Table of Contents Contents [hide ]
1 Background 2 Market Structure 3 Industry Definitions 4 Market Metrics 5 Industry Players 6 Trends and Recent Developments 7 Sources 8 Related ResearchWikis
Background Energy drinks are non-alcoholic beverages which are intended to provide a quick burst of high energy to the consumer. These may be prepared with a composition of methylxanthines, methylxanthines, caffeine, natural flavors, some herbal components or specific vitamins including Vitamins B. They may also contain taurine, guarana, maltodextrin, ginseng, carnitine, inositol, glucuronolactone, creatine and ginkgobiloba. Most products include artificial sugar. The primary active component is generally caffeine. Japan and Thailand have a longer history of energy drinks and the use of caffeine has been a key ingredient in those countries. Energy drinks acting as an alternative to coffee were first introduced in Europe. The market received a significant boost when Red Bull entered the US market in 1997. After this successful market introduction, introduction, various beverage companies including Coca-Cola and Pepsi entered the market. Austria-based Red Bull remains the market leader though with an approximate market share of 65%. According to Beverage Marketing, the growth rate of this industry had been doubling every since the late 90s. The current U.S. domestic market may be approximately $4 billion, expected to grow to an estimated US $10 billion by 2010. Recent years have witnessed the emergence of several new energy drinks. They include KMX of Coca-Cola, 180 of AnheuserBusch, Hansen's Energy, and Adrenaline Rush of PepsiCo's SoBe. Pepsi had earlier introduced AMP under the Mountain Dew brand and also Extreme Energy by Arizona Beverage Company was launched. Growth of the current worldwide market for energy drinks is estimated at 17.8%. Major producers are focusing heavily on marketing, targeting the promotion of energizing conception, result-oriented marketing marketing and product positioning and a greater push into developing markets.
Market Structure The primary consumers of this industry are under 35 years of age and are predominantly male. Teenager and college students are core target market segments for the manufacturers and consist of the core age group of 12 to 30. A recent survey estimates that around 35% percent of energy drink consumers are above 35 years old. Furthermore energy drinks with high sugar levels are more popular among children and women, while energy drinks with strong taste and flavor are m ore preferred by male consumers. Recent studies also indicated that 65% of the energy drinks market consists of male consumers. There are several types of energy drinks products. Different varieties of tea and coffee along with green tea forms one group. Second are traditional energy drinks such as Red Bull and others. In emerging market, however, several producers have introduced new products. Combining energy drinks with alcohol has resulted in new products including “Hair of the Dog”.
Mixing energy drinks with smart drinks has also created new brand names such as NOS.
Industry Definitions Added sugars - sugars and syrups to be added to foodstuffs in the process of preparation. The composition of this added sugar is artificial, not naturally produced. Antioxidants - chemical composites which defend the body from cell loss by retaining oxidation Certified organic - certified by the U.S. Department of Agriculture that the firm’s goods meet distinct organic standards.
Market Metrics Energy drinks were launched in the U.S. in 1997 with Red Bull which has the largest market share. By 2001, the energy drink market had developed to almost $400 million per fiscal year accounting the retail sales. The current market valuation in 2005 is approximately $4 billion. Japan pioneered the energy drink phenomenon. The emergence of the energy drinks market dates back to the early 1960s, with the launching of Lipovitan. In 1929, Lucozade of UK was launched.
The major market regions of the energy drinks industry, according to a 2004 survey, are: Geography Asia Pacific North America
Market Share (%) 58.1% 14.7%
The market share of the Asia Pacific region is anticipated to steadily decrease due to the rise in other emerging markets. The US is anticipated to become the largest consumer market by 2009.
Market Structure The primary consumers of this industry are under 35 years of age and are predominantly male. Teenager and college students are core target market segments for the manufacturers and consist of the core age group of 12 to 30. A recent survey estimates that around 35% percent of energy drink consumers are above 35 years old. Furthermore energy drinks with high sugar levels are more popular among children and women, while energy drinks with strong taste and flavor are m ore preferred by male consumers. Recent studies also indicated that 65% of the energy drinks market consists of male consumers. There are several types of energy drinks products. Different varieties of tea and coffee along with green tea forms one group. Second are traditional energy drinks such as Red Bull and others. In emerging market, however, several producers have introduced new products. Combining energy drinks with alcohol has resulted in new products including “Hair of the Dog”.
Mixing energy drinks with smart drinks has also created new brand names such as NOS.
Industry Definitions Added sugars - sugars and syrups to be added to foodstuffs in the process of preparation. The composition of this added sugar is artificial, not naturally produced. Antioxidants - chemical composites which defend the body from cell loss by retaining oxidation Certified organic - certified by the U.S. Department of Agriculture that the firm’s goods meet distinct organic standards.
Market Metrics Energy drinks were launched in the U.S. in 1997 with Red Bull which has the largest market share. By 2001, the energy drink market had developed to almost $400 million per fiscal year accounting the retail sales. The current market valuation in 2005 is approximately $4 billion. Japan pioneered the energy drink phenomenon. The emergence of the energy drinks market dates back to the early 1960s, with the launching of Lipovitan. In 1929, Lucozade of UK was launched.
The major market regions of the energy drinks industry, according to a 2004 survey, are: Geography Asia Pacific North America
Market Share (%) 58.1% 14.7%
The market share of the Asia Pacific region is anticipated to steadily decrease due to the rise in other emerging markets. The US is anticipated to become the largest consumer market by 2009.
Caffeine Levels in Energy Drinks
A recent chart on growth:
Industry Players Red Bull is the industry leader. There are constantly new energy drinks manufacturers unveil such as yerba maté, green tea and ginkgo biloba. And also they are utilizing other revitalizing elements such as schizandra. The top energy drinks players are as follows based on December 2006:
Breakdown of Top 15 Energy Drinks Drinks Share of Energy Drink Market (based on dollar sales) Red Bull Monster Rockstar Full Throttle Sobe No Fear Amp Sobe Adrenaline Rush Tab Energy Monster XXL Private Label Rip It Sobe Lean BooKoo Sobe Superman Von Dutch
42.6 14.4 11.4 6.9 5.4 3.6 2.9 2.3 0.9 0.9 0.8 0.7 0.5 0.4 0.4
Trends and Recent Developments
Hangover cure energy drinks are now emerging such as "Hair of the Dog". One of the latest trends of the energy drink industry is the launch of “smart” energy drinks. SmartPower SmartPower and NOS brands are new products in this m arket line.
Some of the famous marketing strategy adopted by Red Bull is given below : 1. Student Brand Managers : The brand tried to reach the trend setters and opinion leaders by appointing ( informal agreement ) student brand managers across campuses. These members were given free Red Bull cans and was encouraged to organize parties fo r other youngsters. 2 .Identify Hot Spots : The brand identified hot spots where the majority of consumers /opinion leaders gather. This could be a bar or a party area. Once these hotspots are identified, the brand campaigns in that spot. 3. Extreme Sports : Red Bull i s adopted following brand qualities : Energy , Danger and Youthfulness. Hence the brand chose to sponsor or associate with extreme sports. At one point of time the brand also owned a Formula 1 racing team. 4. Athletes : Rather than roping in expensive celebrities, Red Bull sponsors high performing athletes who are not celebrities. One advantage of doing that is that the brand gets a highly dedicated brand loyalist from the fans of these athletes. According to Forbes Magazine, Red Bull sponsors more than 500 athletes. 5. Quirky Ads : Red Bull is a brand which was built without depending too much on advertising. The brand used advertising for reinforce brand identity rather than for selling the product. The ads of Red Bull has the classical cartoon format with a touch of humor.
Since the launch the brand has managed to dominate the Indian market with more than 60 % market share . The popularity of Red Bull has prompted many cola majors to launch their energy drinks brand in India. There are news reports of Coca Cola and Pepsi bringing their global brands in this category into the Indian market.
Red Bull is the most popular energy drink in the world, with 3 billion cans sold each year
Their slogan is "Red Bull gives you wiiings" [ and the product is aggressively marketed through advertising, tournament sponsorship (Red Bull Air Race, Red Bull Crashed Ice), sports team ownerships (Red Bull Racing, Scuderia Toro Rosso, EC Red Bull Salzburg, FC Red Bull Salzburg, Red Bull New York, RB Leipzig), celebrity endorsements, and with its record label, Red Bull Records, music.[7] In 2009 it was discovered that Red Bull Cola exported from Austria contained trace amounts o fcocaine.[8][9][10][11][12] Red Bull has also been the target of criticism concerning the possible health risks associated with the drink.
Advertising
A common Red Bull Cola campaign car
A 2010 Formula 1 car of the Red Bull Racing F1 Team
Red Bull's AH-1F Cobra helicopter
Red Bull has an aggressive international marketing campaign. The numerous sponsored activities range from extreme sports like mountain biking, BMX, motocross, windsurfing, snowboarding, skateboarding, kayaking, wakeboarding, cliffdiving, surfing, skating, freestyle motocross, rally, Formula 1 racing, and breakdancing to art shows, music, and video games. In keeping with their target market of young males, Red Bull has also enlisted help from celebrities, such as Eminem that would appeal to this group (sponsoring the Red Bull "EmSee Battle Rap championships"). It also hosts events like the "Red Bull Flugtag" (German for "flight day" or "flying day") and other such contests. Red Bull also sponsors association football teams, with clubs in Austria, Germany, the United States and Brazil featuring the Red Bull trademark in their names. By associating the drink's image with these activities, the company seeks to promote a "cool" public image and raise brand power. In addition, the slender container is used to suggest a "sexier" image than some other cola counterparts. Hence, this one energy drink has helped create a market for over 150 related types of ]
merchandise, like Red Rooster and Blue Lightning.
Red Bull's slogan, "it gives you wings", is widely used in these marketing activities. Claims about the drink's effects and performance have been challenged on various occasions, with the UK's Advertising Standards Authority imposing advertising restrictions in 2001 in response to complaints first recorded as early as 1997.
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Even with all of the concerns
regarding Red Bull, in 2000 the corporation earned around $1 billion in worldwide sales and Red Bull held 65% of the market share.
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In Malaysia, however, Red Bull does not use its "Gives you wings" slogan, but instead a single one-word
slogan, Bullleh! , a word play on the Malay word Boleh (lit: Can be done ) and the word Bull . In the PlayStation 3's new social app, PlayStation Home, Red Bull has developed its own in-game island, specifically advertising its energy drink and the Red Bull Air Raceevent. In late November 2009, Red Bull brought out two new spaces, the Red Bull Illume space, and the Red Bull Beach space featuring the Red Bull Flugtag, both released on the same day. In the video game Worms 3D , Red Bull could be drunk by the worms, giving them the effect of faster movement. Red Bull is displayed on virtual track-side billboards during gameplay and in the opening cinematic in the video game Wipeout 2097
Types of Marketing Research Applications Marketing research is the gathering, recording, and analyzing of data that relates to a specific problem in marketing products or services. While this definition implies a systematic approach to marketing, marketing research is often performed as a reaction to a problem that occurs. Marketing research efforts, therefore, often are undertaken for specific projects that have set beginning and ending points
Market and Economic Analysis Market analysis involves analyzing market-segment factors to determine the market potential of a given product or service. The marketing researcher gathers data and analyzes the factors that affect possible sales in a given market segment. The economic analysis is also used by marketing research departments to determine: • How actively a company should market in a given market segment • How much money it should invest in marketing to that segment • How much it may have to produce to fulfill the needs of the market segment
Economic analysis often involves economic forecasting, which analyzes and attempts to forecast developing market trends and demands. Product Research Marketing research departments conduct product research for a variety of reasons, including: • Measuring potential acceptance of new products • Finding improvements or additions for existing products • Making changes or improvements in product packaging • Determining acceptability of a product over a competitor's product
When a new product is being developed, marketing research departments will often use product concept testing to see how customers might react to the new product. Typically, before a business invests in the development of a prototype for a new or improved product, it will have its marketing researchers verbally describe or visually depict the prospective product to a group of potential customers in the target market. Once a product has been accepted during the concept-testing stage, the business may move on to develop a prototype of the product. The marketing research department may then conduct product use tests, in which potential customers —be they industrial users or consumers —are given the new or modified product to try. Consumers may be given a new type of hot breakfast cereal to try at home so that the marketing researcher can test the product use among families; industries may be given a new type of telephone system to test in their offices so that the marketing researcher can receive management's evaluation of the system and see how the new product works in a field test site. After product concept and product use tests are completed, businesses may decide to use market tests before they go full -throttle into the marketplace with their products. These market tests allow the business tp see how the product is accepted in various market segments before it is rolled out to the mass market, and before the business invests in a full-blown release of the product. While test marketing is viable for producers of products that do not involve millions of dollars in production costs for prod uction facilities, it may be cost-prohibitive for businesses producing large, expensive goods. Soap detergent is easily test-marketed for a relatively inexpensive price tag; the cost of test marketing jet airplanes, on the other hand, is not cheap
Pricing Research Marketing research can be used to evaluate the acceptability of product or service prices in the marketplace. While businesses must price their products to make enough money to cover production and operating costs, often the formula they use for achieving a given profit margin causes them to price their products or services above or below acceptable market levels. Pricing research activities conducted by marketing researchers to determine buyers' perception of price and quality factors i n a given product can be used to determine acceptable price levels that will allow businesses to achieve desired profits and gain market share. Marketing research can help to determine acceptable price levels. Because of the competitive marketplace, however, businesses frequently do not have the time to conduct an elaborate pricing research study; therefore, they often enter the marketplace without conducting one.
Advertising Research Advertising can be a costly endeavor for businesses. To determine the potential effect their advertising might have on a target audience, businesses often conduct research into the content, the media, and the effectiveness of advertisements before they invest heavily in the advertising campaign. Content research measures how the desired content comes across to an audience sample (a limited number of people). If the advertisement is pretested, a sample audience may be asked questions after being shown a television commercial or after viewing a layout of a print advertisement. If the advertisements are tested after they have appeared in various media, customers may be asked what they remember about the particular advertisements and how they reacted to them. By pretesting and posttesting customers, marketing researchers can determine whether the desired message is getting across in a positive manner. Media research involves finding the best mix of media with which to hit a target audience. Marketing researchers may evaluate market stud¬ies of various media outlets (e.g., A. C. Nielsen for electronic media, or W. R. Simmons and Company for print media). By researching the media, marketing researchers can determine how best to allocate marketing dollars to hit the desired market. To perform advertising effectiveness research, businesses must state what marketing objectives they hope to accomplish with their advertising efforts before they roll out the advertising campaign. Marketing re¬search must be done prior to the advertising campaign so as to have something to measure the results of the advertising against. If a business is trying to increase customer awareness of one of its m ore overlooked products, then it must determine, before the advertising campaign begins, how well-known that product actually is so that the business will be able to measure how well advertising increases awareness.
