the only criteria used for evaluation. In fact, as new promotional methods emerge the criteria for evaluating promotional methods will likely change.

For our discussion we will look at the following characteristics of a promotional method:
1. Intended Audience: Mass vs. Targeted
2. Payment Model: Paid vs. Non-Paid
3. Interaction Type: Personal vs. Non-Personal
4. Message Flow: One-Way vs. Two-Way
5. Demand Creation: Quick vs. Lagging
6. Message Control
7. Message Credibility
8. Effective Cost of Promotion

1. Intended Audience: Mass Promotion vs. Targeted Promotion

Promotions can be categorized based on the intended coverage of a single promotional message. For instance, a single television advertisement for a major sporting event, such as the Super Bowl, World Cup or Olympics, could be seen by millions of viewers at the same time. Such mass promotion, intended to reach as many people as possible, has been a mainstay of marketers’ promotional efforts for a long time.

Unfortunately, while mass promotions are delivered to a large number of people, the actual number that fall within the marketer’s target market may be small. Because of this, many who use mass promotion techniques find it to be an inefficient way to reach desired customers. Instead, today’s marketers are turning to newer techniques designed to focus promotional delivery to only those with a high probability of being in the marketer’s target market. For example, Google, Yahoo and other Internet search engines employ methods for delivering highly targeted ads to customers as they enter search terms. The assumption made by advertisers is that customers who enter search terms are interested in the information they have entered, especially if they are searching by entering detailed search strings (e.g., phrases rather than a single word). Following this logic, advertisers are much more likely to have their ads displayed to customers within their target market and, thus, receive a higher return on their promotional investment. The movement to highly targeted promotions has gained tremendous traction in recent years and, as new and improved targeting methods are introduced, its importance will continue to grow.

2. Payment Model: Paid Promotion vs. Non-Paid Promotion

Most efforts to promote products require marketers to make direct payment to the medium that delivers the message. For instance, a company must pay a magazine publisher to advertise in the magazine. However, there are several forms of promotion that do not involve direct payment in order to distribute a promotional message. While not necessarily “free” since there may be indirect costs involved, the ability to have a product promoted without making direct payment to the medium can be a viable alternative to expensive promotion options.

3. Interaction Type: Personal vs. Non-Personal

Promotions involving real people communicating with other people is considered personal promotion. While salespeople are a common and well understood type of personal promotion, another type of promotion, called controlled word-of-mouth promotion (a.k.a., buzz marketing), is emerging as a form of personal promotion. Unlike salespeople who attempt to obtain an order from customers, controlled word-of-mouth promotion uses real people to help spread information about a product but is not designed to directly elicit orders.

One key advantage personal promotions have is the ability for the message sender to adjust the message as they gain feedback from message receivers (i.e., two-way communication). So if a customer does not understand something in the initial message (e.g., doesn’t fully understand how the product works) the person delivering the message can adjust the promotion to address questions or concerns. Many non-personal forms of promotion, such as a radio advertisement, are inflexible, at least in the short-term, and cannot be easily adjusted to address questions that arise by the audience experiencing the ad.

4. Message Flow: One-Way vs. Two-Way Communication

Promotions can be classified based on whether the message source enables the message receiver to respond with immediate feedback. Such feedback can then be followed with further information exchange between both parties. Most efforts at mass promotion, such as television advertising, offer only a one-way information flow that does not allow for easy response by the message receiver. However, many targeted promotions, such as using a sales force to promote products, allow message recipients to respond immediately to information from the message sender.

5. Demand Creation: Quick vs. Lagging

As we discussed earlier, the success of promotional activity may not always be measured by comparing spending to an increase in product sales since marketers may use promotion to achieve other objectives. However, when a marketer is looking to increase demand, certain promotional activities offer advantages in turning exposure to promotion into a quick increase in demand. In general, these activities are most effective when customers are offered an incentive to make the purchase either in a monetary way (e.g., save money) or in psychological way (e.g., improves customer’s perceived group role or status level).

6. Message Control

Most promotions are controlled by the marketer who encodes the message (or hires specialists such as advertising agencies to create the promotion) and then pays to have the message delivered. However, no marketer can totally control how the news media, customers or others talk about a company or its products. Reporters for magazines, newspaper and websites, as well as posters to Internet forums may discuss a company’s products in ways that can benefit or hinder a company’s marketing efforts. This is particularly true with non-paid promotions where a marketer is looking to obtain a free “mention” by an influential message medium (e.g., newspaper article).

7. Message Credibility

The perceived control of the message can influence the target market’s perception of message credibility. For example, many customers viewing a comparative advertisement in which a product is shown to be superior to a competitor’s product may be skeptical about the claims since the company with the superior product is paying for the advertisement. Yet, if the same comparison is mentioned in a newspaper article it may be more favorably viewed since readers may perceive the author of the story has possessing an unbiased point-of-view.

8. Cost Effectiveness

Promotional cost is measured in several different ways though the most useful are measured in terms of cost-per-impression (CPI), cost-per-targeted impression (CPTI), and cost-per-action (CPA). The CPI metric (also measured in terms of cost-per-thousand impressions or CPM) relates to how many people are exposed to a promotion in relation to the cost of the promotion. A national or international television advertisement, while expensive to create and broadcast, actually produces a very low CPI given how many people are exposed to the ad. Yet, a low CPI can be misleading if a large percentage of the promotion’s audience is not within the marketer’s target market, in which case the CPTI may be a better metric for gauging promotion effectiveness. The CPTI approach looks at what percentage of an audience is within the marketer’s customer group and, thus, legitimate targets for the promotion. Clearly, CPTI is higher than CPI, but it offers a better indication of how much promotion is reaching targeted customers.

An even more effective way to evaluate promotional costs is through the cost-per-action metric. With CPA the marketer evaluates how many people actually respond to a promotion. Response may be measured by examining purchase activity, number of phone inquiries, website traffic, clicks on advertisements, and other means within a short time after the promotional message was delivered. Unfortunately, measuring CPA is not always easy and tying it directly to a specific promotion can also be difficult. For example, a customer who purchases a snack product may have first learned about the snack product several weeks before from a television advertisement. The fact that it took the customer several weeks to make the purchase does not mean the advertisement was not effective in generating sales, though if the CPA was measured within a day or two after the ad was broadcast this person’s action would not have been counted..

