17. The nature of marketing

Question 1

The role of marketing

Answer 1

Marketing involves a number of related management functions, including:
* market research
* product design and packaging design
* pricing, advertising and distribution
* customer service.

Marketing is a very important business activity. It links the business to the customer. It aims to identify the particular wants and needs of customers in a target market. Marketing managers then try to satisfy those customer needs more effectively than competitors. This means that market research is needed to identify and analyse customer needs. With research results, strategic decisions can then be taken about product design, pricing, promotion and distribution.

Question 2

To be effective, marketing objectives should:

Answer 2

• be linked to corporate objectives and be focused on helping the business achieve those overall
  targets
• be determined by senior management, because the key marketing objectives will impact on the
  markets and products a business trades in for years to come
• be realistic, motivating, achievable, measurable and clearly communicated to other departments.

Question 3

Why are marketing objectives important?

Answer 3

• They provide a sense of focused direction for the marketing department and help the business to achieve its overall corporate objectives.
• Business success can be measured against the targets set by the objectives.
• Marketing objectives can be broken down into regional and product sales targets.
• Marketing objectives form the basis of marketing strategy. Marketing objectives will impact on the marketing strategies adopted. It is necessary to have a clear vision of the business’s objectives in order to discuss how marketing decisions can help to achieve them.

Question 4

Examples of marketing objectives

Answer 4

• the share of the market, perhaps to gain market leadership
• total sales (value or volume, or both)
• average number of items purchased per customer visit
• frequency of shopping by loyal customers
• percentage of customers who return (customer loyalty)
• number of new customers
• customer satisfaction
• brand identity.

Question 5

Coordination of marketing with other departments

Answer 5

For example, if a marketing objective of increasing sales by 10% has been set, the marketing department will need to coordinate with the following departments:
Finance
* The finance department will use the sales forecasts of the marketing department to help construct cash flow forecasts and operational budgets.
* The finance department will have to ensure that the necessary capital is available to pay for the agreed marketing budget for promotional expenditure.

Human resources
* Sales forecasts will be used by human resources to help prepare a workforce plan. For example, additional workers will be needed in sales teams and production to increase sales.
* Human resources must ensure the recruitment and selection of qualified and experienced workers. There must be sufficient workers to produce and sell the increased number of products planned by the marketing department.

Operations
* Market research data will play a key role in new product development.
* The operations department will use sales forecasts to plan the capacity needed, the purchase of the machines that will be used and the raw material inventories required for the higher output level.

Question 6

Determinants of demand

Answer 6

• consumer incomes
• prices of substitute goods and complementary goods
• population size and structure
• fashion and taste
• advertising and promotion spending.

Question 7

Determinants of supply

Answer 7

• costs of production, such as an increase in labour costs
• government taxes imposed on the suppliers, raising their costs
• government subsidies to suppliers, reducing their costs
• weather conditions and other natural factors
• advances in technology which lower the cost of production.

Question 8

Markets

Answer 8

Markets are where buyers and sellers meet to engage in exchange. Increasingly, a market does not have to be in a physical place in the sense of a geographical location.

Understanding of the term ‘market’ can be broken down into:
* The potential market for a product, which is the total population interested in the product.
* The target market, which is the market segment of the total available market that the business has decided to direct its product towards.

Question 9

Industrial markets and consumer markets

Answer 9

An industrial market deals with products bought by businesses. These include specialist industrial
machines, trucks and office supplies. A consumer market deals with products bought by the final users
of the products. These include mobile phones, holidays and fashion clothing.

Question 10

Local, national and international markets

Answer 10

Local businesses just sell in local areas to local customers.

National businesses expand their operations to the national market, selling their products to customers
throughout the whole country. This gives greater potential to increase sales compared to local markets.

Selling to the international market offers the greatest sales potential. The rapid rise of multinationals that operate and sell in many different national markets illustrates the sales potential from exploiting international markets. Expanding into foreign markets is a significant strategic decision. Many aspects of marketing will have to change in order to respond to the wide range of tastes, cultures and laws in different countries.

Question 11

Customer orientation

Answer 11

Customer orientation requires market research and market analysis to measure present and future demand. Customers and their needs come first. The business will attempt to produce what consumers want to buy. This approach has important advantages, especially in fast-changing, volatile consumer markets. As consumers now have increasing awareness of competitors’ products and prices, they must be offered
products they really want to buy. The benefits of customer orientation are:
* The chances of newly developed products failing in the market are reduced. Effective market research helps to prevent product failures. With the huge cost of developing new products, such as cars or computers, most businesses use the customer-oriented approach to reduce the risk of failure.
* Products based on consumers’ needs will have a** longer lifespan and be more profitable** than those
that are sold using a product-led approach.
* Market research never ends. Constant feedback from customers will allow the product and the
method of marketing it to be adapted to changing tastes before competitors get there first.