Sales Research When a marketing research department conducts a sales analysis, it studies customer records and other available data to determine where marketing opportunities lie among potential target markets. Selling re¬search, on the other hand, analyzes th e approach used by the person selling the product or service to determine whether the sales presentation is effectively piquing the interest of customers and allowing them to understand the product. The selling research can determine:
• The kinds of collateral materi als (e.g., brochures, charts, lists) that work best to sell the product • The percentage of sales that are closed in a sales call • Other aspects of the sell ing process that show what methods have been most effective with the target market
Three Levels of Marketing Performance We need to distinguish three levels of marketing performance, which can be called responsive marketing, anticipative marketing, and needshaping marketing
RESPONSIVE MARKETING. Marketing has been defined as the task of "finding and filling needs." This is a commendable form of marketing when there exists a clear need and when some company has identified it and prepared an affordable solution. Recognizing that women want to spend less time cooking and cleaning led to the invention of the m odern washing machine, dryer, dishwasher, and microwave oven. Today many smokers who want to stop smoking can find various treatments. Much of today's marketing is responsive marketing. ANTICIPATIVE MARKETING. It is another feat to recognize an emerging or latent need. As the quality of water deteriorated in many places, Evian, Perrier, and a number of other companies anticipated a growing market for bottled drinking water. As pharmaceutical companies recognized the growing stress in modem urban society, several started research on antistress drugs. Anticipative marketing is more risky than responsive marketing; companies may come into the market too early or too late, or may even be totally wrong about thinking that such a market would develop. NEED-SHAPING MARKETING. The boldest level of marketing occurs when a company introduces a product or service that nobody asked for and often could not even conceive of. No one in the 1950s asked for a Sony Walkman, a Sony Betamax, or a Sony 31/2inch disc. Yet Sony, under its brilliant founder and chairman, Akio Morita, introduced those and many other new products that since have become everyday staples. Morita summarized his marketing philosophy in these words: "I don't se rve markets. I create them." Perhaps the difference between responsive marketers and those who anticipate or shape needs is best summarized in the difference between a market-driven company and a market'driving company. Most companies are at best market-driven, which itself is an advance over being product-driven. Market-driven companies focus on researching current customers to identify their problems, gather new ideas, and to test proposed product improvements and marketing mix changes. Their efforts typically result in incremental improvements, not radical innovations
Creating Great Marketing Plan A marketing plan, like a business plan, is unique to the company it serves. There are few hard and fast rules that guide its creation and implementation. A marketing plan needs to be as flexible as its market allows and as firm as is required to accomplish its goals. Despite all that, there are a few key components critical to the successful development and application of such a plan. A marketing plan, like a business plan, is unique to the company it serves. There are few hard and fast rules that guide its creation and implementation. A marketing plan needs to be as flexible as its mar¬ket allows and as firm as is required to accomplish its goals. Despite all that, there are a few key components critical to the successful development and application of such a plan:
• A good marketing plan has both strategic and tactical elements designed to help identify and accomplish its goals. Despite the fact
that marketing often appears to be no more than the implementation of direction from the corner office, the best ones also contain
elements of strategy that reflect and enhance those principles identified at the highest level. Too often, marketing efforts are seen only as a media placement plan or advertising schedule. The best ones are much more than that and, quite frankly, need to be if they are going to succeed at more than the most episodic and rudimentary level. • A good marketing plan is intertwined with the corporate business plan and, in fact, may actually be that plan, or at least include the
business plan's goals expressed in terms of tactics. Despite what we said in the previous paragraph, the marketing plan can't exist in and of itself without intrinsic links to the company's overall strategies. They are two sides of the same coin and must be played together in order for either to succeed. Marketers who think they can operate independently of corporate goals think incorrectly and either their goals, or those of the company, will be compromised if they try. • A good marketing plan is an active, living document design ed to accomplish tasks, not a theoretical exercise destined to sit on the
shelf. Marketing is a lot like dancing in that, if you don't execute the moves, it does anyone little good that you know all the steps. The best marketing plans are dog-eared documents with pencil edits and handwritten commentary that are falling apart at the seams. That shows they've been used and used well. The worst plans are pristine volumes that sit on shelves and gather dust. There are no grades for neatness when it comes to your marketing plan.
• Good marketers know that all things commercial revolve around marketing. That will sound heretical to anyone who is not a
marketer, but when you get right down to it, marketing impacts virtually every aspect of commerce. As much as an y other member of a company's executive team, the marketer's influence is felt throughout the enterprise and down the ranks. Remember the five Ps of marketing? Perhaps it's good to review them once again so you may judge for yourself the depth and breadth of marketing's impact: • Product: the goods or services that you market and sell. • Price: the value of those goods or services quantified in monetary terms. • Promotion: how you communicate the benefits of those goods and services. • Place: how you expose buyers to products and get products into their hands. • Position: the way the product is perceived in the mind of the buyer.
In each of those instances, the marketer plays the most crucial role in determining value rather than, or at least in cooperation with, other executives who otherwise might be considered appropriate to the task. Take pricing, for instance. Isn't that a function of the chief financial officer? Doesn't the CFO have responsibility for the company's financial stability and profitability? The CFO certainly does have those responsibilities, but he or she can't determine the price of a product without knowing the price at which the competition is selling its products and what the market will bear for such goods. Identifying the proper margin over the cost production is part of price determination, but it plays a relatively small role in the pricing equation. Good pricing and its related profitability, instead, are based on the strategic machinations of the other four Ps, as well as m arket conditions, buyer preferences, current market share and a host of things about which few CFOs have the time or inclination to s tudy. The person in charge of finances and profitability has a role to play in determining price, but that discussion needs to be led by the marketer or someone else well-versed in all the areas that affect those prices and, ultimately, corporate profitability. • A good marketing plan is both internally and externally focused in its determination of the company's appropriate competiti ve
direction. Knowing market conditions is not enough. The marketing plan also must consider the company's abilities to meet those conditions profitably and on a sustained basis. Knowing the market will support the sale of two million of the widgets you produce in the next two months does little good if your firm doesn't have the capacity to produce those widgets. Of course, you can always subcontract the work. But if the cost of manufacture, coupled with the necessary markup, does not produce the level of profitability desired or required, then it may be better to walk away from the business entirely. Without the proper internal focus to your marketing plan, that's an expensive lesson you could have learned the hard way.
• Finally, realize the marketing plan also provides the tools to measure the flow of your company's developmental steps and events.
In the same way it offers a reflection of your company's business plan, the marketing plan creates a series of benchmarks by which
to chart its developmental progress. If all goes well and your marketing succeeds beyond your wildest dreams, then the plan can stand almost as a stairway to that success, with each step identified with a component of that plan. More often than not, the plan will reflect a mix of hits and misses, each
Nine Winning Marketing Practices
Besides winning business practices, is there a set of winning marketing practices? One frequently hears of one-liner formulas that promise marketing success. Here are nine of the more prominent one-liners: 1. Win Through Higher Quality Everyone agrees that poor quality is bad for business. Customers who have been burned with bad quality won't return and will badmouth the company. But what about winning through good quality? There are four problems. First, quality has a lot of meanings. If an automobile company claims good quality, what does it mean? Do its cars have more starting reliability? Do they accelerate faster? Do the car bodies wear better over time? Customers care about different things, so a quality claim without further definition doesn't mean much. Second, people often can't tell a product's quality by looking at it. Consider buying a television receiver. You go into Circuit City and see a hundred different sets with the picture on and the sound blaring. You Look at a few popular brands that you favor. The picture quality is similar with most receivers. The casings may differ but hardly tell you any¬thing about the set's reliability. You don't ask the salesperson to open the back of the set to inspect the quality of the components. In the end, you have at best an image of quality without any evidence. Third, most companies are catching up to each other in quality in most markets. When that happens, quality is no longer a determinant of brand choice. Fourth, some companies are known to have the highest quality, such as Motorola when it touts its 6 sigma quality. But are there enough cus¬tomers who need that quality level and will pay for it? And what were Motorola's costs of getting to 6 sigma quality? It is possible that getting to the highest quality level costs too much. 2. Win Through Better Service We all want good service. But customers define it in different ways. Take service in a restaurant. Some customers would like the waiter to appear quickly, take the order accurately, and deliver the food soon. Other customers would feel that this is rushing them on what otherwise should be a leisurely evening out. Every service breaks down into a list of attributes: speed, cordiality, knowledge, problem-solving, and so on. Each person places different weights at different times in different contexts on each of the service attributes. Claiming better service isn't enough.
3. Win Through Lower Prices A low price strategy has worked for a number of companies, including the world's largest furniture retailer, IKEA; the world's largest general merchandise retailer, Wal-Mart; and one of America's most profitable airlines, Southwest. Yet low-price leaders must be careful. A lower-price firm might suddenly enter the market. Sears practiced low prices for years, until Wal-Mart beat it on prices. Low price alone is not enough to build a viable business enterprise. The Yugo automobile was low in price; it was also lowest in quality and disappeared. A measure of quality and service must also be present, so that customers feel they are buying on value, not price alone. 4. Win Through High Market Share Generally speaking, market share leaders make more money than their lamer competitors. They enjoy scale economies and higher brand recognition. There is a "bandwagon effect," and first-time buyers have more confidence in choosing the company's products. But many high market share leaders are not that profitable. A & P was America's largest supermarket chain for many years and yet
made pathetic profits. Consider the condition of such giant companies as IBM, Sears, and General Motors in the 1980s, a time when they were doing more poorly than many of their smaller competitors.
5. Win Through Adaptation and Customization Many buyers will want the seller to modify his offering to contain special features or services they need. A business firm might w ant Federal Express to pick up its daily mail at 7 P.M., not 5 P.M. A hotel guest might want to rent a room for only part of the day. Such needs can represent opportunities for the seller. However, for many sellers, the cost may be too high to adapt the offering to each customer. Mass customization is working for some companies, but many others would find it to be an unprofitable strategy. 6. Win Through Continuous Product Improvement. Continuous product improvement is a sound strategy, especially if the company can lead the pack in product improvements. But not all product improvements are valued. How much more would customers pay if they are told about a better detergent, a sharper razor blade, a faster automobile? Some products reach the limit of their improvement possibilities, and the last improvement doesn't matter very much. 7. Win Through Product Innovation A frequent exhortation is "Innovate or Evaporate." True, some great innovative companies, such as Sony and 3M, have earned substantial prof¬its by introducing superb new products. But the average company has not fared well in its new product introductions. The new product failure in branded consumer packaged goods is still around 80 percent; in the industrial goods world, it is around 30 percent. A company's dilemma is that if it doesn't introduce new products, it will probably "evaporate"; if it does introduce new products, it may lose a lot of money. 8. Win Through Entering High Growth Markets High growth markets such as solid-state electronics, biotechnology, robotics, and telecommunications have the glamour. Some market leaders have made fortunes in those industries. But the average firm entering a high-growth market fails. One hundred new software firms start up in an area, such as computer graphics, and only a few survive. Once the market accepts some firm's brand as the standard, that firm begins to enjoy increasing volume and returns. Microsoft's Office has become the standard, and other good alternatives have been shuttled aside. An added problem is that products become obsolete very fast in these fast-growing industries, and each company must invest continually to keep up. They hardly recoup their profits from their last offering before they have to invest in developing its replacement. 9. Win Through Exceeding Customer Expectations One of the most popular marketing cliches today is that a winning comp any is one that consistently exceeds customer expectations. Meeting customer expectations will only satisfy customers; exceeding their expectations will delight them. Customers who are delighted with a sup¬plier have a much higher probability of remaining a customer. The problem is that when a customer's expectations are exceeded, he has higher expectations next time. The task of exceeding the higher expectations gets more difficult and more costly. Ultimately, the company must settle for just meeting the l atest expectations. Put another way, many of today's customers want the highest quality, added services, great convenience, customization, return privileges, guarantees—all at the lowest price. Clearly each company has to decide which of these many customer wants it can meet profitably.
Creativity Techniques There are a number of creativity procedures that can be used to help you discover new mind funnels and generate how-to s tatements that reflect new perspectives on a problem situation. Let's look at some of these.
Reverse Assumptions. This method helps you deal with unwarranted assumptions about a problem. You begin by non-evaluatively listing five to twenty basic assumptions about your problem. Include especially obvious assumptions you take for granted —ones you don't even consider anymore. Next, reverse the meaning of these assumptions. Then, non-evaluatively force combinations between your reversed assumptions and your how-to statement. Select, combine, change, add to, and work over your ideas to come up with many new problem statements.
Like-Improve Analysis. Describe your problem. Now look at what you like and what you don't like about the description. Dissect out what you want to improve. Writing the information down as you proceed will greatly improve the quality of the final how-to problem statement.
Guided Fresh Eye. This method encourages you to think about the problem situation as if you were someone or something else. Begin with the problem statement. Now rewrite the problem as if you were a dolphin, bat, eagle, jellyfish, pea pod, or oak seed (choose one); or chemical engineer, mechanical engineer, Martian, or artist (again, choose one); or biologist, chemist, secretary, banker, frog or pharmacologist (choose one); and so forth. Now restate the problem. You'll see new perspectives.
Word Substitution. Word substitution can effectively transform how-to problem statements. Systematically change key nouns, verbs, and adverbs to help you switch t rack in your creative thinking. For example, you can transform "How to get rid of an autocratic leader" into "How to abolish...," "How to work with...," "How to change...," "How to succeed with...," "How to enjoy...," "How to f lourish with...," etc. Note the different perspectives that occur with each wor d substitution.
Who, What, Where, When, and Why. This method asks the questions that force you t o look at a problem in a different way. First, you write a problem statement. You then attempt to answer the following questions about the problem: Why? Who? What? Where? When? Now restate the problem. See if answering these questions hasn't given you new insights.
Needs, Obstacles, and Constraints. This method forces you to look at a problem in a different way. You begin by writing a problem statement. Then you non-evaluatively list your needs; that is, what you want achieve or gain. Next, you list the obstacles or things in your way tha need to be overcome. Finally, you list the constraints—things you mus accept or cope with. All this will change your perspective on t he problem.
Weaknesses of Quick-Fix Solutions. This method asks you to list four quick-fix solutions and the weaknesses of each. Now rewrite the problem statement based on what has been learned from the analyses of the quick fixes.
Targeted Analogies and Metaphors Based on the Problem's Essence.The mere mention of a problem can generate myriad thoughts and pictures in your mind that are hard to avoid and thus spoil creativity. Here's a method that should help you put these thoughts out of your mind as you consider the situation.
In the first step, deal only with an action verb that captures the essence of the problem. For example, the "essence" or acti on verb of an auto jack is lifting things; the wheelbarrow is transporting things; walking on water is floating things or freezing water.
In the second step, generate examples of the problem's essence as metaphors and analogies from the plant and animal world; from industry and government; from various professions; from other countries; from ethnic and religious groups; from the historical past; from mythical and exotic world places, and so forth.
In the third step, choose one interesting example and list detailed characteristics and properties of the example. In the fou rth step, force combinations between these characteristics to provide exotic, bizarre i deas.
Finally, improve and develop each bizarre idea into realistic, sensible, workable problem statements. One way to do this is to non-evaluatively list each characteristic, property, nuance, and free association as you consider the bizarre idea. Force combinations between these and the problem. Analogies and metaphors like these can get you thinking along new lines and new mind funnels so you will wind up in new places.
Marketing Mix and Strategy A marketing strategy outlines the manner in which the marketing mix is used to attract and satisfy the t arget market(s) and accomplish an organization's objectives. Specifically, marketing strategy is develop by considering the following factors :
Environment analysis and marketing research Monitoring of external factors affecting success or failure, such as the economy and competition; solicitation of data to res olve specific marketing issues.
Consumer analysis Examination and evaluation of consumer characteristics, needs, and purchase processes.
Product planning (including foods, services, and ideas) Development and maintenance of products, product assortments, product positions, brands, packaging, and options, and deletion of old products.
Distribution planning Establishment of channel relations, physical distribution, inventory management, warehousing, transportation, allocation of g oods, wholesaling, detailing.
Promotion planning Combination of advertising, publicity, personal selling, and sales promotion; also involves public relations and any other form of communication.
Price planning Outlines price ranges and levels, pricing techniques purchase terms, price adjustments, and the use of price as an active or passive factor.
Segmentation, Targeting, and Positioning Segmentation, targeting, and positioning together comprise a three stage process. We first (1) determine which kinds of customers exist, then (2) select which ones we are best off trying to serve and, finally, (3) implement our segmentation by optimizing our products/services for that segment andcommunicating that we have made the choice to distinguish ourselves that way.
Segmentation involves finding out what kinds of consumers with different needs exist. In the auto market, for example, some consumers demand speed and performance, while others are much more concerned about roominess and safety. In general, it holds true that “You can‟t be all things to all people,” and experience has demonstrated that firms that specialize in m eeting the needs of one group of consumers over another tend to be more profitable. Generically, there are three approaches to marketing. In the undifferentiated strategy, all consumers are treated as the same, with firms not making any specific efforts to satisfy particular groups . This may work when the product is a standard one where one competitor really can‟t offer much that another one can‟t. Usually, this is the case only for commodities. In the concentrated strategy, one firm chooses to focus on one of several segments that exist while leaving other segments to competitors. For example, Southwest Airlines focuses on price sensitive consumers who will forego meals and assigned seating for low prices. In contrast, most airlines follow the differentiated strategy: They offer high priced tickets to those who are inflexible in that they cannot tell in advance when they need to fly and find it impractical to stay over a Saturday. These travelers —usually business travelers —pay high fares but can only fill the planes up partially. The same airlines then sell some of the remaining seats to more price sensitive customers who can buy two weeks in advance and stay over. Note that segmentation calls for some tough choices. There may be a large number of variables that can be used to differentiate consumers of a given product category; yet, in practice, it becomes impossibly cumbersome to work with more than a few at a time. Thus, we need to determine which variables will be most useful in distinguishing different groups of consumers. We might thus decide, for example, that the variables that are most relevant in separating different kinds of soft drink consumers are (1) preference for taste vs. low calories, (2) preference for Cola vs. non-cola taste, (3) price sensitivity —willingness to pay for brand names; and (4) heavy vs. light consumers. We now put these variables together to arrive at various combinations. Several different kinds of variables can be used for segmentation.