With the growing trend to more targeted promotions, especially those delivered through the Internet, combined with the development of sophisticated customer tracking techniques, the ability to compare promotion to actual customer activity is bound to one day be the dominant method for measuring promotional effectiveness.

Promotion Decisions

Those unfamiliar with marketing often assume it is the same thing as advertising. Certainly our coverage so far in the Principles of Marketing Tutorials has suggested this is not the case. Marketing encompasses many tasks and decisions, of which advertising may only be a small portion.

Additionally, when non-marketers hear someone talk about “promotion” they frequently believe the person is talking about advertising. While advertising is the most visible and best understood method of promotion, it is only one of several approaches a marketer can choose to promote their products and services.

In this tutorial we begin our discussion of the third major area of the marketing mix – promotion.

Many view promotional activities as the most glamorous part of marketing. This may have to do with the fact that promotion is often associated with creative activity undertaken to help distinguish a company’s products from competitors’ offerings. While creativity is an important element in promotion decisions, marketers must also have a deep understanding of how the marketing communication process works and how promotion helps the organization achieve its objectives.

What is promotion?

Promotion is a form of corporate communication that uses various methods to reach a targeted audience with a certain message in order to achieve specific organizational objectives. Nearly all organizations, whether for-profit or not-for-profit, in all types of industries, must engage in some form of promotion. Such efforts may range from multinational firms spending large sums on securing high-profile celebrities to serve as corporate spokespersons to the owner of a one-person enterprise passing out business cards at a local businessperson’s meeting.

Like most marketing decisions, an effective promotional strategy requires the marketer understand how promotion fits with other pieces of the marketing puzzle (e.g., product, distribution, pricing, target markets). Consequently, promotion decisions should be made with an appreciation for how it affects other areas of the company. For instance, running a major advertising campaign for a new product without first assuring there will be enough inventory to meet potential demand generated by the advertising would certainly not go over well with the company’s production department (not to mention other key company executives). Thus, marketers should not work in a vacuum when making promotion decisions. Rather, the overall success of a promotional strategy requires input from others in impacted functional areas.

In addition to coordinating general promotion decisions with other business areas, individual promotions must also work together. Under the concept of Integrated Marketing Communication marketers attempt to develop a unified promotional strategy involving the coordination of many different types of promotional techniques. The key idea for the marketer who employs several promotional options (we’ll discuss potential options later in this tutorial) to reach objectives for the product is to employ a consistent message across all options. For instance, salespeople will discuss the same benefits of a product as mentioned in television advertisements. In this way no matter how customers are exposed to a marketer’s promotional efforts they all receive the same information.

Targets of Marketing Promotions

The audience for an organization’s marketing communication efforts is not limited to just the marketer’s target market. While the bulk of a marketer’s promotional budget may be directed at the target market, there are many other groups that could also serve as useful target of a marketing message.

Targets of a marketing message generally fall into one of the following categories:

• Members of the Organization’s Target Market – This category would include current customers, previous customers and potential customers, and as noted, may receive the most promotional attention.
• Influencers of the Organization’s Target Market – There exists a large group of people and organizations that can affect how a company’s target market is exposed to and perceives a company’s products. These influencing groups have their own communication mechanisms that reach the target market and the marketer may be able utilize these influencers to its benefit. Influencers include the news media (e.g., offer company stories), special interest groups, opinion leaders (e.g., doctors directing patients), and industry trade associations.
• Participants in the Distribution Process – The distribution channel provides services to help gain access to final customers and are also target markets since they must recognize a product’s benefits and agree to handle the product in the same way as final customers who must agree to purchase products. Aiming promotions at distribution partners (e.g., retailers, wholesalers, distributors) and other channel members is extremely important and, in some industries, represents a higher portion of a marketer’s promotional budget than promotional spending directed at the final customer.
• Other Companies – The most likely scenario in which a company will communicate with another company occurs when the marketer is probing to see if the company would have an interest in a joint venture, such as a co-marketing arrangement where two firms share marketing costs. Reaching out to other companies, including companies who may be competitors for other products, could help create interest in discussing such a relationship.
• Other Organizational Stakeholders – Marketers may also be involved with communication activities directed at other stakeholders. This group consists of those who provide services, support or, in other ways, impact the company. For example, an industry group that sets industry standards can affect company products through the issuance of recommended compliance standards for product development or other marketing activities. Communicating with this group is important to insure the marketer’s views of any changes in standards are known.

Objectives of Marketing Promotions

The most obvious objective marketers have for promotional activities is to convince customers to make a decision that benefits the marketer (of course the marketer believes the decision will also benefit the customer). For most for-profit marketers this means getting customers to buy an organization’s product and, in most cases, to remain a loyal long-term customer. For other marketers, such as not-for-profits, it means getting customers to increase donations, utilize more services, change attitudes, or change behavior (e.g., stop smoking campaigns).

However, marketers must understand that getting customers to commit to a decision, such as a purchase decision, is only achievable when a customer is ready to make the decision. As we saw in the tutorials covering Consumer Buying Behavior and Business Buying Behavior, customers often move through several stages before a purchase decision is made. Additionally before turning into a repeat customer, purchasers analyze their initial purchase to see whether they received a good value, and then often repeat the purchase process again before deciding to make the same choice.

The type of customer the marketer is attempting to attract and which stage of the purchase process a customer is in will affect the objectives of a particular marketing communication effort. And since a marketer often has multiple simultaneous promotional campaigns, the objective of each could be different.