Question 12

Product orientation

Answer 12

• Product-oriented businesses invent and develop products as they believe that they will find consumers to purchase them.
• Pure research into technical innovations without consumer research is rare but still exists. This is true in the pharmaceutical and electronic industries, for example. Dyson’s investment in bagless vacuum cleaners is also a good example. There is still the belief that if a business produces an innovative product of a good enough quality, then it will be purchased.
• Product-oriented businesses concentrate their efforts on efficiently producing high-quality goods. They believe quality will be valued above market fashion. Such quality-driven firms do still exist, especially in product areas where quality or safety is of great importance, such as in the manufacture
  of advanced medical equipment or crash helmets.

Question 13

Evaluating the difference between customer and product orientation

Answer 13

• The trend is towards customer orientation, but there are limitations to this approach. Frequently updating market research can be expensive. Also, if a business tried to respond to every passing consumer trend or market fashion, then it may waste its resources and end up not doing anything particularly well. It is expensive for a business to offer sufficient choice and range to meet every consumer need.
• In contrast, product orientation, researching and developing a truly innovative product, can lead to high sales and profit, even if there has been no formal market research.
• Market research and identifying consumer needs are
  not a guarantee of business success. The new products developed in this way may come to market too late
  or fail to match competing products. Success and survival in the competitive and globalised markets of the twenty-first century depend upon the whole marketing process not just market research.

Question 14

Market growth

Answer 14

The rate of market growth depends on several factors:
* a country’s rate of economic growth
* changes in consumer incomes
* development of new markets and products that reduce sales in existing markets and products
* changes in consumer tastes
* technological change, which can boost market sales following a new innovation
* whether the market is saturated because most consumers already own the product.

Question 15

Measure of market share and market growth

Answer 15

Different results may be obtained depending on whether the growth and share rates are measured in volume or value terms.

Question 16

Classification of products

Answer 16

Consumer products are often classified into:
* convenience products – purchased frequently, often bought on impulse and sold to a large target market (e.g. sweets, soft drinks)
* shopping products – usually require some planning and research by consumers before being purchased; consumers do not buy these frequently (e.g. washing machines)
* speciality products – bought infrequently, often expensive and with strong brand loyalty (e.g. cars and designer clothing).

Industrial products are often classified into:
* materials and components – needed for production to take place (e.g. steel and electric motors for washing machines)
* capital items – equipment, machinery and vehicles (e.g. lathes, IT systems and industrial buildings)
* services and supplies – business services and utilities (e.g. power supplies and IT support/maintenance).

Question 17

Differences between selling industrial and consumer goods

Answer 17

• Most industrial products, such as equipment for power stations, are much more complex than many consumer products so specialist sales employees and support services will be more important with B2B selling.
• Industrial buyers will rarely buy on impulse. They will only purchase after long consideration and detailed analysis of alternative products. A business selling B2B needs to keep in regular contact with industrial customers.
• Traditional mass media advertising and sales promotion techniques are not used in most industrial markets. Selling can be via trade fairs or direct contact with industrial buyers, often, initially, via websites.
• Mass marketing in consumer markets is a common strategy but in most industrial markets there are relatively few buyers. Products may need to be adapted to meet the needs of a particular business buyer. An example of this would be a specialist elevator system for a very tall hotel building.

Question 18

Mass and niche market

Answer 18

Mass market
* This large market is made up of customers who are willing to purchase a standardised product (undifferentiated product).
* High sales levels allow for high levels of production.
* Low price is often a key element in selling the product.

Niche market
* Customers want to buy differentiated products.
* Size of a niche market is often small.
* Market research is often necessary to establish customers’ special needs.

Question 19

Mass market
* Advantages

Answer 19

• high sales of a standard product can lead to lower average costs of production.
• Cost advantages can lead to lower prices to
  consumers which help to reinforce the position
  of the product in the market.
• extensive publicity for the business and its product leading to clear brand identity.

Question 20

Mass market
* Disadvantages

Answer 20

• Lack of differentiated products and differentiated marketing does not appeal to many consumers.
• The focus on low prices does not help to establish a premium brand image for the product.
• Technological or other changes could lead to a fall in demand for the standardised product. Overdependence is a risky strategy.