Demographic variables essentially refer to personal statistics such as income, gender, education, location (rural vs. urban, East
vs. West), ethnicity, and family size. Campbell‟s soup, for instance, has found that Western U.S. consumers on the average prefer spicier soups—thus, you get a different product in the same cans at the East and West coasts. Facing flat sales of guns
in the traditional male dominated market, a manufacturer came out with the Lady Remmington, a more compact, handier gun more attractive to women. Taking this a step farther, it is also possible to segment on lifestyle and values.”
Some consumers want to be seen as similar to others, while a different segment wants to stand apart from the crowd.
Another basis for segmentation is behavior . Some consumers are “brand loyal”—i.e., they tend to stick with their preferred brands even when a competing one is on sale. Some consumers are “heavy” users while others are “light” users. For example, research conducted by the wine industry shows that some 80% of the product is consumed by 20% of the consumers — presumably a rather intoxicated group.
One can also segment on benefits sought, essentially bypassing demographic explanatory variables. Some consumers, for example, like scented soap (a segment likely to be attra cted to brands such as Irish Spring), while others prefer the “clean” feeling of unscented soap (the “Ivory” segment). Some consumers use toothpaste primarily to promote oral health, while another segment is more interested in breath freshening.
In the next step, we decide to target one or more segments. Our choice should generally depend on several factors. First, how well are existing segments served by other manufacturers? It will be more difficult to appeal to a segment that is already well served than to one whose needs are not currently being served well. Secondly, how large is the segment, and how can we expect it to grow? (Note that a downside to a large, rapidly growing segment is that it tends to attract competition) . Thirdly, do we have strengths as a company that will help us appeal particularly to one group of consumers? Firms may already have an established reputation. While McDonald‟s has a great reputation for fast, consistent quality, family friendly food, it would be difficult to co nvince consumers that McDonald‟s now offers gourmet food. Thus, McD‟s would probably be better off targeting families in search of consistent quality food in nice, clean restaurants. Positioning involves implementing our targeting. For example, Apple Computer has chosen to position itself as a maker of user-friendly
computers. Thus, Apple has done a lot through its advertising to promote itself, through its unintimidating icons, as a computer for “nongeeks.” The Visual C software programming language, in contrast, is aimed a “techies.”
Michael Treacy and Fred Wiersema suggested in their 1993 book The Discipline of Market Leaders that most successful firms fall into one of three categories:
Operationally excellent firms, which maintain a strong competitive advantage by maintaining exceptional efficiency, thus
enabling the firm to provide reliable service to the customer at a significantly lower cost than those of less well organized and well run competitors. The emphasis here is mostly on low cost, subject to reliable performance, and less value is put on customizing the offering for the specific customer. Wal-Mart is an example of this discipline. Elaborate logistical designs allow goods to be moved at the lowest cost, with extensive systems predicting when specific quantities of supplies will be needed.
Customer intimate firms, which excel in serving the specific needs of the individual customer well. There is less emphasis on
efficiency, which is sacrificed for providing more precisely what is wanted by the customer. Reliability is also stressed. Nordstrom‟s and IBM are examples of this discipline.
Technologically excellent firms , which produce the most advanced products currently available with the latest technology,
constantly maintaining leadership in innovation. These firms, because they work with costly technology that need constant refinement, cannot be as efficient as the operationally excellent firms and often cannot adapt their products as well to the needs of the individual customer. Intel is an example of this discipline. Treacy and Wiersema suggest that in addition to excelling on one of the three value dimensions, firms must meet acceptable levels on the other two. Wal-Mart, for example, does maintain some level of customer service. Nordstrom‟s and Intel both must meet some standards of cost effectiveness. The emphasis, beyond meeting the minimum required level in the two other dimensions, is on the dimension of
strength. Repositioning involves an attempt to change consumer perceptions of a brand, usually because the existing position that the brand holds
has become less attractive. Sears, for example, attempted to reposition itself from a place that offered great sales but unattractive prices the rest of the time to a store that consistently offered “everyday low prices.” Repositioning in practice is very difficult to accomplish. A great deal of money is often needed for advertising and other promotio nal efforts, and in many cases, the repositioning fails. To effectively attempt repositioning, it is important to understand how one‟s brand and those of competitors are perceived. One approach to identifying consumer product perceptions is multidimensional scaling. Here, we identify how products are perceived on two or more “dimensions,” allowing us to plot brands against each other. It may then be possible to attempt to “move” one‟s brand in a more desirable direction by selectively promoting certain points. There are two main approaches to multi-dimensional scaling. In the a prioriapproach, market researchers identify dimensions of interest and then ask consumers about their perceptions on each dimension for each brand. This is useful when (1) the market researcher knows which dimensions are of interest and (2) the cust omer‟s perception on each dimension is relatively clear (as opposed to being “made up” on the spot to be able to give the researcher a desired ans wer). In the similarity rating approach, respondents are not asked about their perceptions of brands on any specific dimensions. Instead, subjects are asked to rate the extent of similarity of different pairs of products (e.g., How similar, on a scale of 1- 7, is Snicker‟s to Kitkat, and how similar is Toblerone to Three Musketeers?) Using a computer algorithms, the computer then identifi es positions of each brand on a map of a given number of dimensions. The computer does not reveal what each dimension means —that must be left to human interpretation based on what the variations in each dimension appears to reveal. This second method is more useful when no specific product dimensions have been identified as being of particular interest or when it is not clear what the variables of difference are for the product category.
Demographics Demographics are clearly tied to subculture and segmentation. Here, however, we shift our focus from analyzing specific subcultures to trying to understand the implications for an entire population of its makeup. Some articles of possible interest: Coffee, Lipsticks, and the Economy The 2008 Tax Rebate and Consumer Behavior Gasoline Prices and Consumer Behavior Several issues are useful in the structure of a population. For example, in some rapidly growing countries, a large percentage of the population is concentrated among younger generations. In countries such as Korea, China, and Taiwan, this has helped stimulate economic growth, while in certain poorer countries, it puts pressures on society to accommodate an increasing number of people on a fixed amount of land. Other countries such as Japan and Germany, in contrast, experience problems with a "graying" society, where fewer non-retired people are around to support an increasing number of aging seniors. Because Germany actually hovers around negative population growth, the German government has issued large financial incentives, in the forms of subsidies, for women who have children. In the United States, population growth occurs both through births and immigration. Since the number of births is not growing, problems occur for firms that are dependent on population growth (e.g., Gerber, a manufacturer of baby food). Social class is a somewhat nebulous subject that involves stratifying people into groups with various amounts of prestige, power, and privilege. In part because of the pioneering influence in American history, status differentiations here are quite vague. We cannot, for example, associate social class with income, because a traditionally low status job as a plumber may today come with as much income as a traditionally more prestigious job as a school teacher. In certain other cultures, however, stratification is more clear-cut. Although the caste system in India is now illegal, it still maintains a tremendous influence on that society. While some mobility exists today, social class awareness is also somewhat greater in Britain, where social status is in part reinforced by the class connotations of the accent with which one speaks. Textbooks speak of several indices that have been used to "compute" social class in the United States, weighing factors such as income, the nature of one‟s employment, and level of education. Taken too literally, these indices are not very meaningful; more broa dly speaking, they illustrate the reality that social status is a complex variable that is determined, not always with consensus among observers, by several different variables.
Consumer Research Methods Market research is often needed to ensure that we produce what customers really want and not what we think they want. Primary vs. secondary research methods. There are two main approaches to marketing. Secondary research involves using information
that others have already put together. For example, if you are thinking about starting a business making clothes for tall people, you don‟t need to question people about how tall they are to find out how many tall people exist—that information has already been published by the U.S. Government. Primary research, in contrast, is research that you design and conduct yourself. For example, you may need to find out whether consumers would prefer that your soft drinks be sweater or tarter. Research will often help us reduce risks associated with a new product, but itcannot take the risk away entirely . It is also important to ascertain whether the research has been complete. For example, Coca Cola did a great deal of research prior to releasing the New Coke, and consumers seemed to prefer the taste. However, consumers were not prepared to have this drink replace traditional Coke. Secondary Methods. For more information about secondary market research tools and issues Primary Methods. Several tools are available to the market researcher —e.g., mail questionnaires, phone surveys, observation, and focus
groups. Surveys are useful for getting a great deal of specific information. Surveys can contain open-ended questions (e.g., “In which city and
state were you born? ____________”) or closed -ended, where the respondent is asked to select answers from a brief list (e.g., “__Male ___ Female.” Open ended questions have the advantage that the respondent is not limited to the options listed, and that the respondent is not being influenced by seeing a list of responses. However, open-ended questions are often skipped by respondents, and coding them can be quite a challenge. In general, for surveys to yield meaningful responses, sample sizes of over 100 are usually required because precision is essential. For example, if a market share of twenty percent would result in a loss while thirty percent would be profitabl e, a confidence interval of 20-35% is too wide to be useful. Surveys come in several different forms. Mail surveys are relatively inexpensive, but response rates are typically quite low —typically from 5-20%. Phone-surveys get somewhat higher response rates, but not many questions can be asked because many answer options have to be repeated and few people are willing to stay on the phone for more than five minutes. Mall intercepts are a convenient way to reach consumers, but respondents may be reluctant to discuss anything sensitive face-to-face with an interviewer. Surveys, as any kind of research, are vulnerable to bias. The wording of a question can influence the outcome a great deal. For example, more people answered no to the question “Should speeches against democracy be allowed?” than answered yes to “Should speeches against democracy be forbidden?” For face-to-face interviews, interviewer bias is a danger, too. Interviewer bias occurs when the interviewer influences the way the respondent answers. For example, unconsciously an interviewer that works for the firm manufacturing the product in question may smile a little when something good is being said about the product and frown a little when something negative is being said. The respondent may catch on and say something more positive than his or her real opinion. Finally, a response bias may occur—if only part of the sample responds to a survey, the respondents‟ answers may not be representative of the population. Focus groups are useful when the marketer wants to launch a new product or modify an existing one. A focus group usually involves
having some 8-12 people come together in a room to discuss their consumption preferences and experienc es. The group is usually led by a moderator, who will start out talking broadly about topics related broadly to the product without mentioning the product itself. For example, a focus group aimed at sugar- free cookies might first address consumers‟ snacking preferences, only gradually moving toward the specific product of sugar-free cookies. By not mentioning the product up front, we avoid biasing the participants into thinking only in terms of the specific product brought out. Thus, instead of having consumers think primarily in terms of what might be good or bad about the product, we can ask them to discuss more broadly the ultimate benefits they really seek. For example, instead of having consumers merely discuss what they think about some sugar-free cookies that we are considering releasing to the market, we can have consumers speak about their motivatio ns for using snacks and what general kinds of benefits they seek. Such a discussion might reveal a concern about healthfulness and a desire for wholesome foods. Probing on the meaning of wholesomeness, consumers might indicate a desire to avoid artificial ingredients. This would be an important concern in the marketing of sugar-free cookies, but might not have come up if consumers were asked to comment directly on the product where the use of artificial ingredients is, by virtue of the nature of the product, necessary. Focus groups are well suited for some purposes, but poorly suited for others. In general, focus groups are very good for getting breadth— i.e., finding out what kinds of issues are important for consumers in a given product category. Here, it is helpful that focus groups are completely “open-ended:” The consumer mentions his or her preferences and opinions, and the focus group moderator can ask the consumer to elaborate. In a questionnaire, if one did not think to ask about something, chances are that few consumers would take the time to write out an elaborate answer. Focus groups also have some drawbacks, for example:
They represent small sample sizes . Because of the cost of running focus groups, only a few groups can be run. Suppose you run four focus groups with ten members each. This will result in an n of 4(10)=40, which is too small to generalize from. Therefore, focus groups cannot give us a good idea of: What proportion of the population is likely to buy the product.
What price consumers are willing to pay.
The groups are inherently social. This means that:
Consumers will often say things that may make them look good (i.e., they watch public television rather than soap operas or cook fresh meals for their families daily) even if that is not true.
Consumers may be reluctant to speak about embarrassing issues (e.g., weight control, birth control).
Personal interviews involve in-depth questioning of an individual about his or her interest in or experiences with a product. The benefit
here is that we can get really into depth (when the respondent says something interesting, we can ask him or her to elaborate), but this method of research is costly and can be extremely vulnerable to interviewer bias. To get a person to elaborate, it may help to try a common tool of psychologists and psychiatrists —simply repeating what the person said. He or she will often become uncomfortable with the silence that follows and will then tend to elaborate. This approach has the benefit that it minimizes the interference with the respondent‟s own ideas and thoughts. He or she is not influenced by a new question but will, instead, go more in depth on what he or she was saying. Personal interviews are highly susceptible to inadvertent “signaling” to the respondent. Although an interviewer is looking to get at the truth, he or she may have a significant interest in a positive consumer response. Unconsciously, then, he or she may inadvertently smile a little when something positive is said and frown a little when something negative is said. Consciously, this will often not be noticeable, and the respondent often will not consciously be aware that he or she is being “reinforced” and “punished” for saying positiv e or negative things, but at an unconscious level, the cumulative effect of several facial expressions are likely to be felt. Although this type of conditioning will not get a completely negative respondent to say all positive things, it may “swing” the balance a bit so that respondents are more likely to say positive thoughts and withhold, or limit the duration of, negative thoughts. Projective techniques are used when a consumer may feel embarrassed to admit to certain opinions, feelings, or preferences. For
example, many older executives may not be comfortable admitting to being intimidated by computers. It has been found that in such cases, people will tend to respond more openly about “someone else.” Thus, we may ask them to explain reasons why a friend has not yet bought a computer, or to tell a story about a person in a picture who is or is not using a product. The main problem with this method is that it is difficult to analyze responses. Projective techniques are inherently inefficient to use. The elaborate context that has to be put into place takes time and energy away from the main question. There may also be real differences between the respondent and the third party. Saying or thinking about something that “hits too close to home” may also influence the respondent, who may or may not be able to see through the ruse. Observation of consumers is often a powerful tool. Looking at how consumers select products may yield insights into how they make
decisions and what they look for. For example, some American manufacturers were concerned about low sales of their products in Japan. Observing Japanese consumers, it was found that many of these Japanese consumers scrutinized packages looking for a name of a major manufacturer—the product specific-brands that are common in the U.S. (e.g., Tide) were not impressive to the Japanese, who wanted a name of a major firm like Mitsubishi or Proctor & Gamble. Observation may help us determine how much time consumers spend comparing prices, or whether nutritional labels are being consulted. A question arises as to whether this type of “spying” inappropriately invades the privacy of consumers. Although there may be cause for some concern in that the particular individuals have not consented to be part of this research, it should be noted that there is no particular interest in what the individual customer being watched does. The question is what consumers —either as an entire group or as segments—do. Consumers benefit, for example, from stores that are designed effectively to promote efficient shopping. If it is found that women are more uncomfortable than men about others standing too close, the areas of the store heavily trafficked by women can be designed accordingly. What is being reported here, then, are averages and tendencies in response. The intent is not to find “juicy” observations specific to one customer. The video clip with Paco Underhill that we saw in class demonstrated the application of observati on research to the retail setting. By understanding the phenomena such as the tendency toward a right turn, the location of merchandise can be observed. It is also possible to identify problem areas where customers may be overly vulnerable to the “but brush,” or overly close encounter with others. This method can be used to identify problems that the customer experiences, such as difficulty finding a product, a mirror, a changing room, or a store employee for help. Online research methods. The Internet now reaches the great majority of households in the U.S., and thus, online research provides new
opportunity and has increased in use. One potential benefit of online surveys is the use of “conditional branching.” In conventional paper and pencil surveys, one question might ask if the respondent has shopped for a new car during the last eight months. If the respondent answers “no,” he or she will be asked to skip ahead several questions—e.g., going straight to question 17 instead of proceeding to number 9. If the respondent answered “yes,” he or she would be instructed to go to the next question which, along with the next several ones, would address issues related to this shopping experience. Conditional branching allows the computer to skip directly to the appropriate question. If a respondent is asked which brands he or she considered, it is also possible to customize brand comparison questions to those listed. Suppose, for example, that the respondent considered Ford, Toyota, and Hyundai, it would be possible to ask the subject questions about his or her view of the relative quality of each respective pair—in this case, Ford vs. Toyota, Ford vs. Hyundai, and Toyota vs. Hyundai.