Types of Promotion Objectives

The possible objectives for marketing promotions may include the following:

• Build Awareness – New products and new companies are often unknown to a market, which means initial promotional efforts must focus on establishing an identity. In this situation the marketer must focus promotion to: 1) effectively reach customers, and 2) tell the market who they are and what they have to offer.
• Create Interest – Moving a customer from awareness of a product to making a purchase can present a significant challenge. As we saw with our discussion of consumer and business buying behavior, customers must first recognize they have a need before they actively start to consider a purchase. The focus on creating messages that convince customers that a need exists has been the hallmark of marketing for a long time with promotional appeals targeted at basic human characteristics such as emotions, fears, sex, and humor.
• Provide Information – Some promotion is designed to assist customers in the search stage of the purchasing process. In some cases, such as when a product is so novel it creates a new category of product and has few competitors, the information is simply intended to explain what the product is and may not mention any competitors. In other situations, where the product competes in an existing market, informational promotion may be used to help with a product positioning strategy. As we discuss in the Targeting Markets Tutorial, marketers may use promotional means, including direct comparisons with competitor’s products, in an effort to get customers to mentally distinguish the marketer’s product from those of competitors.
• Stimulate Demand – The right promotion can drive customers to make a purchase. In the case of products that a customer has not previously purchased or has not purchased in a long time, the promotional efforts may be directed at getting the customer to try the product. This is often seen on the Internet where software companies allow for free demonstrations or even free downloadable trials of their products. For products with an established customer-base, promotion can encourage customers to increase their purchasing by providing a reason to purchase products sooner or purchase in greater quantities than they normally do. For example, a pre-holiday newspaper advertisement may remind customers to stock up for the holiday by purchasing more than they typically purchase during non-holiday periods.
• Reinforce the Brand – Once a purchase is made, a marketer can use promotion to help build a strong relationship that can lead to the purchaser becoming a loyal customer. For instance, many retail stores now ask for a customer’s email address so that follow-up emails containing additional product information or even an incentive to purchase other products from the retailer can be sent in order to strengthen the customer-marketer relationship.

The Communication Process

The act of communicating has been evaluated extensively for many, many years. One of the classic analyses of communication took place in the 1940s and 1950s when researchers, including Claude Shannon, Warren Weaver, Wilbur Schramm and others, offered models describing how communication takes place.

In general, communication is how people exchange meaningful information. Models that reflect how communication occurs often include the elements shown below:

Communication Participants:

For communication to occur there must be at least two participants:

• Message Source – The source of communication is the party intending to convey information to another party. The message source can be an individual (e.g., salesperson) or an organization (e.g., through advertising). In order to convey a message, the source must engage in message encoding, which involves mental and physical processes necessary to construct a message in order to reach a desired goal (i.e., convey meaningful information). This undertaking consists of using sensory stimuli, such as visuals (e.g., words, symbols, images), sounds (e.g., spoken word), and scents (e.g., fragrance) to convey a message.
• Message Receiver – The receiver of communication is the intended target of a message source’s efforts. For a message to be understood the receiver must decode the message by undertaking mental and physical processes necessary to give meaning to the message. Clearly, a message can only be decoded if the receiver is actually exposed to the message.

• Communication Delivery:

  Communication takes place in the form of a message that is exchanged between a source and receiver. A message can be shaped using one or a combination of sensory stimuli that work together to convey meaning that meets the objectives of the sender. The sender uses a transmission medium to send the message. In marketing the medium may include the use of different media outlets (e.g., Internet, television, radio, print), promotion-only outlets (e.g., postal mail, billboards), and person-to-person contact (e.g., salespeople).

  Additionally, communication can be improved if there is a two-way flow of information in the form of a feedback channel. This occurs if the message receiver is able to respond, often quickly, to the message source. In this way, the original message receiver now becomes the message source and the communication process begins again.

Obstacles to Effective Communication

While a message source may be able to deliver a message through a transmission medium, there are many potential obstacles to the message successfully reaching the receiver the way the sender intends. The potential obstacles that may affect good communication include:

• Poor Encoding – This occurs when the message source fails to create the right sensory stimuli to meet the objectives of the message. For instance, in person-to-person communication, verbally phrasing words poorly so the intended communication is not what is actually meant, is the result of poor encoding. Poor encoding is also seen in advertisements that are difficult for the intended audience to understand, such as words or symbols that lack meaning or, worse, have totally different meaning within a certain cultural groups. This often occurs when marketers use the same advertising message across many different countries. Differences due to translation or cultural understanding can result in the message receiver having a different frame of reference for how to interpret words, symbols, sounds, etc. This may lead the message receiver to decode the meaning of the message in a different way than was intended by the message sender.
• Poor Decoding – This refers to a message receiver’s error in processing the message so that the meaning given to the received message is not what the source intended. This differs from poor encoding when it is clear, through comparative analysis with other receivers, that a particular receiver perceived a message differently from others and from what the message source intended. Clearly, as we noted above, if the receiver’s frame of reference is different (e.g., meaning of words are different) then decoding problems can occur. More likely, when it comes to marketing promotions, decoding errors occur due to personal or psychological factors, such as not paying attention to a full television advertisement, driving too quickly past a billboard, or allowing one’s mind to wonder while talking to a salesperson.
• Medium Failure – Sometimes communication channels break down and end up sending out weak or faltering signals. Other times the wrong medium is used to communicate the message. For instance, trying to educate doctors about a new treatment for heart disease using television commercials that quickly flash highly detailed information is not going to be as effective as presenting this information in a print ad where doctors can take their time evaluating the information.
• Communication Noise – Noise in communication occurs when an outside force in someway affects delivery of the message. The most obvious example is when loud sounds block the receiver’s ability to hear a message. Nearly any distraction to the sender or the receiver can lead to communication noise. In advertising, many customers are overwhelmed (i.e., distracted) by the large number of advertisements they encountered each day. Such advertising clutter (i.e., noise) makes it difficult for advertisers to get their message through to desired customers.

Keys to Effective Communication

For marketers understanding how communication works can improve the delivery of their message. From the information just discussed, marketers should focus on the following to improve communication with their targeted audience:

• Carefully Encode – Marketers should make sure the message they send is crafted in a way that will be interpreted by message receivers as intended. This means having a good understanding of how their audience interprets words, symbols, sounds and other stimuli used by marketers.
• Allow Feedback – Encouraging the message receiver to provide feedback can greatly improve communication and help determine if a marketer’s message was decoded and interpreted properly. Feedback can be improved by providing easy-to-use options for responding, such as phone numbers, Internet chat, and email.
• Reduce Noise – In many promotional situations the marketer has little control over interference with their message. However, there are a few instances where the marketer can proactively lower the noise level. For instance, salespeople can be trained to reduce noise by employing techniques that limit customer distractions, such as scheduling meetings during non-busy times or by inviting potential customers to an environment that offers fewer distractions, such as a conference facility. Additionally, advertising can be developed in ways that separates the marketer’s ad from others, including the use of whitespace in magazine ads.
• Choose Right Audience – Targeting the right message receiver will go a long way to improving a marketer’s ability to promote their products. Messages are much more likely to be received and appropriately decoded by those who have an interest in the content of the message.