Question 21

Niche market
* Advantages

Answer 21

• By using niche marketing, small businesses can survive and thrive in markets that are dominated by larger firms.
• An unexploited niche has no competitors. Selling to this niche offers the chance to sell at high prices and high profit margins until competitors react by entering too. Consumers will often pay more for an exclusive product.
• Niche market products and exclusive marketing can be used by large firms to create status and image. Their mass-market products may lack these qualities.

Question 22

Niche market
* Disadvantages

Answer 22

• Small market niches do not allow economies of scale to be achieved.
• There is limited scope for business growth if the niche market has few customers.
• The business is vulnerable to market changes if it only operates in one niche market. This makes it a risky strategy.
• If selling in a niche market is profitable, this is likely to attract competitors. This could lead to lower prices and profitability.

Question 23

Market segmentation

Answer 23

• Market segmentation is customer focused, so it is consistent with the concept of customer orientation.
• different products are targeted at different segments.
• businesses must research the total market carefully, which allows to identify the specific consumer groups that exist within the market.
• o build a picture of the typical consumer and their key characteristics (customer profile)
• Charactersitics of consumer profile: income levels, age, gender, social class and region.

Question 24

Methods of market segmentation

Answer 24

Geoghraphical
* Consumer tastes often vary between different geographic areas. These might result from cultural, social
and climatic differences. Also have to be adjusted for different geographic locations.

Demographic
* study of population data and trends, and demographic factors, such as age, gender, income, family size, social class and ethnic background

Psychographic
* These factors are to do with differences between people’s lifestyles, personalities, values and attitudes.

Question 25

Market segmentation
* Advantages

Answer 25

• Businesses can define their target market precisely, and design and produce goods that are specifically aimed at these groups, leading to increased sales.
• It enables identification of gaps in the market and groups of consumers that are not currently being targeted, which might then be successfully exploited.
• Differentiated marketing strategies can be focused on different target markets.
• Small firms that are unable to compete in the
  whole market are able to specialise in one or two
  market segments.
• Price discrimination between consumer groups
  can be used to increase revenue and profits

Question 26

Market segmentation
* Disadvantages

Answer 26

• Research and development and production costs might be high as a result of needing to make and market different product variations.
• Promotional costs might be high as different advertisements and promotions might be needed for different segments. Marketing economies of scale may not be fully exploited.
• Production and inventory holding costs will be higher than for producing and selling just one undifferentiated product.
• By focusing on one or two limited market segments, excessive specialisation could lead to problems if consumers in those
  segments change their purchasing habits significantly.
• Extensive market research is needed to identify market segments and their needs.

Question 27

Customer relationship marketing (CRM)

Answer 27

The objective of customer relationship marketing (CRM) is to develop customer loyalty to ensure that customers buy from the business in the future. Studies have shown that it can cost between four and ten times as much to gain new customers (with expensive promotions) as it does to keep existing ones. At the heart of CRM is communication with the customer to gain information. Now that technology has made the collection of customer data so much easier and cheaper, CRM is becoming a
widely adopted marketing strategy.

Question 28

effective long-term CRM

Answer 28

• Targeted marketing – giving each customer the products and services they have indicated, from records of past purchases, that they most need.
• Customer service and support – after-sales service and effective call centres are good examples of the support essential to building customer loyalty.
• Communicate regularly with customers – to give frequent updates on new products / special offers / new features / new promotions and support services.
• Using social media – some CRM systems use social media sites to track and communicate with customers. This allows businesses to make more accurate decisions about which products to supply to satisfy customers’ needs.

Question 29

Consumer Relationship Marketing
* Costs

Answer 29

• IT systems and software are needed and employees need to be trained to respond to customer feedback.
• Effective CRM campaigns may require the use of an external marketing consultancy at high cost.
• CRM needs an existing customer base to be established first before investing in CRM. If this is not done, the costs will not lead to higher sales.
• It may be costly to respond to each customer’s feedback, especially if it contains special requests or requirements.

Question 30

Consumer Relationship Marketing
* Benefits

Answer 30

• For businesses with an existing customer base CRM has proved to be cost-effective. Higher sales from effective CRM nearly always exceed its cost.
• It is a sustainable strategy creating long-term customers unlike ‘special price offers’ or similar promotions.
• Loyal customers often recommend the business to friends and family, providing additional marketing benefit at no cost.
• It costs less per customer than trying to attract new customers.