There are certain drawbacks to online surveys. Some consumers may be more comfortable with online activities than others —and not all households will have access. Today, however, this type of response bias is probably not significantly greater than that associated with other types of research methods. A more serious problem is that it has consistently been found in online research that it is very difficult—if not impossible—to get respondents to carefully read instructions and other information online —there is a tendency to move quickly. This makes it difficult to perform research that depends on the respondent‟s reading of a situa tion or product description. Online search data and page visit logs provides valuable ground for analysis. It is possible to see how frequently various terms are used by those who use a firm‟s web site search feature or to see the route taken by most cons umers to get to the page with the information they ultimately want. If consumers use a certain term frequently that is not used by the firm in its product descriptions, the need to include this term in online content can be seen in search logs. If consumers take a long, “torturous” route to information frequently accessed, it may be appropriate to redesign the menu structure and/or insert hyperlinks in “intermediate” pages that are found in many users‟ routes. Scanner data. Many consumers are members of supermarket “clubs.” In return for signing p for a card and presenting this when making
purchases, consumers are often eligible for considerable discounts on selected products. Researchers use a more elaborate version of this type of program in some communities. Here, a number of consumers receive small payments and/or other incentives to sign up to be part of a research panel. They then receive a card that they are asked to present any time they go shopping. Nearly all retailers in the area usually cooperate. It is now possible to track what the consumer bought in all stores and to have a historical record. The consumer‟s shopping record is usually combined with demographic information (e.g., income, educational level of adults in the household, occupations of adults, ages of children, and whether the family owns and rents) and the family‟s television watching habits. (Electronic equipment run by firms such as A. C. Nielsen will actually recognize the face of each family member when he or she sits down to watch).
It is now possible to assess the relative impact of a number of factors on the consumer‟s choice— e.g.,
What brand in a given product category was bought during the last, or a series of past, purchase occasions;
Whether, and if so, how many times a consumer has seen an ad for the brand in question or a competing one;
Whether the target brand (and/or a competing one) is on sale during the store visit;
Whether any brand had preferential display space;
The impact of income and/or family size on purchase patterns; and
Whether a coupon was used for the purchase and, if so, its value.
A “split cable” technology allows the researchers to randomly select half the panel members in a given community to receive o ne advertising treatment and the other half another. The selection is truly random since each household, as opposed to neighborhood, is selected to get one treatment or the other. Thus, observed differences should, allowing for sampling error, the be result of advertising exposure since there are no other systematic differences between groups.
Interestingly, it has been found that consumers tend to be more influenced by commercials that they “zap” through while channel surfing even if they only see part of the commercial. This most likely results from the reality that one must pay greater attention while channel surfing than when watching a commercial in order to determine which program is worth watching. Scanner data is, at the present time, only available for certain grocery item product categories —e.g., food items, beverages, cleaning items, laundry detergent, paper towels, and toilet paper. It is not available for most non-grocery product items . Scanner data analysis
is most useful for frequently purchased items (e.g., drinks, food items, snacks, and toilet paper) since a series of purchases in the same product category yield more information with greater precision than would a record of one purchase at one point in time. Even if scanner data were available for electronic products such as printers, computers, and MP3 players, for example, these products would be purchased quite infrequently. A single purchase, then, would not be as effective in effectively distinguishing the effects of different factors—e.g., advertising, shelf space, pricing of the product and competitors, and availability of a coupon —since we have at most one purchase instance during a long period of time during which several of these factors would apply at the same time. In the case of items that are purchased frequently, the consumer has the opportunity to buy a product, buy a competing product, or buy nothing at all depending on the status of the brand of interest and competing brands. In the case of the purchase of an MP3 player, in contrast, there may be promotions associated with several brands going on at the same time, and each may advertise. It may also be that the purchase was motivated by the breakdown of an existing product or dissatisfaction or a desire to add more capabilities. Physiological measures are occasionally used to examine consumer response. For example, advertisers may want to measure a
consumer‟s level of arousal during various parts of an advertisement. This can be used to assess possible discomfort on the negative side and level of attention on the positive side. By attaching a tiny camera to plain eye glasses worn by the subject while watching an advertisement, it is possible to determine where on screen or other ad display the subject focuses at any one time. If the focus remains fixed throughout an ad sequence where the interesting and active part area changes, we can track whether the respondent is following the sequence intended. If he or she is not, he or she is likely either not to be paying as much attention as desired or to be confused by an overly complex sequence. In situations where the subject‟s eyes do move, we can assess whether this movement is going in the intended direction. Mind-reading would clearly not be ethical and is, at the present time, not possible in any event. However, it is possible to measure brain waves by attaching electrodes. These readings will not reveal what the subject actually thinks, but it is possible to distinguish between beta waves—indicating active thought and analysis—and alpha waves, indicating lower levels of attention. An important feature of physiologi cal measures is that we can often track performance over time. A subject may, for example, be demonstrating good characteristics—such as appropriate level of arousal and eye movement —during some of the ad sequence and not during other parts. This, then, gives some guidance as to which parts of the ad are effective and which ones need to be reworked. In a variation of direct physiological measures, a subject may be asked, at various points during an advertisement, to indicate his or her level of interest, liking, comfort, and approval by moving a lever or some instrument (much like one would adjust the volume on a radio or MP3 player). Republican strategist used this technique during the impeachment and trial of Bill Clinton in the late 1990s. By watching approval during various phases of a speech by the former President, it was found that viewers tended to respond negatively when he referred to “speaking truthfully” but favorably when the President referred to the issues in controversy as part of his “private life.” The Republican researchers were able to separate average results from Democrats, Independents, and Republicans, effectively looking at different segments to make sure that differences between each did not cancel out effects of the different segments. (For example, if at one point Democrats reacted positively and Republicans responded negatively with the same intensity, the average result of apparent indifference would have been very misleading). Research sequence. In general, if more than one type of research is to be used, the more flexible and less precise method —such as
focus groups and/or individual interviews—should generally be used before the less flexible but more precise methods (e.g., surveys and scanner data) are used. Focus groups and interviews are flexible and allow the researcher to follow up on interesting issues raised by participants who can be probed. However, because the sample sizes are small and because participants in a focus group are influenced by each other, few data points are collected. If we run five focus groups with eight people each, for example, we would have a total of forty responses. Even if we assume that these are independent, a sample size of forty would give very imprecise results. We might conclude, for example, that somewhere between 5% and 40% of the target market would be interested in the product we have to offer. This is usually no more precise than what we already reasonably new. Questionnaires, in contrast, are highly inflexible. It is not possible to ask follow-up questions. Therefore, we can use our insights from focus groups and interviews to develop questionnaires that contain specific questions that can be asked to a larger number of people. There will still be some sampling error, but with a sample size of 1,000+ responses, we may be able to narrow the 95% confidence interval for the percentage of the target market that is seriously interested in our product to, say, 17-21%, a range that is much more meaningful. Cautions. Some cautions should be heeded in marketing research. First, in general, research should only be commissioned when it is
worth the cost. Thus, research should normally be useful in making specific decisions (what size should the product be? Should the product be launched? Should we charge $1.75 or $2.25?) Secondly, marketing research can be, and often is, abused. Managers frequently have their own “agendas” (e.g., they either would like a product to be launched or would prefer that it not be launched so that the firm will have more resources left over to tackle their favorite products). Often, a way to get your way is to demonstrate through “objective” research that your opinions make economic sense. One example of misleading research, which was reported nationwide in the media, involved the case of “The Pentagon Declares War on Rush Limbaugh.” The Pentagon, within a year of the election of Democrat Bill Clinton, reported that only 4.2% of soldiers listening to the Armed Forces Network wanted to hear Rush Limbaugh. However, although this finding was reported without quest ion in the media, it
was later found that the conclusion was based on the question “What single thing can we do to improve programming?” If you did not write in something like “Carry Rush Limbaugh,” you were counted as not wanting to hear him.
FOOD MARKETING Food Marketing, Consumption, and Manufacturing Food Marketing. Food products often involve the general marketing approaches and techniques applied the marketing of other kinds of
products and services. In food marketing, topics such as test marketing, segmentation, positioning, branding, targeting, consumer research, and market entry strategy, for example, are highly relevant. In addition, food marketing involves other kinds of challenges-such as dealing with a perishable product whose quality and availability varies as a function of current harvest conditions. The value chain--the extent to which sequential parties in the marketing channel add value to the product--is particularly important. Today, processing and new distribution options provide increasing increasing opportunities available to food marketers to provide the consumer with convenience. Markting, services, and processing added do, however, result in significantly higher costs. In the old days, for example, consumers might have baked their own bread from locally grown flour. Today, most households buy pre-manufactured bread, and it is estimated that the farmer receives only some 5% of the price paid by the consumer for the wheat. Demographics and Food Marketing. The study of demographics involves understanding statistical characteristics of a population. For
food marketing purposes, this may help firms (1) understand the current market place (e.g., a firm interested in entering the market for sports drinks in a given country, or worldwide, might investigate the number of people between the ages of fifteen and thirty-five, who would constitute a particularly significant market) or (2) predict future trends. In the United States and Germany, for example, birth rates are relatively low, so it can be predicted that the demand for school lunch boxes will probably decline. Therefore, firms marketing such products might see if they, instead, can shift their resources toward products consumed by a growing population (e.g., bait boxes for a growing population of retired individuals who want to go fishing). Food marketers must consider several issues affect the structure of a population. For example, in some rapidly growing countries, a large percentage of the population is concentrated among younger generations. In countries such as Korea, China, and Taiwan, this has helped stimulate economic growth, while in certain poorer countries, it puts pressures on society to accommodate an increasing number of people on a fixed amount of land. Other countries such as Japan and Germany, in contrast, experience problems wit h a “graying” society, where fewer non-retired people are around to support an increasing number of aging seniors. Because Germany actually hovers around negative population growth, the German government has issued large financial incentives, in the forms of subsidies, for women who have children. In the United States, population growth occurs both through births and immigration. Since the number of births is not growing, problems occur for firms that are dependent on population growth (e.g., Gerber, a manufacturer of baby food). Social class can be used in the positioning of food products. One strategy,upward pull marketing, involves positioning a product for mainstream consumers, but portraying the prod uct as being consumed by upper class consumers. For example, Haagen-Dazs takes care in the selection of clothing, jewelry, and surroundings in its advertisements to portray upscale living, as do the makers of Grey Poupon mustard. Another strategy, however, takes a diametrically opposite approach. In at level positioning, blue collar families are portrayed as such, emphasizing the working class lifestyle. Many members of this demographic group associate strongly with this setting and are proud of their lifestyles, making this sometimes a viable strategy. An advertisement for Almond Joy, for example, features a struggling high school student being quizzed by his teacher remarking, “Sometimes you feel like a nut, sometimes you don‟t!” Nowadays, by the way, social class is often satirized in advertising, as evident in the Palanna All-Fruit commercials while the matron faints because the police officer refers to the fruit preserves as “jelly.” Demographics in the U.S. have significantly affected demand for certain food products. With declining birth rates, there is less demand for baby foods in general, a trend that will continue. Immigration has contributed to a demand for more diverse foods. Long working hours have fueled a demand for prepared foods, a category that has experienced significant growth in supermarkets since the 1980s. Food Marketing and Consumption Patterns. Certain foods—such as chicken, cheese, and soft drinks —have experienced significant
growth in consumption in recent years. For some foods, total market consumption has increased, but this increase may be primarily because of choices of a subgroup. For example, while many Americans have reduced their intake of pork due to concerns about fat, overall per capita consumption of pork has increased in the U.S. This increase probably results in large part from immigration from Asia, where pork is a favored dish. Consumption of certain other products has decreased. Many consumers have replaced whole milk with
leaner varieties, and substitutes have become available to reduce sugar consumption. Beef and egg consumption have been declining, but this may be reversing as high protein diets gain increasing favor. Some food categories have seen increasing consumption in large part because of heavy promotional campaigns to stimulate demand. International Comparisons. Americans generally spend a significantly smaller portion of their income on food than do people in most
other countries. Part of this is due to American affluence—in India and the Philippines, families are estimated to spend 51% and 56% of their incomes on food, respectively, in large part because of low average incomes. Food prices also tend to be lower in the U.S. than they are in most industrialized countries, leaving more money for other purposes. Americans, on the average, are estimated to spend 711% of their income on food, compared to 18% in Japan where food tends to be very expensive. This is because food prices are relatively low, compared to other products, here. Food outlets. Food, in the United States, is sold in a diversity of outlets. Supermarkets carry a broad assortment of goods and generally
offer lower prices. Certain convenience products —e.g., beverages and snacks —are provided in more outlets where consumers may be willing to pay higher prices for convenience. Distinctions between retail formats are increasingly blurred —e.g., supermarkets, convenience stores, and restaurants all sell prepared foods to go. A small number of online retailers now sell food that can be delivered to consumers‟ homes. This is usually not a way to reduce costs —with delivery, costs are usually higher than in supermarkets —but rather a way to provide convenience to time-pressed consumers. Internationally, there are large variations. In developing countries, food is often sold in open markets or in small stores, typically with more locally produced and fewer branded products available. Even in many industrialized countries, supermarket s are less common than they are in the U.S. In Japan, for example, many people show in local neighborhood stores because it is impractical to drive to a large supermarket. In some European countries, many people do not own cars, and thus smaller local shops may be visited frequently. Food is increasingly being consumed away from the home —in restaurants, cafeterias, or at food stands. Here, a large part of the cost is for preparation and other services such as ambiance. Consumers are often quite willing to pay these costs, however, in return for convenience and enjoyment. Government Food Programs. Government food programs, in addition to helping low income households, do increase demand for food to some extent. In fact, increasing demand for farm products was a greater motivation than helping poor people for the formation of the U.S. food stamp program. The actual impact on food stamps on actual consumer demand is limited, however, due to the fungibility of money. It is estimated that one dollar in food stamps increases the demand for food by 20 cents, but when food stamps are available to cover some food costs, recipients are likely to divert much of the money they would otherwise have spent to other necessities. Food Marketing Issues. The food industry faces numerous marketing decisions. Money can be invested in brand building (through
advertising and other forms of promotion) to increase either quantities demanded or the price consumers are willing to pay for a product. Coca Cola, for example, spends a great deal of money both on perfecting its formula and on promoting the brand. This allows Coke to charge more for its product than can makers of regional and smaller brands. Manufacturers may be able to leverage their existing brand names by developing new product lines. For example, Heinz started out as a brand for pickles but branched out into ketchup. Some brand extensions may involve a risk of damage to the original brand if the quality is not good enough. Coca Cola, for example, refused to apply the Coke name to a diet drink back when artificial sweeteners had a significant ly less attractive taste. Coke created Tab Cola, but only when aspartame (NutraSweet) was approved for use in soft drinks did Coca Cola come out with a Diet Coke. Manufacturers that have invested a great deal of money in brands may have developed a certain level of consumer brand loyalty —that is, a tendency for consumers to continue to buy a preferred brand even when an attractive offer is made by competitors. For loyalty to be present, it is not enough to merely observe that the consumer buys the same brand consistently. The consumer, to be brand loyal, must be able to actively resist promotional efforts by competitors. A brand loyal consumer will continue to buy the preferred brand even if a competing product is improved, offers a price promotion or premium, or receives preferred display space. Some consumers how multibrand loyalty . Here, a consumer switches between a few preferred brands. The consumer may either alternate for variety or may, as a rule of thumb, buy whichever one of the preferred brands are on sale. This consumer, however, would not switch to other brands on sale. Brand loyalty is, of course, a matter of degree. Some consumers will not switch for a moderate discount, but would switch for a large one or will occasionally buy another brand for convenience or variety. The “Four P s” of Marketing. Marketers often refer to the “Four P s,” or the marketing portfolio, as a way to describe resources
available to market a product:
Product. Firms can invest in the product by using high quality ingredients or doing extensive research and development to
improve it. Both McDonald‟s and Burger King, for example, literally spend millions of dollars to perfect their French fries! In today‟s Western markets with varying tastes and preferences, it has generally been found that products that offer a specific benefit—e.g., a very tart taste in jam—tend to fare better than “me, too” products that merely imitate a competitor‟s products. Less is known about Eastern and developing countries.