Marketing Research

Many organizations find the markets they serve are dynamic with customers, competitors and market conditions continually changing. And marketing efforts that work today cannot be relied upon to be successful in the future. Meeting changing conditions requires marketers have sufficient market knowledge in order to make the right adjustments to their marketing strategy. For marketers gaining knowledge is accomplished through marketing research.

In this part of the Principles of Marketing Tutorials we begin a multi-part discussion of research in marketing. We explore what marketing research is and see why it is considered the foundation of marketing. This tutorial also looks at the elements of good research including factors that distinguish good research from poor. We examine the risks associated with marketing research and see why it should be used to aid decision-making, but never used as the sole reason for making decisions. Finally, we look at the trends shaping marketing research.

Note that in this tutorial we use the terms “marketing research” and “market research” interchangeably. Many feel there is a distinct difference, with “marketing research” covering a broader array of research efforts associated with marketing decisions while “market research” is specific to understanding nuances of a particular market. For the purpose of this tutorial we treat these as the same.

Importance of Marketing Research

Research, as a general concept, is the process of gathering information to learn about something that is not fully known. Nearly everyone engages in some form of research. From the highly trained geologist investigating newly discovered earthquake faults, to the author of best selling spy novels gaining insight into new surveillance techniques, to the model train hobbyist spending hours hunting down the manufacturer of an old electric engine, each is driven by the quest for information.

For marketers, research is not only used for the purpose of learning, it is also a critical component needed to make good decisions. Market research does this by giving marketers a picture of what is occurring (or likely to occur) and, when done well, offers alternative choices that can be made. For instance, good research may suggest multiple options for introducing new products or entering new markets. In most cases marketing decisions prove less risky (though they are never risk free) when the marketer can select from more than one option.

Using an analogy of a house foundation, marketing research can be viewed as the foundation of marketing. Just as a well-built house requires a strong foundation to remain sturdy, marketing decisions need the support of research in order to be viewed favorably by customers and to stand up to competition and other external pressures. Consequently, all areas of marketing and all marketing decisions should be supported with some level of research.

While research is key to marketing decision making, it does not always need to be elaborate to be effective. Sometimes small efforts, such as doing a quick search on the Internet, will provide the needed information. However, for most marketers there are times when more elaborate research work is needed and understanding the right way to conduct research, whether performing the work themselves or hiring someone else to handle it, can increase the effectiveness of these projects.

Doing Research Right

Marketing research is a process that investigates both organizations and people. Of course, organizations are made up of people so when it comes down to it, marketing research is a branch of the social sciences. Social science studies people and their relationships and includes such areas as economics, sociology and psychology. To gain understanding into their fields, researchers in the social sciences use scientific methods that have been tested and refined over hundreds of years. Many of these methods require the institution of tight controls on research projects. For instance, many companies survey (i.e., ask questions) a small percentage of their customers (called a sample) to see how satisfied they are with the company’s efforts. For the information obtained from a small group of customers to be useful when evaluating how all customers feel, certain controls must be in place including controls on who should be included in the sample.

Thus, doing research right means the necessary controls are in place to insure it is done correctly and increase the chance the results are relevant. Relying on results of research conducted incorrectly to make decisions could prove problematic if not disastrous. Thousands of examples exist of firms using faulty research to make decisions, including many dot-com companies that failed between 1999 and 2002.

As one might expect, the trade-off for doing research right is the increase in cost and time needed to conduct the research. So a big decision for marketers, when it comes to doing research, is to determine the balance between the need for obtaining relevant information and the costs involved in carrying out the research.

Research Validity and Reliability

As we discussed, not all research requires undertaking an elaborate study. But even marketers conducting small, informal research should know that any type of research performed poorly will not yield relevant results. In fact, all research, no matter how well controlled, carries the potential to be wrong. There are many reasons why research may not yield good results (a full discussion being beyond the scope of this tutorial), however, most errors can be traced to problems with how data is gathered. In particular, many research mistakes occur due to problems associated with research validity and research reliability.

Research Validity

This problem with data gathering represents several concepts that to the non-researcher may be quite complex. But basically validity boils down to whether the research is really measuring what it claims to be measuring. For instance, if a marketer is purchasing a research report from a company claiming to measure how people prefer the marketer’s products over competitors’ products, the marketer should understand how the data was gathered to help determine if the research really captures the information the way the research company says it does.

While research validity is measured in several ways, those evaluating research results should keep asking this simple question: Is the research measuring what it is supposed to measure? If the marketer has doubts about the answer to this question then it is possible the results should also be questioned.

Research Reliability

This problem relates to whether research results can be applied to a wider group than those who took part in a study. In other words, would similar results be obtained if another group containing different respondents or a different set of data points were used? For example, if 40 salespeople out of 2,000-person corporate sales force participate in a research study focusing on company policy, is the information obtained from these 40 people sufficient to conclude how the entire sales forces feels about company policies? What if the same study was done again with 40 different salespeople, would the responses be similar?

Reliability is chiefly concerned with making sure the method of data gathering leads to consistent results. For some types of research this can be measured by having different researchers follow the same methods to see if results can be duplicated. If results are similar then it is likely the method of data gathering is reliable. Assuring research can be replicated and can produce similar results is an important element of the scientific research method.

Risk in Marketing Research

The discussion above regarding doing research right shows that good marketing research, especially when it involves formal research projects, requires strict controls in order to produce relevant information. Being relevant means the probability is high that the research results reflect what is happening now or might happen in the future. But following the right procedures to produce a relevant study does not insure the results of research will be 100% correct as there is always the potential that results are wrong.

Because of the risks associated with research, marketers are cautioned not to use the results of marketing research as the only input in making marketing decisions. Rather, smart marketing decisions require considering many factors, including management’s own judgment of what is best. But being cautious with how research is used should not diminish the need to conduct research. While making decisions without research input may work sometimes, long-term success is not likely to happen without regular efforts to collect information.

Additionally, risk in research extends to research produced by others. As we discuss in the Planning for Marketing Research Tutorial, the research process often includes using information initially gathered by other sources, such as market research firms. However, in many instances the methods for collecting this information is not be fully disclosed, thus questions exist regarding research validity and reliability. Marketers using research collected by third-party sources should do so with a reasonable level of skepticism. In fact, it is wise for marketers to always make an effort to locate multiple information sources that address the same issue (e.g., two or more sales forecasts reports). A good rule-of-thumb for all marketers is never to rely on one source for making definitive statements about a market.

Trends in Marketing Research

In recent years the evolution of marketing research has been dramatic with marketers getting access to a wide variety of tools and techniques to improve their hunt for information. Below we discuss a few important trends shaping the marketing research field:

Gaining an Information Advantage

In its role as the foundation of marketing, marketing research is arguably marketing’s most important task. Today marketers not only view research as a key ingredient in making marketing decisions they also consider information to be a critical factor in gaining advantage over competitors. Because organizations recognize the power information has in helping create and maintain products that offer value, there is an insatiable appetite to gain even more insight into customers and markets. Marketers in nearly all industries are expected to direct more resources to gathering and analyzing information especially in highly competitive markets. Many of the trends discussed below are directly related to marketers’ quest to acquire large amounts of customer, competitive and market information.

Internet Technologies

To address the need for more information, marketing companies are developing new methods for collecting data. This has led to the introduction of several new technologies to assist in the information gathering process. Many of these developments are Internet-based technologies that include:

• Enhanced Tracking - The Internet offers an unparalleled ability to track and monitor customers. Each time a visitor accesses a website they provide marketers with extensive information including how they arrived at the website (e.g., via a search engine) and what they did when on the website (e.g., what products were investigated). In many ways the vast data available through Internet tracking has yet to be used by the majority of marketers. However, as tracking software becomes more sophisticated the use of tracking data will be a routinely used research tool.
• Improved Communication – Not only is the Internet enabling marketers to monitor customers’ website activity, it also offers significant improvement in customer-to-company communication which is vital for marketing research. For instance, the ability to encourage customers to offer feedback on the company’s products and service is easy using website popup notices and email reminders. Also, as we discuss in the Planning for Market Research Tutorial, the use of the Internet for conducting online focus group research is expanding.
• Research Tools – A large number of Internet services have added options for conducting research. These include the ubiquitous search engines, tools for conducting online surveys, and access to large databases containing previous research studies (i.e., secondary research).

Other Technologies

In addition to the Internet, marketing research has benefited from other technological improvements including:

• Virtual Reality and Simulations - Marketers can use computer developed virtual worlds to simulate real world customer activity such as store shopping. While this type of research is mostly performed in a controlled laboratory setting, there are emerging virtual worlds on the Internet where marketers can test concepts and communicate with customers.
• Global Positioning Systems – GPS enables marketers to track inventory and even track mobile sales and service personnel. Soon GPS will be a common feature of customers’ communication devices, such as cellphones, offering marketers the potential to locate and track customers.
• Data Analysis Software – As we will see in the Planning for Market Research Tutorial, research includes gathering information and it also involves analyzing what is collected. A number of software and statistical programs have been refined to give marketers greater insight into what the data really means.

Affordable Research

For many years formal research projects were considered something that only the largest marketers could afford due to the expense of carrying out relevant research. However, the technologies discussed above make it affordable for companies of all sizes to engage in research that were financially prohibitive just few years ago. For instance, surveying customers is quick and easy using one of the many online survey services which charge low fees to create, distribute and analyze results.

Merging of Data Sources

The wide range of technologies used to gather data has led to the creation of data centers where information is stored. Today many of these data centers are sharing information with other centers in a manner that offers the marketer a fuller picture of their customers. For instance, as we noted in the Managing Customers Tutorial, many companies have multiple contact points where customers can interact with the company (e.g., in-person, on the web, via phone call). In the past the information gathered at these points was often stored separately so if a customer contacted the company through one contact point they may not be recognized if they also contacted the company through a different point.

Companies now see the value in knowing what customers do across all contact points and work to integrate customer information. Additionally, some marketers are going outside their own data collection and seek information on their customers from other sources, such as information provided by credit card companies. This information is then merged with the company-owned information to get a fuller picture of customer activity.

Privacy Concerns

The continual demand for customer information, along with advances in technology and the merging of information sources, has lead marketing organizations to gather information in ways that raise concerns among privacy advocates. Many customers are unaware of the amount and nature of the data marketers collect. As new information gathering techniques and technologies emerge customer response to issues of privacy may determine whether these methods are feasible or forbidden.

Respondent Cooperation at Issue

The growing concern with privacy is leading many customers to limit their participation in a company’s research activities. This includes customers choosing not to respond to company requests to take part in research studies that may come via telephone or email solicitation. Customers are also becoming more aware of how their Internet activities are tracked and are responding by using techniques to restrict marketers tracking efforts. For example, marketers can place small data files called cookies on customers’ computer and then use this to track user activity. Many customers are learning to disable the cookies and, in doing so, limit the marketer’s ability to track customer activity.

Research as a Promotional Tool

While most people do not equate marketing research with promotion, the fact is many companies are discovering research can also function as a major promotional tool. The practice of distributing company-produced research reports to potential customers and the news media has been used for a number of years in scientific and technology industries. In recent years the practice has expanded into many other fields, particularly among firms involved in consulting, healthcare and financial industries. Such reports often provide readers with information related to product features and benefits, comparisons with competitor’s offerings and target market perceptions. These reports are produced using high quality graphs and charts backed up by carefully created narratives that proudly emphasize the company’s strengths.

Unfortunately, many research reports produced for promotional reasons are not scientific and thus may not carry much value. While many companies claim the research supports their products, many of these claims may in fact be more fluff than substance since they are not grounded in good research methods.

Managing Customers

In the What is Marketing? Tutorial we noted that marketers make decisions which result in value to both the marketer and its customers. Throughout the Principles of Marketing Tutorials we emphasize the importance customers play in helping marketers meet their business objectives. To drive home this point, in the Managing Customers Tutorial, we concentrate our discussion on understanding customers and examining their role in the marketing process. We will see that for most organizations understanding customers is necessary not only because of their effect on marketing decisions but because customers’ activities influence the entire organization.