Price. Different strategies may be taken with respect to price. Generically, there are two ways to make a profit —sell a lot and
make a small margin on each unit or make a large margin on each unit and settle for lesser volumes. Firms in most markets are better off if the market is balanced —where some firms compete on price and others on other features (such as different taste preferences for different segments) . The same idea applies at the retail level where some retailers compete on price (e.g., Food-4-Less and Wal-Mart) while others (such as Vons Pavillion) compete on service while charging higher prices.
Distribution. Most supermarkets are offered more products than they have space for. Thus, many manufacturers will find it
difficult to get their products into retail stores.
Promotion involves the different tools that firms have to get consumers to buy more of their products, possibly at higher
prices. Advertising is what we think of by default, but promotion also includes coupons, in-store price promotions, in-store demonstrations, or premiums (e.g., if you buy a package of Jimmy Dean hotdogs this week, you get a free package of Kraft mustard). The Value Chain . A central issue in food marketing is the value chain, the process by which different parties in between the farmer and
the consumer add value to the product. In an extreme case, the farmer only receives about five cents for every dollar ultimately charged for bread in the store. Part of the added cost results from other ingredients, but much of the value is added from processing (e.g., milling), manufacturing, distribution (transportation, wholesaling, and retailing) and brand building. The value chain provides an opportunity for many firms to add value to a product. This, of course, pushes up the ultimate retail prices of foods. However, these added costs usually result from consumer demand where consumers are willing to pay for additional convenience. In recent years, for example, there has been a sharp increase in the demand for prepared foods —from supermarkets or from dine-in or take-out from restaurants. It is important to note that the value chain comes about in large part because a sequence of contributors allows each to specialize in what it does best or is most comfortable—and best qualified—to be doing. Farmers, for example, tend to be most interested in doing actual farming tasks and may be uncomfortable making deals with processors and manufacturers. Agents may specialize in this task. The costs of learning can be spread across many different farmers. The farmer may then be better off paying the agent and spend his or her time on farming instead . For the agent, having a large number of farmers as clients is profitable. Most farms would not have a sufficient volume to justify setting up milling operations, but large processors can take advantage of economies of scale by servicing many farmers. Large manufacturers can invest in brand building, and distributors can combine goods from many different suppliers to distribute and sell efficiently. The Food Marketing Environment. The food market is affected by many different forces —e.g., sociological (fewer children mean less
demand for certain products), government regulations, international trade conditions, science and technology, weather and other conditions affecting harvest conditions, economic cycles, and competitive conditions.
Food Markets: Characteristics Food Marketing Efficiency refers to providing consumers with desired levels of service at the lowest cost possible. This does not necessarily mean to minimize costs after materials leave the farm. Services added later in the process may be very valuable to
the consumer. Raw wheat would not be very valuable to most end consumers. The objective, then, is to add the needed value steps as efficiently as possible. Wal-Mart is extremely efficient in providing the retail (and effectively wholesale) part of the value chain even though that service ultimately costs money. Few consumers would want to drive a long distance to a bakery, and even if they did, the baker would then have to provide the retail services. The baker would probably have to spend more money on hiring people and maintaining the store than Wal-Mart adds to the cost by performing these services. Characteristics of Food Products and Production. Certain problems are introduced by the characteristics of agricultural production:
Large crop variations. Weather and other environmental factors greatly influence the size of a crop during any given year. At
the farm level, demand for agricultural products is generally very inelastic. That means that a small change in the crop size can greatly affect prices. If the orange harvest is only 5% above normal, orange juice manufacturers have a lot of farmers to buy from. Since it is difficult to increase consumer demand much in the short run, manufacturers are unlikely to significantly increase the quantities purchased, and prices may go down by much more than the 5%. Seasonal effects. Certain products—such as turkeys, pumpkin pie, and cranberries—are demanded mostly during selected periods of the year. Other products—such as oranges for orange juice —are demanded more uniformly year-round, but are available in larger quantities during the season. Fresh peaches, for example, are abundantly available in the U.S. during the summer, but usually need to be imported —at high costs—during the winter season. Increasing production levels . Scientific advances have enabled farmers to produce more crops on a given amount of land. This
has dramatically increased the supply of certain products, often more than the increase in population and export markets. This has made markets more competitive.
Geographic concentration and varying production costs. Certain products are grown most efficiently in certain parts of the
country. Wheat and corn could be grown in the South, but at a higher cost than in colder climates. Oranges tend to fare better in warmer climates. This means that many products need to be transported over long distances.
Derived demand . Farmers need farm supplies (e.g., fertilizer, seeds) and equipment (e.g., tractors). Thus, when there is an
increase in market demand for a particular crop, this will tend to result in increased demand for products supplied to farmers. Problems in Agricultural Marketing. Farmers tend to face serious problems due to their limited control over market conditions. In the
long run, farmers can to some extent control their own production levels, but they have no control over others. If other farmers increase
their production, thus increasing supply and resulting in decreased market prices, there is nothing that the farmer can do about it. Another problem is that it takes time for the farmer to adjust his or her output. To increase production of hogs, for example, it is necessary to breed more stock. This takes time, and by the time the larger stock is available, prices may have reversed —i.e., the farmer decided to raise more hogs when prices went up, but by the time the stock is ready, market prices may have declined (either because of an increasing supply from other farmers or because of a change in consumer tastes). Farmers have low bargaining power in dealing with buyers. Processors or manufacturers have many farmers to choose from. They do not need the product from any one particular farmer since commodities are seen as identical. Farmers, therefore, end up having to sell at a market price that may or may not be profitable at a given time. Farmers often face a “cost-squeeze” when market prices change. When market prices decline (usually due to supply conditions), prices paid to farmers decline. However, the farmer‟s costs are unlikely to decline, lea ving the farmer to absorb this loss. Such price fluctuations may change a crop from being mildly profitable to being causing significant losses. Decisions on Marketing Efforts. Certain food product producers have decided to collectively promote their crops—e.g., Florida oranges,
Washington apples, and beef growers. For a commodities product, it is generally not worthwhile for the individual farmer to promote. Thus, promotion efforts are typically undertaken by trade groups such as the Beef Council. If participation is voluntary, many producers would be likely to free-ride—that is, benefit from others‟ efforts without contributing themselves. In many jurisdictions, participation in various programs in mandatory. In some cases, farmers can petition for a refund, but must then go through a great deal of effort. Manufacturers frequently engage in brand building —e.g., Kraft promotes Kraft cheese as being of especially high quality. Here, the manufacturer benefits, and thus may have an incentive to spend money on these promotional efforts. Trends in Food and Agricultural Marketing. Science has allowed both for significant increases in productivity and for adapting products
to market needs. For example, it is now possible to produce firmer fruits that are less likely to be bruised or spoil in transit. (This may happen at some cost in taste, however). Other research may be conducted to optimize tastes and appearances for one or more consumer segments. This research is often proprietary —sponsored by specific manufacturers and kept secret as a competitive advantage. In order to meet the demands of consumers and manufacturers, there is now an increased need for growers, processors, and manufacturers to work together to create products that meet needed standards. It is also possible today to produce an increasing number of niche products—products that appeal to one particular segment of the market. Competition is increasingly global, with both suppliers and buyers being spread increasingly across the world. Because of the increasingly complex marketplace, managers increasingly need more business and interpersonal skills in addition to technical knowledge. The food industry faces pressures not only in terms of nutritional value and safety, but also from environmental concerns.
Price and Competition in Food Markets Basic Economics. The notions of supply and demand are fundamental to economics. The general logic here is that consumers will be
willing to buy a larger quantity of goods at a lower price than they would at a higher price. As we will see, this assumption is sometimes violated, usually when consumers use price as a cue to quality and assume that a higher priced product is better. Similarly, sellers are generally willing to sell a larger quantity when a higher price is offered. Thus, we have the traditional supply and demand curves:
Several things are evident from this chart:
Each curve—supply and demand—indicates the quantity supplied or demanded at the prices offered. At a price of $4.00, for example, buyers would be willing buy about 85 units. However, at that price, only about 10 would be supplied.
Where the two curves intersect, the equilibrium, or market, price is found. The quantity supplied at that price is the same as the quantity demanded at that price—about $7.50 in this chart.
When the market price changes —because of a change in supply—the demand curve is not directly affected. If the price decreases, there will be an increase in quantity demanded but not a change in overall demand .
Supply and demand curves often have a curved —as opposed to straight line—shape since there is no reason why the same change in price—say, $1.00—will have the same impact at high or low prices. For example, if the price of heavy cream were reduced from $3.00 to $2.00 a pint, quantity demanded would increase. However, if heavy cream sells for an already low price of $1.00 per pint, reducing the price even further would have little effect. This product simply contains too many calories for consumers to consume more even if it were free.
As we will see in examining research on consumer response to price, real life demand is not always as smooth as it is portrayed in theoretical demand curves. For example, sharp changes may occur when certain “critical” price points are reached. Consider the following hypothetical quantities of cereal boxes demanded:
It is clear that the dramatic drop in quantity demanded as we go from $3.95 to $4.00 is likely not due so much to the small 5 cent increase in price as it is to our reaching a “critical” price of $4.00 that consumers are reluctant to pass. That is, suddenly when the price reaches $4.00, it appears as “expensive.” If we increase the price another 5 cents, the additional drop in quantity demanded is small. Price elasticity refers to the extent to which quantity demanded is affected by changes in the price. By definition % change in quantity demanded Elasticity = ________________________________ % change in price Research has found that at prices normally charged in supermarkets, the price elasticity appears to be around -2.0 for many different product categories. That is, if prices are raised by 1%, sales will tend to decline by 2%. Demand Curves. Total demand for a product results from adding the demand for each consumer. Some consumers will have high levels
of demand, or low elasticity, and others will be highly price elastic. As a practical matter, it is usually most convenient to consider total demand as the sum of demand from different segments. Here, again, certain groups of consumes will value the product more than others. For example, in the case of steak, followers of the Atkins diet will value the product highly. These consumers will buy large quantities even at high prices. Since they have already bought all they can eat anyway, they may not buy much more if prices are lowered. In contrast, those following a low fat diet may not buy much beef no matter how cheap it is. Certain consumers are very price sensitive. They will tend to buy whatever is cheapest —if beef is cheaper than chicken, they will buy beef, but they will not buy much beef if it is more expensive. Finally, the largest segment probably consists of consumers who are somewhat price sensitive. They will buy some beef at high prices, but they will buy increasingly more at lower prices.
Supply . In the short run, supply is determined by what is available. If there is a glut of beef, prices will come down, and prices will
increase if there is a shortage. In the long run, producers can adjust their production levels. Often, adjustments take a long time. To increase production of beef, you first have to raise stock. You may also have to build barns or acquire more land to hold the livestock. By the time production has been increased, prices may be on the way down. It may also be difficult to decrease production since a lot of resources have already been invested in production capacity . If prices of wheat go down, it may be difficult for a farmer to sell land that he or she no longer finds useful to plant. Costs come both in fixed and variable categories. Fixed costs are costs that are not affected by the quantity produced. The mortgage on
a farm costs the same regardless of how much is planted, and the loan payments on manufacturing equipment are the same regardless of how much it is used. Variable costs, in contrast, depend on the quantity produced . If a farmer produces less wheat, he or she will need to buy less seed. Some costs are in a gray area. Labor costs may or may not go down with decreased production, especiall y in the short run. Because fixed costs cannot be changed in the short run, firms may find it optimal to produce a product even though it will lose money. If variable costs, but not all fixed costs, are covered, the firm will lose more by not producing. Even if revenue is less than variable costs, farmers may be forced to produce due to pre-existing contracts. Changes in supply and demand. Supply may change due to changes in the market such as:
The size of the current year’s crop.
Changes in the population. As population increases, demand for certain products may change. Even if the overall population
is not affected, there may be large changes in the sizes of different segments. For example, U.S. population growth has been modest, but Asian immigration has increased dramatically, creating more demand for rice and pork.
Changes in income or wealth . During recessions, consumers tend to cut down on their spending. It is difficult to cut down
much on basic food products, but people may reduce consumption of luxuries and upscale brands.
Changes in tastes and p references. The U.S. population has grown more diverse and many “ethnic” foods have spread to other
groups. There is, for example, a large demand for Chinese and Mexican food among white Americans. This growth may happen at the expense of traditional foods such as potatoes and hamburgers.
Changes in the prices of substitutable products. If there is an abundant harvest of corn, the demand for sugar is going to
decline even if there is no change in sugar supply or the demand for sweeteners. Corn syrup can be substituted for sugar as a sweetener, so if this is more economical, fewer manufacturers will buy sugar. Future price expectations. If it is expected that a product will increase in time—e.g., if it is predicted that there will be a bad harvest next year—speculators may hold back inventory rather than selling it, thus decreasing supply.