Yet, understanding customers is a never-ending challenge. One reason is that not all customers are the same and, consequently, benefits sought by one customer may differ from those sought by another. Because of this marketers must continually conduct marketing research to evaluate customers and to determine what they want. And uncovering what customers want is made significantly easier if a company establishes methods designed to manage their customers.

In this tutorial we explore the techniques marketers use to manage their customers. We begin by defining what a customer is and why they are important to an organization. We then look at what tools and strategies must be in place to skillfully manage customers including the crucial requirement that marketers build relationships with their customers. Finally, we conclude with a discussion of how servicing customers is often just as critical as selling products to them.

What is a Customer?

In general terms, a customer is a person or organization that a marketer believes will benefit from the goods and services offered by the marketer’s organization. As this definition suggests, a customer is not necessarily someone who is currently purchasing from the marketer. In fact, customers may fall into one of three customer groups:

• Existing Customers – Consists of customers who have purchased or otherwise used an organization’s goods or services, typically within a designated period of time. For some organizations the timeframe may be short, for instance, a coffee shop may only consider someone to be an Existing Customer if they have purchased within the last three months. Other organizations may view someone as an Existing Customer even though they have not purchased in the last few years (e.g., television manufacturer). Existing Customers are by far the most important of the three customer groups since they have a current relationship with a company and, consequently, they give a company a reason to remain in contact with them. Additionally, Existing Customers also represent the best market for future sales, especially if they are satisfied with the relationship they presently have with the marketer. Getting these Existing Customers to purchase more is significantly less expensive and time consuming than finding new customers mainly because they know and hopefully trust the marketer and, if managed correctly, are easy to reach with promotional appeals (i.e., emailing a special discount for new product).
• Former Customers – This group consists of those who have formerly had relations with the marketing organization typically through a previous purchase. However, the marketer no longer feels the customer is an Existing Customer either because they have not purchased from the marketer within a certain timeframe or through other indications (e.g., a Former Customer just purchased a similar product from the marketer’s competitor). The value of this group to a marketer will depend on whether the customer’s previous relationship was considered satisfactory to the customer or the marketer. For instance, a Former Customer who felt they were not treated well by the marketer will be more difficult to persuade to buy again compared to a Former Customer who liked the marketer but decided to buy from someone else who had a similar product that was priced lower.
• Potential Customers – The third category of customers includes those who have yet to purchase but possess what the marketer believes are the requirements to eventually become Existing Customers. As we will see in the Targeting Markets Tutorial, the requirements to become a customer include such issues as having a need for a product, possessing the financial means to buy, and having the authority to make a buying decision. Locating Potential Customers is an ongoing process for two reasons. First, Existing Customers may become Former Customers (e.g., decide to buy from a competitor) and, thus, must be replaced by new customers. Second, while we noted above that Existing Customers are the best source for future sales, it is new customers that are needed in order for a business to significantly expand. For example, a company that sells only in its own country may see less room for sales growth if a high percentage of people in the country are already Existing Customers. In order to realize stronger growth the company may seek to sell their products in other countries where Potential Customers may be quite high.

Customers and the Organization

For most organizations understanding customers is the key to success while not understanding them is a recipe for failure. It is so important that the constant drive to satisfy customers is not only a concern for those responsible for carrying out marketing tasks; satisfying customers is a concern of everyone in the entire organization.

Whether someone’s job involves direct contact with customers (e.g., salespeople, delivery drivers, telephone customer service representatives) or indirect contact (e.g., production, accounting), all members of an organization must appreciate the role customers play in helping the organization meets its goals. To ensure everyone understands the customer’s role, many organizations continually preach a “customer is most important” message in department meetings, organizational communication (e.g., internal emails, website postings), and corporate training programs. To drive home the importance of customers, the message often contains examples of how customers impact the company. These examples include:

• Source of Information and Ideas - Satisfying the needs of customers requires organizations maintain close contact with them. Marketers can get close to customers by conducting marketing research (e.g., surveys) and other feedback methods (e.g., website comments forms) that encourage customers to share their thoughts and feelings. With this information marketers are able to learn what people think of their present marketing efforts and receive suggestions for making improvements. For instance, research and feedback methods can offer marketers insight into new products and services sought by their customers.
• Affects Activities Throughout Organization - For most organizations customers not only affect decisions made by the marketing team but they are the key driver for decisions made throughout the organization. For example, customer’s reaction to the design of a product may affect the type of raw materials used in the product manufacturing process. With customers impacting such a significant portion of a company, creating an environment geared to locating, understanding and satisfying customers is imperative.
• Needed to Sustain the Organization - Finally, customers are the reason an organization is in business. Without customers or the potential to attract customers, a company is not viable. Consequently, customers are not only key to revenue and profits they are also key to creating and maintaining jobs within the organization.

The Importance of Good Customers

For marketers simply finding customers who are willing to purchase their goods or services is not enough to build a successful marketing strategy. Instead, as we note in our definition of marketing in the What is Marketing? Tutorial, marketers should look to manage customers in a way that will “identify, create and maintain satisfying relationships with customers.” By using marketing efforts that are designed to “maintain satisfying relationships” rather than simply pursuing a quick sale, the likelihood increases that customers will be more trusting of the marketer and exhibit a higher level of satisfaction with the organization. In turn satisfied customers are more likely to become “good” customers.

For our purposes we define a “good” customer as one who holds the potential to undertake activities that offer long-term value to an organization. The activities performed by customers not only include purchasing products, these also include such things as:

• offering feedback on company performance
• making prompt payment
• offering suggestions for new products
• voluntarily promoting the company’s products to others

These activities along with many others (including profit from product sales) represent the value (i.e., benefits for costs spent) an organization receives from its customers. In the case of “good” customers their potential for providing value should be a signal for marketers to direct additional marketing efforts in building, strengthening and sustaining a relationship with these customers.

The fact that we place the descriptive term “good” in front of customers should not be taken lightly. Not all customers who currently have relationships with an organization (i.e., Existing Customers) should be treated on an equal level. Some consistently spend large sums to purchase products from an organization; others do not spend large sums but hold the potential to do so; and still others use up a large amount of an organization’s resources but contribute little revenue. Clearly there are lines of demarcation between those in the Existing Customer category. As we will see later, identifying this line is critical for marketing success.

Challenge of Managing Customers

While on the surface the process for managing customers may seem to be intuitive and straightforward, in reality organizations struggle to accomplish this. One reason for the struggle is that no two customers are the same. What is appealing to one customer may not necessarily work for another.

For instance, a marketer may change how it issues coupons to customers by reducing the frequency of issuing coupons by regular mail and instead directing customers to electronic coupons found on its website. The marketer makes this move to encourage customers to visit the website more often with the hope it will lead to cost savings (e.g., sending out traditional coupons by mail requires postage expense), allow the marketer to acquire more customer information (e.g., monitor their activities when they visit the website), and give the marketer the opportunity to sell more product to the customer (e.g., special promotional messages on the website). However, some long time customers may view electronic coupons as requiring more work on their part compared to coupons delivered through regular mail. In this example the introduction of a new feature may satisfy some customers while irritating others.

Customer Contact Points

Another problem is that customers may interact with organizations at different contact points. A contact point is the method a customer uses to communicate with a company. For instance, consider the different ways customers may interact with an organization:

• In-Person – Customers seek in-person assistance for their needs by visiting retail stores and other outlets, and also through discussion with company salespeople who visit customers at their place of business or in their home.
• Telephone – Customers seeking to make purchases or have a problem solved may find it more convenient to do so through phone contact. In many companies a dedicated department called a call center handles all incoming customer inquiries.
• Internet – The fastest growing contact point is through the Internet. The use of the Internet for purchasing (called electronic commerce) has exploded and is now the leading method for purchasing certain types of products including music. The Internet is also a key area where customers look for help with their purchases.
• Kiosks – A kiosk is a standalone, interactive computer, often equipped with a touch-screen, that offers customers several service options including product information, ability to make a purchase, and review of a customer’s account. Kiosks are now widely used for airline check-in, retail job applications, and banking.
• In-Person Product Support – Some in-person assistance is not principally intended to assist with selling but is designed to offer support once a purchase is made. Such services are handled by delivery people and service/repair technicians.
• Financial Assistance – Customer contact may also occur through company personnel who assist customers with financial issues. For instance, credit personnel help customers arrange the necessary funds to make a purchase while personnel in accounts receivable work with customers who are experiencing payment problems.

The challenge of insuring that customers are handled properly no matter the contact point they use is daunting for many companies. For some organizations the customer contact points cited above operate independently of others. For instance, retail stores may not be directly connected to telephone customer service. The result is that for different contact points many companies have developed different procedures and techniques for handling customers. And for some firms there exists little integration between the contact points so customers communicating through one point one day and another point the next day may receive conflicting information. In such cases customers are likely to become frustrated and question the company’s ability to service its customers.

Customer Relationship Management

In order to overcome the challenges faced as they attempt to cultivate and manage customers many marketers have turned to a business concept known as Customer Relationship Management (CRM). CRM is a strategic approach whose goal is to get everyone in an organization, not just the marketer, to recognize the importance of customers. Under CRM the key driver for marketing success is to treat “good” customers in a way that will increase the probability they will stay “good” customers. This is accomplished in part by ensuring that a customer receives accurate information and has a consistent and satisfying experience every time he/she interacts with a company.

While CRM is generally used to manage Existing Customers, it also has application for other customer groups. For instance, CRM is used to help identify Former Customers that may hold potential to become customers again. This is often possible due to the amount of information that is obtained and subsequently retained when Former Customers were considered Existing Customers. Additionally, CRM can serve an integral role in helping to locate Potential Customers. As we will explore in the Targeting Markets Tutorial, one method for doing this is to use information contained in CRM to determine important characteristics that are exhibited by Existing Customer and use this information to pursue new customers in untapped customer markets who have similar characteristics.

Computer technology plays a key part in carrying out CRM. A proper technology-based system is needed so that nearly anyone in an organization that comes into contact with a customer (e.g., sales force, service force, customer service representatives, accounts receivable, etc.) has access to necessary information and is well prepared to deal with the customer. But CRM is not only about utilizing high-tech products. CRM requires a strong organizational commitment that includes extensive training for all employees.

But while maintaining close and consistent relationships with customers through all contact points makes good business sense, accomplishing this has often been a challenge. Numerous problems, from technology failures and lack of communication between contact points as well as lack of adequate employee training or outright employee resistance, have derailed many CRM efforts. So while CRM is now widely adopted and is becoming an essential tool for most business organizations, it still has a long way to go before it is ingrained as an essential business function within most organizations.

Customer Service and Marketing

As we have noted, to effectively manage customers marketers must be concerned with the entire experience a customer has with a company. While much of the value sought by customers is obtained directly from the consumption or use of goods or services they purchase (i.e., offers benefits that address a need), customers’ satisfaction is not limited to direct product benefits. Instead the customer’s buying experience covers the entire purchasing experience and is a mix of product and non-product benefits.

When it comes to managing customers, an important non-product benefit that affects customers’ feelings about a company is customer service, which is defined as activities used by the marketer to support the purchaser’s experience with a product. Customer service includes several activities including:

• Training - services needed to assist the customer in learning how to use a product
• Repair – services needed to handle damaged or malfunctioning products
• Financial Assistance – services needed to help customers with the financial commitment in purchases or using the product
• Complaint Resolution - services needed to address other problems that have arisen with customers’ use of a product

In many industries customers’ experience with a company’s customer service can significantly affect their overall opinion of the product. Companies producing superior products may negatively impact their products if they back these up with shoddy service. On the other hand, many companies compete not because their products are superior to their competitors’ but because they offer a higher level of customer service. In fact, many believe that customer service will eventually become the most significant benefit offered by a company because global competition (i.e., increase in similar products) makes it more difficult for a company’s product to offer unique advantages.

Customer service manifests itself in several ways, with the most common being a dedicated department to handle customer issues. Whether a company establishes a separate department or spreads the function among many departments, being responsive and offering reliable service is critical and in the future will be demanded by customers.