Market/Clearing Prices. A market, or clearing, price is set when the market matches supply and demand. If the price is too low, more
quantity will be demanded than what is supplied, and the price will rise. If the price is too high, there will be a surplus and the price will decline. This clearing price allocates the product to those who value it the most (though not necessarily to those who “deserve” it). Macroeconomic Influences on Prices . A common concern in the U.S. and in many other countries is that food prices are too low. At
market prices, it is complained, farmers will not be able to make a profit and therefore run a danger of going out of business. Sometimes, governments will attempt interventions to raise prices or otherwise affect farmers‟ revenue. One method is a subsidy, or “negative tax” whereby farmers are given extra payments from the government. For example, at one time, certain chicken growers, for every dollar worth of meat they sold, received a subsidy of $1.01. Thus, the effective price paid to the farmer was $2.01. In this case, of course, this extra price was not passed on down the channel. As an alternative, a government may buy up product at the open market, thus increasing demand, until prices hit a desired level. Alternatively, supply can be curtailed by quotas —e.g., only certain farmers are allowed to grow a certain amount of tobacco, and there are limits on how much of certain products (e.g., sugar) can be imported. In certain countries and in war time, certain products may be rationed. Here, no matter how much someone is willing to pay, he or she can only buy a limited amount of scarce goods. Price controls, limiting the maximum that can be charged for a product, can also be imposed, but these have the very serious consequence that production will decrease —it will not be profitable to produce as much product as is demanded at the artificially low price. Shortages are then likely to occur. Consumer Response to Price. Both manufacturers and retailers make decisions as to optimal prices to charge consumers. Ultimate price
decisions in the United States are, of course, made by the retailer, but manufacturers make promotional and other decisions that influence retailer decisions. Ways to Change Prices. One obvious way to increase the price of a product is to increase the “sticker” price— the price that is actually
charged for a container. Consumers, however, often react strongly to such obvious price increases —especially if competitors have not yet raised their prices, too. Other methods have therefore been devised. To understand how these methods work, first consider the idea that Resources Given Up Price = ----------------------------------Value Received
Increasing the sticker price changes the numerator —what the consumer sacrifices. Other approaches focus on the denominator. One approach involves reducing the quantity provided in a container. Instead of raising a sticker price of a can of coffee from $3.49, the content can be reduced from, say, 11 to 9 ounces. Alternatively, one can change quality . Candy makers, when the prices of chocolate went up, used less chocolate and more “gooey” stuff. Finally, terms and service can be changed. This usually does not happen in consumer food products, where this is not relevant. However, a seed or fertilizer store might stop giving farmers ninety interest free days to pay for purchases. Price Discrimination. As we saw in our examination of components of the demand curve, some consumers value a product more than
others and are willing to pay more. Marketers then are interested in getting each customer to pay as much as he or she is willing. It is infeasible to ask consumers how much they value a product and then charge that amount, but sneaky ways have been devised to charge certain customers more. In explicit price discriminations, only certain customers are eligible for a lower price —e.g., student or senior citizen discounts. More common is implicit price discrimination. Anyone who wants to can cut a coupon out of the newspaper, but not all customers bother. Products can be put on sale periodically. Those consumers who care more about saving money than getting their preferred brand will switch, but others will pay full price. Consumer Price Response and Awareness. An interesting study showed that most consumers, in shopping for frequently purchased
product categories, did not do much price comparison. Consumers, on the average, inspected only 1.2 items before making a selection, spending only twelve seconds before moving on. Only 21.6% claimed to have compared prices, and only 55.6% answered within 5% accuracy when asked about the price of the product they had just picked up. This seems to suggest that consumers to not pay much attention to prices. On the other hand, we know from scanner data that consumers respond a great deal to price changes. It appears that rather than looking at prices per se on every shopping occasion, consumers may check prices only periodically (say, every ten shopping times) or rely on cues in the environment —e.g., buy whatever brand is on sale. A study found that many consumers did, indeed, pay attention only to the fact that a product was on sale (the promotion “signal”). These consumers would select a brand regardless of whether the actual discount were small (e.g., 2%) or large —say 25%. Odd-even Pricing. Most supermarkets tend to use the so-called “odd” prices—those ending in .99 or .95—rather than round dollar
figures. Many believe that this practice is intended to make prices seem lower than they are. For example, $2.99 could be seen as “two dollars plus „change‟” rather than “almost three dollars.” Research shows that consumers are slightly more likely to purchase at these odd prices, but the effect is not large. Odd prices may send a signal that a product is a “bargain.” This may be good for some low involvement products such as flour, but it may be bad for premium quality brands where an even price may signal higher quality. A premium wine may therefore be better priced at $28.00 than at $27.99. A study conducted in the 1970s showed that restaurant patrons at that time responded more favorably to odd prices when the price was less than $7.00 but better to even prices when the price was higher. Thus, the price of $4.99 should be chosen instead of $5.00 but $11.00 should be chosen over $10.99. (Adjusting for inflation, these figures should probably be roughly doubled toda y). Odd prices, by the way, are believed not to have been invented to deceive consumers. Early on, there was a concern that dishonest store clerks might not ring up purchases for customers who paid the exact amount due and did not ask for receipt s. If the clerk had to give the customer change, he or she had to ring up the purchase to do so, however. Estimating Consumer Willingness to Pay. It is extremely difficult to estimate how much a consumer will be willing to pay for a new
product. Focus groups and questionnaires asking this question will generally not provide useful answers. People have difficulty determining how they would actually behave in a hypothetical situation. What they think and what they would actually do often do not “jive.” In practice, one of the few viable methods is experimentation —e.g., selling a product in certain test stores at different prices and seeing responses. One can test different price levels in a laboratory where consumers are asked to shop for a basket of goods, but this is a bit farther removed from reality. Conjoint analysis, a method where consumers rate a number of combinations of product attributes, including price (e.g., healthy, $2.99, poor taste vs. unhealthy, $3.99, superior taste) may be used. Here, the consumer rates the overall combination—how good is this offering?—and a statistical technique is then used to “decompose” the effects of the variables tested, including price. For existing product categories, it may also be possible to develop computer models based on scanner data and other market information. Competition in Agricultural Markets. Farmers generally face commodities markets. A product produced by one farmer is considered
essentially equivalent to a product of the same grade produced by another. Farmers are thus price-takers. They can sell all they can produce at the market price, but they have no individual bargaining power to raise prices. In the consumer goods markets, markets can be either competitive, monopolistically competitive, or oligopolistic. In an oligopoly, a few large manufacturers dominate. For example, in the cola drinks market, Coke and Pepsi have most of the power. Each will influence the market a great deal. If one raises prices, the other can raise prices, too, and not worry too much about losing market share. In categories where there are several large competitors, the market structure is monopolistic competition. There are, for example, numerous manufacturers of ice cream. If one lowers its price or introduces a new product, this may significantly affect sales of other brands. Certain large brands still have a great deal of bargaining power, however. Dreyers, for example, can charge a lot more for its ice-cream than a lesser known brand based on its brand image.
Distribution: Wholesaling and Retailing of Food Products A large part of the food products value-chain is distribution— (1) efficiently getting the product (2) in good condition to where (3) it is convenient for the consumer to buy it (4) in a setting that is consistent with the brand‟s image.
Distribution (also known as the place variable in the marketing mix, or the 4 P s) involves getting the product from the manufacturer to the ultimate consumer. Distribution is often a much underestimated factor in marketing. Many marketers fall for the trap that if you make a better product, consumers will buy it. The problem is that retailers may not be willing to devote shelf-space to new products. Retailers would often rather use that shelf-space for existing products have that proven records of selling. Although many firms advertise that they save the consumer money by selling direct and “eliminating the middleman,” this is a dubious claim. The truth is that intermediaries, such as retailers and wholesalers, tend to add efficiency because they can do specialized tasks better than the consumer or the manufacturer. Because wholesalers and retailers exist, the consumer can buy one pen at a time in a store located conveniently rather than having to order it from a distant factory. Thus, distributors add efficiency by:
Breaking bulk—the consumer can buy small quantities at a time. Consumers can buy a dozen eggs and a quart of milk at one
time. Channels move large quantities of foods from farmers, processors, and manufacturers, taking advantages of economies of scale. Distributing. The consumers can buy at a neighborhood store, which in turn can buy from a regional warehouse.
Carrying inventory
Financing
Channel structures vary somewhat by the nature of the product. A large restaurant chain might buy ketchup directly from the manufacturer. The simplest structure is the farmer selling directly to consumers. It is, however, usually inconvenient for the consumer to travel to the farm and for the farmer to sell small quantities to each of many buyers, but occasionally farmers like to supplement their sales by selling at farmers‟ markets. Consumers may benefit from fresher products and possibly lower prices, but most of the value here is probably entertainment. Large buyers might be able to buy directly from the farmer—e.g., McDonald‟s could buy cows directly in very large quantities and then sell burgers to retail customers.
In most cases, however, a wholesaler is involved. This wholesaler buys things from several different manufacturers and delivers those to retailers. A wholesaler may, for example, serve many different retail stores with many brands of cereal, spices, and other food ingredients. The retailer than can buy many different products from the same source, increasing convenience. The wholesaler can buy thousands of cases of Morton salt from the manufacturer and just a few cases at a time to each retailer. The wholesaler will add a margin for this service, but this margin is usually less than what the manufacturer and/or retailer would have to spend in dealing directly with each other.
Manufacturers of different kinds of products have different interests with respect to the availability of their products. For convenience products such as soft drinks, it is essential that your product be available widely . Chances are that if a store does not have a consumer‟s preferred brand of soft drinks, the consumer will settle for another brand rather than taking the trouble to go to another store. Occasionally, however, manufacturers will prefer selectivedistribution since they prefer to have their products available only in upscale stores. Parallel distribution structures refer to the fact that products may reach consumers in different ways. Most products flow through the
traditional manufacturer --> retailer --> consumer channel. Certain large chains may, however, demand to buy directly from the manufacturer since they believe they can provide the distributio n services at a lower cost themselves. In turn, of course, they want lower prices, which may anger the traditional retailers who feel that this represents unfair competition.
We must consider what is realistically available to each firm. A small manufacturer of potato chips would like to be available in grocery stores nationally, but this may not be realistic. We need to consider, then, both who will be willing to carry our products and whom we would actually like to carry them. In general, for convenience products, intense distribution is desirable, but only brands that have a certain amount of power—e.g., an established brand name—can hope to gain national intense distribution. Note that for convenience goods, intense distribution is less likely to harm the brand image—it is not a problem, for example, for Haagen Dazs to be available in a convenience store along with bargain brands —it is expected that people will not travel much for these products, so they should be available anywhere the consumer demands them. However, in the category of shopping goods, having Rolex watches sold in discount stores would be undesirable—here, consumers do travel, and goods are evaluated by customers to some extent based on the surrounding merchandise. Retailing . There are several ways in which retail stores can position themselves. One strategy involves low-cost, low-service. On the
opposite side of the spectrum, others may offer high-cost-high-service. Generally, having a clear strategy and position tends to be more effective since "average" stores tend to face a greater scope of competition —e.g., Sears competes both "below" with K-Mart and "above" with Macy‟s. K-Mart, in contrast, competes mostly laterally, facing Wal-Mart and Target. Margins. Stores need to maximize their profits and must consider their margins to do so. Gross margins generally reflect the difference
between what a store pays the retailer and what it charges the customer. On the average, this difference in supermarkets is about 25%. (Although there are large differences between product categories, as an illustration, a can that sold for $1.00 might have been bought on wholesale for $0.75). Net margins, in contrast, take into account the allocated costs of running the store —wages, rent, utilities, insurance, and "shrinkage." In grocery stores, these margins are usually less than 5%. Margins can be considered at the unit level —you make $0.35 on a package of salt —or as a percentage of sales—35% if the salt sold for $1.00. Sometimes, it may also be useful to consider margins per unit of space to best allocate retail space to different categories. There are two theoretical forms of retailing. The "High-Low" method involves selling products at high prices most of the time but occasionally having significant sales. In contrast, the "everyday low price" (EDLP) strategy involves lower prices all the time but no sales. In practice, there are few if any EDLP stores —most stores put a large amount of merchandise on sale much of the time. It has been found that offering lower everyday prices requires a very large increase in sales volume to be profitable. Slotting Fees. Since retailers are offered many more products than they can carry, they often have a great deal of bargaining power with
suppliers. Retailers are often reluctant to accept a new product that may or may not be successful. Often, when a new product is introduced, manufacturers are asked to pay a “slotting” fee to get access to the retailer‟s shelves. This may seem unfair at first, but two facts should be considered: (1) The retailer is taking a risk by putting out the product, possibly replacing an existing product on which it has at least broken even. (2) Slotting fees may compensate the retailer for given space to a slow-moving product category. If the retailer could not charge a slotting fee, it might decide to devote most of its shelf-space to major national brands that would “turn” more quickly. That is, on a given “slot,” you might sell fifty packs of Nabisco c ookies per day, but only seven of the smaller brand. Ultimately, of course, the slotting fee is at least in part passed through to the consumer, but the slotting fee both allows the retailer to protect itself from risk and maintain a unit selling at lower volumes. It should be noted that price competition in the retail field is intense with very low margins. The money received from slotting fees is part of the store‟s total revenue. If no slotting fees were charged, prices on the slow-moving and new products may be lower, but it is unlikely that overall store prices would be lower. Retailers would simply have to charge higher prices on other products and would likely be tempted to drop many low share brands. Increasing power of retailers. As more and more products compete for space in supermarkets, retailers have gained an increasing power
to determine what is "in" and what is "out." This means that they can often "hold out" for better prices and other "concessions" such as advertising support and fixtures. A significant trend in recent years has been toward manufacturers‟ "private label" brands— that is, the retailers' own brands competing against the national ones. For example, Del Monte peas may now have to compete against Ralph‟ s brand of peas in those stores. Although private label brands sell for lower prices than national brands, margins are greater for retailers because
costs are lower. For example, it is more profitable to sell a can of peas $1.00 when it cost $0.60 to supply than it is to sell a name brand can at $1.25 when that cost $1.05 at wholesale. "Wheel of Retailing .” An interesting phenomenon that has been consistently observed in the retail world is the tendency of stores to
progressively add to their services. Many stores have started out as discount facilities but have gradually added services that customers have desired. For example, the main purpose of shopping at establishments like Costco and Sam‟s Club is to get low prices. Th ese stores have, however, added a tremendous number of services —e.g., eye examinations, eye glass prescription services, tire installation, insurance services, upscale coffee, and vaccinations.
To the extent these services can be added in a cost effective manner, that is a good thing. Ironically, however, what frequently happens is that "room" now opens up for a "bare bones" chain to come in and fill the void that the original store was supposed to have filled! New stores can now come in and offer lower prices before addition al, costly services "creep" in. Note that upscaling over time may be an appropriate strategy and that the owner of the "rising" chain may itself want to start another, lower- service division (e.g., Ralph‟s may want to own another chain such as Food 4 Less). Retailing polarity. A number of retailers have tended to go to one extreme or the other—either toward a great emphasis on price or a
move toward higher service. Rapid economic growth has made high service retailers more attractive to a growing number of affluent consumers, and less affluent consumers have become more accustomed to intense price competition between different retailers. Scanner Data. Retailers and manufacturers today are able to make strategic decisions based on information from price scannings at
checkout counters. Wal-Mart, for example, has looked at which products tend to be purchased together. At Wal-Mart supercenters which carry both food and traditional products, it was decided to put bananas both in the produce and the cereal sections. Many consumers would get to cereal and realize that they needed bananas. Not all were willing to go back and get them, but bananas will be bought if located next to cereal.
In some cities, a group of consumers agree to participate in a scanner data “panel.” These consumers receive a card much like the loyalty cards available to members of Vons Club. Their purchases are tracked and correlated with media exposure and demographics. This makes certain analyses possible:
By comparing purchases to television exposure, it is possible to see whether and how many times an ad has been seen. Split cable allows testing whereby half of the cable subscribers see an ad while the other half does not. Sales to those who have and those who have not seen an ad can be compared, or two different advertising themes can be tested.
The impact of promotional situations—such as whether the brand of interest or a competitor was on sale, whether a coupon was redeemed, or whether any category brand received special display space —can be considered.
Purchases can be compared to past purchases. This allows for tests of brand loyalty and switching behavior.
Timing of purchases can be examined. Does a particular product sell higher volumes on certain days?
How do a particular store‟s sales compare to those in other chains? For example, neighborhoods with high concentrations of specific ethnic groups may sell more of certain brands or product categories.
International Food Markets Background . The United States exports much of its food supply and in turn imports certain goods that are (1) more economical to grow
in other countries, (2) serve niche markets, or (3) perceived to be better if made in certain countries (e.g., Irish whiskey or Belgian chocolate). Exchange rates come in two forms:
“Floating”—here, currencies are set on the open market based on the supply of and demand for each currency. For example,
all other things being equal, if the U.S. imports more from Japan than it exports there, there will be less demand for U.S. dollars (they are not desired for purchasing goods) and more demand for Japanese yen —thus, the price of the yen, in dollars, will increase, so you will get fewer yen for a dollar.
“Fixed”—currencies may be “pegged” to another currency (e.g., the Argentinian currency is guaranteed in terms of a to a
composite of currencies (i.e., to avoid making the currency dependent entirely on the U.S. dollar, the value might be 0.25*U.S. dollar+4*Mexican peso+50*Japanese yen+0.2*Euro), or to some other valuable such as gold. Note that it is very difficult to maintain these fixed exchange rates—governments must buy or sell currency on the open market when currencies go outside the accepted ranges. Fixed exchange rates, although they produce stability and predictability, tend to get in the way of market forces—if a currency is kept artificially low, a country will tend to export too much and import too little.
Measuring country wealth. There are two ways to measure the wealth of a country. The nominal per capita gross domestic product (GDP) refers to the value of goods and services produced per person in a country if this value in local currency were to be exchanged into
dollars. Suppose, for example, that the per capita GDP of Japan is 3,500,000 yen and the dollar exchanges for 100 yen, so that the per capita GDP is (3,500,000/100)=$35,000. However, that $35,000 will not buy as much in Japan —food and housing are much more expensive there. Therefore, we introduce the idea of purchase parity adjusted per capita GDP, which reflects what this money can buy in the country. This is typically based on the relative costs of a weighted “basket” of goods in a country (e.g., 35% of the cost of housing, 40% the cost of food, 10% the cost of clothing, and 15% cost of ot her items). If it turns out that this measure of cost of living is 30% higher in Japan, the purchase parity adjusted GPD in Japan would then be ($35,000/(130%) = $26,923. (The Gross Domestic Product (GPD) and Gross National Product (GNP) are almost identical figures. The GNP, for example, includes income made by citizens working abroad, and does not include the income of foreigners working in the country. Traditionally, the GNP was more prevalent; today the GPD is more commonly used—in practice, the two measures fall within a few percent of each other.) In general, the nominal per capita GPD is more useful for determining local consumers‟ ability to buy imported goods, the cos t of which are determined in large measure by the costs in the home market, while the purchase parity adjusted measure is more useful when products are produced, at local costs, in the country of purchase. For example, the ability of Argentinians to purchase micro computer chips, which are produced mostly in the U.S. and Japan, is better predicted by nominal income, while the ability to purchase toothpaste made by a U.S. firm in a factory in Argentina is better predicted by purchase parity adjusted income. It should be noted that, in some countries, income is quite unevenly distributed so that these average measures may not be very meaningful. In Brazil, for example, there is a very large underclass making significantl y less than the national average, and thus, the national figure is not a good indicator of the purchase power of the mass market. Similarly, great regional differences exis t within some countries—income is much higher in northern Germany than it is in the former East Germany, and income in southern Italy is much lower than in northern Italy. Protectionism: Although trade generally benefits a country as a whole, powerful interests within countries frequently put obstacles —
i.e., they seek to inhibit free trade. There are several ways this can be done:
Tariff barriers: A duty, or tax or fee, is put on products imported. This is usually a percentage of the cost of the good.