Customer Service Trends

Marketers have seen the customer service process evolve from an area that received only marginal attention into a primary functional area. In response to customers’ demands for responsive and reliable service, companies are investing heavily in innovative methods and processes to strengthen their service level. These innovations include:

Increased Customer Self-Service

A major trend in customer service is the move by companies to encourage customers to be involved in helping solve their own service issues. This can be seen in retail industries where self-service ranges from customers placing their own grocery products in shopping bags all the way to having customers do their own checkout including scanning products and making payment. Also, as we will soon discuss, customers needing information are being encouraged by companies to first undertake the effort themselves often by visiting special company-provided information areas (see Website and Phone Accessible Knowledge Base below). Only after they have explored these options are customers encouraged to contact customer service.

Revenue Generators

Companies that maintain a customer service staff have found that these people not only can help solve customer problems but they may also be in a position to convince customers to purchase more. Many companies are now requiring sales training for their customer service personnel. At a basic level customer service representatives may be trained to ask if customers are interested in hearing about other products or services. If a customer shows interest then the representative will transfer the customer to a sales associate. At a more advanced level the representative will shift to a selling role and attempt to get the customer to commit to additional product purchases.

Out-Sourcing

One of the most controversial developments impacting customer service is the move by many companies around the world to establish customer service functions outside of either their home country or the country in which their customers reside. Called out-sourcing, companies pursue this strategy to both reduce cost and also increase service coverage. For instance, having multiple customer service outlets around the world allows customers to talk via phone with a service person no matter what time of day. The ability to move service to another country is only viable in large part due to technological developments (see Internet Telephone below). But such moves have raised concerns on two fronts. First, many see this trend as leading to a reduction of customer service jobs within a home country. Second, customer service personnel located off-shore may lack sufficient training and often lack an understanding of the conditions within the customers’ local market both of which can affect service levels. At the extreme a poorly managed move to out-source customer service can lead to a decrease in customer satisfaction which in the long-run could affect sales.

Customer Service Technologies

As we will see throughout the Principles of Marketing Tutorials, technological innovation has significantly impacted all areas of marketing. Within customer service, improvements in computer hardware and software, as well as rampant adoption of the Internet as a prime channel for connecting with customers, has lead to numerous innovative methods to address customer needs. These methods include:

• Online Chat – Companies are finding value in using Internet chat as a way to address customer questions. Typically the chat feature is presented via a pop-up browser window that appears when a customer clicks on a website link, though newer technology using computer programming dubbed AJAX allows for chat to take place right on a webpage and not through pop-up windows. Whether presented as a separate window or contained within a regular webpage, online chat sessions are undertaken in real-time with customers and company service people exchanging text messages. More advanced chat technology called collaborative browsing or co-browsing allows customer service representatives to manipulate a customer’s browser by sending webpages that contain relevant information. For instance, retailer Land’s End “pushes” webpages to customers’ browsers in response to requests for clothing. In this way the service person can offer suggestions and guidance by controlling what the customer is seeing on their screen.
• Website and Phone Accessible Knowledge Base – As part of customers’ desire to be more involved in solving their own problems, companies have moved to offering technological solutions in ways that appeal to customers’ desire for self service. The predominant method for doing this is by maintaining a collection of answers to commonly asked questions. The collection may be part of a Knowledge Base that is accessible either online, through such methods as frequently asked questions (FAQ), or through a call system where an automated helper or virtual attendants guide customers to an answer.
• Really Simple Syndication (RSS) – Another Internet technology that is rapidly gaining a place in customer service is called Really Simple Syndication (RSS). Made popular by its use in Internet blogs and now widely used on most popular websites, RSS allows a company to send out information quickly, and to a large number, with little manual effort compared to traditional methods. With RSS customers are able to subscribe to a company’s RSS feed and anytime the company updates information that is connected to a RSS feed (e.g., website) a notice is instantly sent to all subscribers. Subscribers who have installed the proper software or have access to an online reader will see the information appear automatically. Customer service has found RSS to be useful for: communicating product updates; technical matters, such as product defects or recalls; and general company communication, such as notification of special promotions.
• Wireless Data Access – Providing a high-level of customer services does not only occur when the customer initiates contact with an organization. Customer service takes place during any potential interaction including those that may be initiated by a company representative who is meeting face-to-face with a customer. For instance, an organization may send salespeople and other support personnel to a customer’s location and their ability to address customer concerns is vital to maintaining strong customer service. To ensure field people have the most up-to-date information, many companies now equip their field teams with portable devices that can access the Internet from virtually any location. This is accomplished through wireless Internet connections which allow the field person to access company computers and tap into customer data.
• Text Messaging – Once considered a play-toy for teenagers, text messaging is quickly being adopted as a tool for customer service. Many companies and organizations, including colleges and universities, now use text messaging as a means to communicate with their customers. For instance, colleges and universities have set up instant alert security systems where students can receive a text message in the case of on-campus emergency or weather-related problem.
• Internet Telephone – Despite the growth in the Internet as an outlet for addressing customer questions, many customers still prefer to discuss their situation with a live person through a telephone conversation. For large companies that receive thousands of calls a day a dedicated department or call center may be in place to handle customer inquiries. No matter the organization’s size, the cost of maintaining telephone support services can be expensive. One major expense lies with the cost of using traditional telecommunication lines. Commonly referred to as Plain Old Telephone Service or POTS, this system is more expensive because telephone lines are generally dedicated to individual users, that is, a single line can only handle one phone call, fax transmission, or computer data connection at a time. While a discussion of technical issues behind this are beyond the scope of this tutorial, suffice to say that POTS system is inefficient since a single telephone line has the capacity to handle a far larger volume of phone and data transmission. For this reason companies have moved to a technology called Voice over Internet Protocol (VoIP). With VoIP, telephone calls are delivered over the Internet with multiple phones sharing the same connection. With more people using the same line the cost per call is reduced. While the audio quality of the call may not be as reliable as POTS technology, improvements over the last few years have narrowed the quality gap to the point where most customers cannot distinguish the difference.
• Intelligent Call Routing – Another innovation associated with telephone support deals with technologies that identify and filter incoming customer calls. One method is the use of software that attempts to identify the caller (usually based on the incoming phone number) and then automatically directs the call for proper servicing. For instance, an appliance manufacturer may be able to distinguish between those who have purchased a refrigerator and those who purchased microwave oven. But some marketers go a step further and can program their call routing system to distinguish “good” customers from others. This may result in these customers receiving preferential placement in the calling order or queue so that they will be serviced before lower rated customers who sequentially may have called before the “good” customer.