Quotas: A country can export only a certain number of goods to the importing country. For example, Mexico can export only a
certain quantity of tomatoes to the United States.
“Voluntary” export restraints: These are not official quotas, but involve agreements made by countries to limit the amount of goods they export to an importing country. Outright quotas are more common than “voluntary” agreements for food products.
Subsidies to domestic products : If the government supports domestic produ cers of a product, these may end up with a cost
advantage relative to foreign producers who do not get this subsidy. Some U.S. chicken farmers have received subsidies for chickens exported. Non-tariff barriers, such as differential standards in testing foreign and domestic products for safety, disclosure of less information to foreign manufacturers needed to get products approved, slow processing of imports at ports of entry, or arbitrary laws which favor domestic manufacturers. For perishable food products, a significant danger is having a shipment held up waiting for customs clearance.
Justifications for protectionism: Several justifications have been made for the practice of protectionism. Some appear to hold more
merit than others:
Protection of an “infant” industry : This is usually not applicable to food products.
Resistance to unfair foreign competition : The U.S. sugar industry contends that most foreign manufacturers subsidize their sugar production, so the U.S. must follow to remain competitive. This argument will hold little merit with the dispute resolution mechanism available through the World Trade Organization.
Preservation of a vital domestic industry : The U.S. wants to be able to produce its own defense products, even if foreign imports would be cheaper, since the U.S. does not want to be dependent on foreign manufacturers with whose countries conflicts may arise. Similarly, Japan would prefer to be able to produce its own food supply despite its exorbitant costs. For an industry essential to national security, this may be a compelling argument, but it is often used for less compelling ones (e.g., manufactures of funeral caskets or honey).
Intervention into a temporary trade balance: A country may want to try to reverse a temporary decline in trade balances by
limiting imports. In practice, this does not work since such moves are typically met by retaliation.
Maintenance of domestic living standards and preservation of jobs. Import restrictions can temporarily protect domestic jobs,
and can in the long run protect specific jobs (e.g., chicken farmers). This is less of an accepted argument —these workers should instead by retrained to work in jobs where their country has a relative advantage.
Retaliation: The proper way to address trade disputes is now through the World Trade Organization. In the past, where
enforcement was less available, this might have been a reasonable argument. Variations in Food Taste Preferences. Our food preferences tend to be “learned” early in life. It is likely that we will continue to
prefer the kind of food we ate growing up. U.S. agricultural interests lobbied successfully to have wheat included in food aid to Japan after World War II. The intent was to develop a taste for this product among the next generation —a very forward looking strategy! Chinese people today do not generally like the taste of U.S. fast food. The younger generation can “endure” this while the taste is very unpleasant for older Chinese. Children now growing up and being exposed to this food may appreciate the taste more.
Religion has some impact on food preferences since certain religions do not allow the consumption of certain foods. There may be significant cultural context to food consumption. Banquets, for example, are a very important part of the Chinese culture. Food Diffusion. Food products often spread to other countries. Often, this a process that takes considerable time. Chinese food is
believed to have become popular in the U.S. because of Chinese immigrants who started restaurants here. Mexican food has spread to households of other ethnic groups. Some products are significantly modified in adopting countries—e.g., U.S. pizza is much more elaborate than the traditional Italian dish.
Food Positioning. A country of origin may affect the image of a food product either favorably or unfavorably. When an association is
favorable (e.g., French cheese or wine), the country of origin may be emphasized. Sometimes an origin may be implied when it actually does not exist. In this practice, which raises serious ethical questions, packagi ng text may be written in French, for example, even though the product is made in the U.S. and is intended for sale here. A product name may also imply foreign origin —e.g., Häagen-Dazs ice-cream. An alternative strategy, when the association is not believed to be seen positively, is to obscure national origin. A wine made in Germany and a beer made in France use this approach. Food may also need a different type of positioning based on usage occasion. Tang, for example, is positioned as a cheap and convenient drink in the U.S. In Brazil, real orange juice is cheaper and readily available on the streets. Thus, such a positioning would not work. Instead, a pineapple flavored drink was promoted as a special treat. In China, prepared food is available from street vendors much cheaper than McDonald‟s food. Thus, the American position of convenience and low cost are not viable. Instea d, McDonald‟s is positioned on its Western mystique. Food Adaptation. Food often needs to be adapted to be successful in a new country. The Japanese tend to like food less sweet than do
Americans, so KFC uses less sugar in its potato salad there. Some McDonald‟s sandwiches are much spicier in China. Serving size may also have to be adjusted. Americans often eat larger portions than people in many countries. Packaging is often more important in some countries. Products exported from the U.S. to Japan often need a significant upgrade to packaging materials where the container is seen a s a reflection of the quality of the product. Promotional Decisions. A large part of most U.S. food products‟ marketing is accomplished through television. However, in many
countries, ownership of TVs is much less common than in the U.S. In most of the World, people watch less TV than Americans do, and some countries either do not allow or limit TV advertising. Other media, then, may have to be used in certain countries. Billboards are often more common in India, for example. Certain other promotional tools may also be unsuitable. There may not exist an adequate infrastructure for coupon redemption. Free samples may not be cost effective in countries with low incomes. Low income individuals who cannot afford to buy the products might endure long lines for a free sample. Government Export Assistance. Both the U.S. government and several states have programs to promote agricultural products abroad.
Some programs involve financial assistance, such as low interest loans. Others assist in making connections with foreign buyers or paperwork.
Food Market Structure Background . Several characteristics of a market determine its structure. Usually, no one firm or individual controls the entire value
chain, but some firms may decide to integrate horizontally —by buying up competing firms or increasing capacity—or vertically by buying facilities that tend to come earlier or later in the chain. Some industries provide for large economies of scale, potentially resulting in a limited number of firms controlling a large portion of the total market. Where economies of scale are smaller, or where obstacles such as government regulations limit the size of individual firms, the market may be more fragmented. Horizontal Integration. Economies of scale can be important in some industries. Sometimes, it may also be useful to have different
brands or businesses that serve different segments. For example, a firm that has experience in the retail industry might want to operate both a full-service retail chain that can charge higher prices and a discount chain that serves a more price sensitive segment. When growth opportunities in existing firms may be limited, there may be significant pressure to find other businesses in which to invest current earnings. Frequently, stockholders do not want to have profits paid back in dividends since this money would be immediatley taxable. Firms may therefore need to find other ways to invest the money to make a satisfactory return, and it may be attractive to buy another firm in an industry the management already understands. In the United States , and to an increasing extent in Europe , governments are concerned about too much market share being controlled by one or a few firms and opportunities to acquire competitors may therefore be limited. There are also some businesses that do not lend themselves well to consolidation. For example, running farms depends a great deal of entrepreneurial drive and willigness to work long hours, so therefore corporate farms tend to be rare —usuallly, they would simply not be cost-effective. Vertical Integation. Another way for a firm to grow is to integrate vertically . Here, the firm will buy firms that come earlier or later in
the value chain. For example, McDonald‟s could buy a meat packing plant that would supply much of the beef that its restauran ts would need.
There are certain advantages to vertical integration. The most important advantage probably is having an assured supply in case of a “tight” market. Sometimes, it may also be possible to obtain “synergy”— a situation where two assets together may be worth more than the “sum of their parts.” For example, a seed manufacturer might be able to buy a chemical firm that supplies fertilizer used in the process of producing the seed and be able to use some research and development investments in both processes.
In agricultural industries, however, genuine synergy potential does not appear to be frequent. There are also considerable potential downsides to vertical integration:
The management will need to oversee investments in an industry where it has limited experience;
Management attention is being spread between more industries, allowing less time to focus in each;
High levels of leverage —if economic developments depress one industry, this may “ripple” through the value chain, compounding the problem;
Lack of willingness of customers at one level to buy from a firm at which they may be competing at another level (e.g., other fast food restaurants where reluctant to buy Pepsi when the parent company also owned fast food restaurants); and
Potential conflicts of interest. If a food manufacturer also owns a bank that lends to farmers, farmers may feel pressure to make decisions on sales based on financing decisions or vice versa. This may cause regulatory concern and/or intervention.
In practice, therefore, many atttemps at vertical integration have not been very successful. Specialization . Firms that tend to focus on one process often become more effective. KFC, for example, prides itself on the slogan of doing only “chicken right.” It is possible for firms that specialize to gain considerable economies of scale, including considerable
bargaining power because of large quantities purchased. The firm can also spread research and development expenses across large volumes and can afford to invest in technology and research that allow superior quality and performance. Wholesalers spread costs of distribution across numerous product categories and develop extensive knowledge of efficiency in distribution. Farmers may hire agents to negotiate and tend to focus on farming rather than getting into how to make and distribute butter and cartoned milk in small quantities. Diversification. Agricultural price markets often fluctuate dramatically. Therefore, it may be dangerous for a farmer to put “all [his or
her] eggs in one basket.” For this reason, a farmer may produce several different crops or may even produce both produce and meat. On the average, this will probably be a less efficient strategy —the farmer does not get to specialize, does not get the same economies of scale, and does not get as much use of each piece of equipment. However, in return, the farmer is less likely to be driven out of business by a disaster in one crop area. For larger firms, diversification appears to be less useful. Financial theory holds that it is usually not beneficial for stockholders if firms diversity. The stockholders themselves can diversify by buying a portfolio balanced between different stocks. Sometimes, however, it may be difficult for a firm to find an opportunity to invest current earnings in the core industry, and management may be motivated to buy into other industries mostly as a way to avoid paying dividends that would be subject to immediate taxation. Decentralization . In the old days, it was frequently necessary for buyers and sellers to physically gather to settle market prices. Many
commodities would be sold through auctions where the price would be set by supply and demand. Nowadays, much of the negotiation can be done electronically. A farmer may notify an agent of what he or she has to send and one or more buyers can be approached. Buyers and sellers can then accept or reject offers that are being made at various times. This is more efficient, but it also means that less will be known about market prices by at least some participants. Large buyers that can invest in extensive market research often will know much more than small sellers about market conditions and thus have an advantage in negotiations. Since auctions in some markets now account for only a minority of commodities sold, the U.S. government is now unable to supply reliable market price estimates for some categories. Farmer cooperatives. Farmers may decide to set up organizations that allow them to pool sales and purchases or provide or obtain
certain services jointly. Cooperative organizations may be set up to run storage elevators or milling operations rather than contracting with outside firms to provide these services. In many cases, cooperatives appear to come about not so much for economic savings but rather for ideological reasons—farmers feeling in control of the process rather than having to deal with outside firms. Cooperatives may not be cost efficient, especially if they need to handle smaller volumes than commercial operators. They must also be managed —either by volunteers or outside management. With cooperatives also come governance issues and the need to resolve disputes between members. Cooperatives may be set up for marketing purposes—finding buyers for and transportation to potential buyers or establishing a
regional brand identity. Purchasing cooperatives may allow for greater bargaining power through larger volume purchases. Cooperatives can also pool buying of such services as medical benefits or insurance for farms with a small number of employees.
Food Market Development Background . Market development involves creating or expanding a market for new or existing products and/or increasing the value of these products. Few consumers today are aware of the prickly pear, however, but farmers who grow this cactus plant would like to market it as a way to decrease “bad,” low-density cholesterol without reducing “good,” high density cholesterol levels. Strategies, objectives, and the hierarchy of effects . The promotional activities needed for a given product will depend on factors such as its current stage in the product life cycle. For prickly pear growers, simply getting more people to know that their product exists will be a challenge. Once more people know, a significant challenge is going to get more people to actually try the product. This may be difficult to accomplish because of the high cost of the product and the vast number of choices of other products that consumers can consume. There is simply not enough time or money to try all. If a product category catches on, emphasis may then need to switch to brand differentiation and the firm may need to work on getting consumers to hold favorable beliefs about their brand. In later stages of the product life cycle, where most consumers‟ opinions have largely been set, temporary sales increas es, usually through price promotions, may be the only realistic objective. The strategic planning process . In order to make good investment decisions with respect to how much to spend on marketing and how to allocate this spending among opportunities available (e.g., advertising and price promotions), it is useful to go through a strategic planning process. This process involves several steps, but these steps are not rigidly separated and it may be necessary to return to previous stages as new considerations come up.
Setting marketing objectives. The first step involves setting the most appropriate marketing objectives. These objectives need to be reasonably specific and manageable; thus, merely saying that the goal is to maximize profit is not enough. How will this be done? It is also
important to make priorities. A firm might like to reduce costs, improve quality, increase distribution channels, increase awareness, and improve consumer percpetion of the product at the same time. However, some of these objectives, such as reducing cost and improving quality at the same time, may not be compatible. The firm may also not have the resources to pursue all the other objectives at the same time. Therefore, the firm must focus on where resources will be used most effectively. Generically, some objectives may be:
Get current users to use more
Get more people to buy product
Get product used for new purposes
Develop preference relative to other products or brands; and
Develop price insensitivity relative to other products or brands
Setting strategy. Once objectives have been set, a strategy for formulating these objectives can be made. Improving quality, for
example, might be achieved either by increased research and development, the use of higher quality materials, or by investing in new manufacturing technology. The most appropriate choice will depend on factors such as cost and effectiveness, but may also depend on
risk. There may be a new technology that, if it can be perfected, would represent a large breakthrough but also carries a risk that it will not work. A larger firm may be able to shoulder such a s risk but for a smaller firm, the risk may be prohibitive. Note that as a strategy is considered and potential complicatons arise, it may be necessary to reassess appropriate objectives.
Several criteria may be useful in evaluating a strategy. Some strategies may seem brilliant may, under stricter analysis, may be recognized as unrealistic. Strategies that take advantage of a firm‟s special abilities (e.g., pa tents, technology, or human resources) and are consistent with consumer perception of the brand are also more likely to be successful. A number of promotional tools are available—e.g., advertising, premiums, public relations, or distribution enhancement. For a review of this topic, seehttp://www.consumerpsychologist.com/Introduction.html . Tactics and implementation. Once a plan for the strategy has been made, decisions must be made on implementation. If a decision as
been made to position a product as a premium brand through advertising, specific ads must be developed and tested and appropriate media and advertising schedules should be resolved. When implementation begins, results need to be monitored. Some problems may be addressed with fine-tuning, but if the campaign does not seem to produce expected results, the strategy may need to be reconsidered.
In the longter term, consumer response—such as purchase rates and beliefs held about the brand —can be assessed in more detail. The next test is then whether this consumer response—such as improved attitudes—actually results in increased market share or higher
profits. Even a successful strategy must be frequently re-evaluated to address changing market conditions such as change in competitor strategies, costs of materials, or changes in consumer tastes. Consumer adoption of new food p roducts. Some food products have great potential for sales growth through expansion of the customer base. One way to spread new foods is through massive advertising. This strategy appears to have been used in marketing the Hot Pockets® convenience products.
Many foods also spread as some groups of consumers “imitate” others they see consuming them, and some are encouraged to try new foods based on word-of-mouth communication. For a discussion of the diffusion of innovation, seehttp://www.consumerpsychologist.com/cb_Diffusion_of_Innovation.html ). Levels of market development . Development efforts may center at several different levels. Producers of a commodity —e.g., Florida orange growers—may want to promote their food, hoping that preference will be developed relative to other food categories (e.g., apple juice or sodas) or to similar products from other regions. Alternatively, development efforts can focus on a branded product (e.g., Diet Coke ®), a brand (e.g., all Coca Cola ® branded products), or all brands owned by the same company (e.g., all beverages owned by the Coca Cola ® Company). More targeted development efforts may provide more specific results for a given product.
Production Costs, Demand, and Competition Influences on Prices. As the chart suggests, prices that farmers receive for their commodities and other products depend on supply and demand factors. The amount of output available from other farmers, from imports, or the extent to which other products represent good substitutes affect the supply side. Demand for the product can ultimately be traced back from the consumer through the value chain. Manufacturers will base their orders on expectations of demand. If demand is expected to be high, prices will tend to rise; if less demand is expected, prices are more likely to decrease.
Most retailers, with the exception of “giants” such as Wal -Mart, will tend to order through a wholesaler. The wholesaler must anticipate the demand from retailers and have stock on hand to meet this demand. Bargaining Power of Farmers. Farmers, who sell commodities in relatively small quantities, ordinarily have very little bargaining power. Since the same commodity from different farmers is considered identical, the farmer can in theory sell all his or her product at the market price but cannot sell at a higher price. In practice, however, many of today‟s commodi ties transactions take place electronically and/or through brokers. This means that there may not be reliable information about market prices available and that the buyer will have the upper hand in negotiations. The farmer could try to get bids from different buyers, but that will take a great deal of time away from the farmer‟s work of actually producing crops. Predictable and Less Predictable Market Changes. Farmers are very vulnerable to environmental change. Small changes in supply and/or demand can greatly affect the prices that are paid for commodities (where demand tends to be very inelastic) and for supplies needed. Some changes may be relatively predictable —e.g.,
Phased-in trade agreements. When trade agreements are signed, all markets are usually not completely opened immediately.
Producers are often given some time to adapt to the changes. Thus, farmers may be aware of a new source of competition that will be faced at some specified future time.
Long-term diet trends. Low carbohydrate diets have spread very quickly in recent times, but most other diet trends take
longer to grow. Consumers gradually reduced their consumption of some high fat foods over time, for example.
Trends in substitute products . New technological advances may allow the use of certain substitute products. For example,
after the approval of aspartame (NutraSweet ®), more and more consumers switched to sugar free soft drinks —very bad news for sugar and corn growers. However, not all consumers will get used to the new taste immediately, so the defection may be gradual.
Changes in cost structure a nd technology . The market prices of some farm inputs —such as petroleum—fluctuate, but for some
materials, there is a more definitive trend as production (supply) or demand change over time. Technology is now becoming available to assess the productivity of specific plot areas based on global positioning satellite (GPS). Since this makes those farmers who adopt the technology more productive, it can be expected to increase supply of affected crops and thus put downward pressure on crops. Because the technology is adopted gradually, the entire impact will not be immediate but can be anticipated over time. Less predictable changes. Some market factors are more difficult to predict. Since most commodities prices respond very strongly to supply conditions, the size of the current harvest will greatly affect prices. The harvest crop yield usually cannot be accurately predicted at the time when sowing has to be planned. Exchange rates between currencies also fluctuate dramatically. If the dollar increases in value relative to other currencies, American crops will become more expensive for people in other countries to buy (they have to spend more of their own currency to buy the dollars that must be used to pay American farmers) and imports will become more attractive for Americans (because the dollar now buys more abroad). Farm value. Farm value refers to the proportion of the total food costs paid by consumers that come back to the farmer. For some foods, such as bread, the farm value will be very low. Other ingredients are used in bread, too, but the farmer usually only gets about 5% of the retail bread price for the wheat supplied. The rest of the value is added through processing, manufacturing, distribution, and marketing. The farm value is higher for meat products.
The fact that parties other than the farmer are making money is not necessarily a bad thing. Other members of the value chain add steps that are valued by the consumer. In recent years, the farm value of many food products has decreased. Again, this is not necessarily unreasonable since consumers are demanding more services. The fact that consumers are willing to pay the supermarket more money for prepared foods, as opposed to the raw ingredients, does not mean that the farmer will be paid less. We can think of the trend toward consumers demanding more value added to the products as making the pie larger. The farmer will get a slice of fewer degrees, but because the pie is larger, the total area will remain unaffected. Other factors might, of course, influence farm value. When demand for a greater value added product is met, the demand for the farmer‟s ingredients may go up, leading to higher prices and benefitin g the farmer. Several factors affect farm value. Some are:
Degree of processing required . For foods that require more processing (such as the wheat that ultimately makes it into
products such as bread and pizza), more of the value has to be added after the farm. Thus, we expect farm value to be less.
Perishability . Perishable products require more expensive and less efficient transportation. It may also be necessary to add
extra processing or to maintain extra capacity perform the processing quickly. Lettuce has to be transported very quickly, often in air conditioned trucks. Shorter and less efficient channels must be used to get the product to the store in fresh condition.
Seasonality of supply . It may be necessary to add extra processing or to maintain extra capacity perform the processing of
perishable seasonal crops quickly. Canners must maintain capacity that can be used only during part of the year to be able to handle the large crop of peaches coming in at harvest time. There may not be any use for the canning plants during the rest of the year, so the total yearly cost has to be absorbed by the crops processed during a short period of time. Canned and frozen crops may be less attractive to consumers, reducing the value of the crop during off-season.
Seasonality of supply . A commodity disproportionately in demand at one time—such as turkeys whose sales are concentrated
during November and December—often require services such as freezing and/or storage, adding to costs.
Transportation costs. Products that must be transported for long distances, in small quantities, or are difficult to handle raise
costs.
Bulk-to-value ratio. In part based on transportation costs, bulkier products are more difficult to handle and store. Meat has
high value for its bulk but wheat does not. For corn, the cob and leaves carry little if any value. Trends vs. fluctuations. It is normal that prices, demand, or other variables will fluctuate —that is, go up and down in a seemingly random manner—over time in response to a large number of factors. On the other hand, some changes over time tend to show a consistent trend — that is, even if prices seem to vary, they may tend to go up over time.
In the above chart, prices fluctuate, but if we graph a trend line (based on a regression analysis of price as a function of time), we see that average prices tend to increase over time. It is important to recognize that a trend that has been experienced in the past will not necessarily continue. For example, consumption of eggs had been declining for some time, due to concerns about cholesterol, until the trend reversed, in large part because of the growing popularity of high-protein diets. Data with large fluctuations is described as “noisy.” That is, it is difficult to distinguish the genuine trend from the temp orary fluctuations because these fluctuations are relatively large. Below, we see examples of relatively “clean” (as represented by the heavy line) and relatively “noisy” (as represented by the dotted line) data:
A number of characteristics influence the evolution of prices, costs, consumption rates, or other phenomena. Some possibilities can be see in this chart:
Some changes are linear, suggesting that the change happens at a relatively consistent rate over time. Changes can also be non-linear — that is, they can happen at increasing or decreasing rates. For example, immigration rates and the proportion of Americans over age 65 are growing at exponential levels. Some trends go until a point and then level off —thus, the early higher rates of growth are no longer predictive of future trends. A clear case of this is the maturity phase of the product life cycle where a product has now been adopted by most of the consumers who will, leaving little opportunity for growth. Some trends will reverse themselves. For example, in the late 1990s, a number of people invested in ostriches, driving up the price. Ostrich meat was touted as offering a taste similar to red meat but with much lower fat content. Owners bred the ostriches hoping for greater profits from selling ostriches to others. When the stocks were large enough that it was time to try to actually sell the meat, however, the “bottom fell out” of the market, resulting in a sharp decline in value. Much the same thing happened in the Internet stock market during the 1990s. A special kind of trend involves seasonality. Turkey and cranberries are consumed disproportionately during November and December in the U.S. Prices of fresh peaches reach very high levels during the winter months, where much of the supply is imported, and drop dramatically during the summer months. It is possible to “partition” such seasonal effects from a long term trend:
When one adjusts for seasonal effects, this chart shows a consistent upward trend. Lags in response to market conditions. A free market economy is based on the idea that the buyers and sellers will respond to changes in the market. When it is no longer profitable to produce and sell the current quantity, sellers will want to cut back on production. When prices rise due to high levels of demand, seller will want to increase capacity to produce a greater quantity. In practice, however, adjusting takes place. If the price of beef goes up, it will take time to raise more cattle to be slaughtered. In the short run, the farmer may actually produce less because cattle are held back for breeding rather than being sold off for meat. When prices go down, the farmer has already invested in facilities and/or the current crop. Thus, it will take time to adjust production. Ironically, the adjustment phase may take so long, and too many farmers may “jump on the bandwagon,” that by the time the adjustment has taken place, the tren d may have reversed. For example, if farmers see an attractive market for almonds, they may grow more almond trees. By the time these trees are ready to yield, however, the price may have declined. Too many farmers may have grown too many trees, flooding the market. Many farmers may then rip up their trees and grow other commodities, forcing supply down and prices up, encouraging a new round of investments! It takes time to recognize that prices are consistently going up or down (as opposed to just fluctuating). Implementing the capacity change then takes time, and it may be necessary to secure a loan or other capital before the investment can be begun. It may take some time for prices to be felt at the different ends of the value chain or channel. For example, if the wholesale supply price of peanut butter goes up, peanut farmers who contracted in advance to sell at a given price may not feel the price change until it becomes time to negotiate for next year‟s contract.
“Real” vs. inflation-adjusted prices. Inflation is a reality. Over time, average prices tend to go up dramatically. Measures of inflation — such as the U.S. Consumer Price Index —are based on weighing the cost of a “basket” of goods. Different expenditures felt by a typical family—such as food, housing, medical care, and transportation —are each weighted in arriving at an estimate of overall price changes. Often, however, inflation rates vary dramatically between product categories. Some components of the economy —such as health care and real estate—have very high rates of inflation while the costs of many electronic products are actually declining. Changes in the prices of different agricultural products often vary considerably by category. To make price comparisons meaningful over time, we can adjust for inflation. If we set an arbitrary year to be our “index” year, we can more meaningfully compare economic data over time.
Food Market Development Background . Market development involves creating or expanding a market for new or existing products and/or increasing the value of these products. Few consumers today are aware of the prickly pear, however, but farmers who grow this cactus plant would like to market it as a way to decrease “bad,” low-density cholesterol without reducing “good,” high density cholesterol levels. Strategies, objectives, and the hierarchy of effects . The promotional activities needed for a given product will depend on factors such as its current stage in the product life cycle. For prickly pear growers, simply getting more people to know that their product exists will be a challenge. Once more people know, a significant challenge is going to get more people to actually try the product. This may be difficult to accomplish because of the high cost of the product and the vast number of choices of other products that consumers can consume. There is simply not enough time or money to try all. If a product category catches on, emphasis may then need to switch to brand differentiation and the firm may need to work on getting consumers to hold favorable beliefs about their brand. In later stages of the product life cycle, where most consumers‟ opinions have largely been set, temporary sales increases, usually through price pr omotions, may be the only realistic objective. The strategic planning process . In order to make good investment decisions with respect to how much to spend on marketing and how to allocate this spending among opportunities available (e.g., advertising and price promotions), it is useful to go through a strategic planning process. This process involves several steps, but these steps are not rigidly separated and it may be necessary to return to previous stages as new considerations come up.
Setting marketing objectives. The first step involves setting the most appropriate marketing objectives. These objectives need to be reasonably specific and manageable; thus, merely saying that the goal is to maximize profit is not enough. How will this be done? It is also
important to make priorities. A firm might like to reduce costs, improve quality, increase distribution channels, increase awareness, and improve consumer percpetion of the product at the same time. However, some of these objectives, such as reducing cost and improving quality at the same time, may not be compatible. The firm may also not have the resources to pursue all the other objectives at the same time. Therefore, the firm must focus on where resources will be used most effectively. Generically, some objectives may be:
Get current users to use more
Get more people to buy product
Get product used for new purposes
Develop preference relative to other products or brands; and
Develop price insensitivity relative to other products or brands
Setting strategy. Once objectives have been set, a strategy for formulating these objectives can be made. Improving quality, for
example, might be achieved either by increased research and development, the use of higher quality materials, or by investing in new manufacturing technology. The most appropriate choice will depend on factors such as cost and effectiveness, but may also depend on risk. There may be a new technology that, if it can be perfected, would represent a large breakthrough but also carries a risk that it will not work. A larger firm may be able to shoulder such a s risk but for a smaller firm, the risk may be prohibitive. Note that as a strategy is considered and potential complicatons arise, it may be necessary to reassess appropriate objectives.
Several criteria may be useful in evaluating a strategy. Some strategies may seem brilliant may, under stricter analysis, may be recognized as unrealistic. Strategies that take advantage of a firm‟s special abilities (e.g., patents, technology, or human resources) and are consistent with consumer perception of the brand are also more likely to be successful. A number of promotional tools are available—e.g., advertising, premiums, public relations, or distribution enhancement. For a review of this topic, seehttp://www.consumerpsychologist.com/Introduction.html . Tactics and implementation. Once a plan for the strategy has been made, decisions must be made on implementation. If a decision as
been made to position a product as a premium brand through advertising, specific ads must be developed and tested and appropriate media and advertising schedules should be resolved. When implementation begins, results need to be monitored. Some problems may be addressed with fine-tuning, but if the campaign does not seem to produce expected results, the strategy may need to be reconsidered.
In the longter term, consumer response—such as purchase rates and beliefs held about the brand —can be assessed in more detail. The next test is then whether this consumer response—such as improved attitudes—actually results in increased market share or higher profits. Even a successful strategy must be frequently re-evaluated to address changing market conditions such as change in competitor strategies, costs of materials, or changes in consumer tastes.
Consumer adoption of new food p roducts. Some food products have great potential for sales growth through expansion of the customer base. One way to spread new foods is through massive advertising. This strategy appears to have been used in marketing the Hot Pockets® convenience products.
Many foods also spread as some groups of consumers “imitate” others they see consuming them, and some are encouraged to try new foods based on word-of-mouth communication. For a discussion of the diffusion of innovation, Levels of market development . Development efforts may center at several different levels. Producers of a commodity —e.g., Florida orange growers—may want to promote their food, hoping that preference will be developed relative to other food categories (e.g., apple juice or sodas) or to similar products from other regions. Alternatively, development efforts can focus on a branded product (e.g., Diet Coke ®), a brand (e.g., all Coca Cola ® branded products), or all brands owned by the same company (e.g., all beverages owned by the Coca Cola ® Company). More targeted development efforts may provide more specific results for a given product.
Price and Competition in Food Markets Basic Economics. The notions of supply and demand are fundamental to economics. The general logic here is that consumers will be
willing to buy a larger quantity of goods at a lower price than they would at a higher price. As we will see, this assumption is sometimes violated, usually when consumers use price as a cue to quality and assume that a higher priced product is better. Similarly, sellers are generally willing to sell a larger quantity when a higher price is offered. Thus, we have the traditional supply and demand curves:
Several things are evident from this chart:
Each curve—supply and demand—indicates the quantity supplied or demanded at the prices offered. At a price of $4.00, for example, buyers would be willing buy about 85 units. However, at that price, only about 10 would be supplied.
Where the two curves intersect, the equilibrium, or market, price is found. The quantity supplied at that price is the same as the quantity demanded at that price—about $7.50 in this chart.
When the market price changes —because of a change in supply—the demand curve is not directly affected. If the price decreases, there will be an increase in quantity demanded but not a change in overall demand .
Supply and demand curves often have a curved —as opposed to straight line—shape since there is no reason why the same change in price—say, $1.00—will have the same impact at high or low prices. For example, if the price of heavy cream were reduced from $3.00 to $2.00 a pint, quantity demanded would increase. However, if heavy cream sells for an already low price of $1.00 per pint, reducing the price even further would have little effect. This product simply contains too many calories for consumers to consume more even if it were free.
As we will see in examining research on consumer response to price, real life demand is not always as smooth as it is portrayed in theoretical demand curves. For example, sharp changes may occur when certain “critical” price points are reached. Consider the following hypothetical quantities of cereal boxes demanded:
It is clear that the dramatic drop in quantity demanded as we go from $3.95 to $4.00 is likely not due so much to the small 5 cent increase in price as it is to our reaching a “critical” price of $4.00 that consumers are reluctant to pass. That is, suddenly when the price reaches $4.00, it appears as “expensive.” If we increase the price another 5 cents, the additional drop in quantity demanded is small. Price elasticity refers to the extent to which quantity demanded is affected by changes in the price. By definition % change in quantity demanded Elasticity = ________________________________ % change in price Research has found that at prices normally charged in supermarkets, the price elasticity appears to be around -2.0 for many different product categories. That is, if prices are raised by 1%, sales will tend to decline by 2%. Demand Curves. Total demand for a product results from adding the demand for each consumer. Some consumers will have high levels
of demand, or low elasticity, and others will be highly price elastic. As a practical matter, it is usually most convenient to consider total demand as the sum of demand from different segments. Here, again, certain groups of consumes will value the product more than others. For example, in the case of steak, followers of the Atkins diet will value the product highly. These consumers will buy large quantities even at high prices. Since they have already bought all they can eat anyway, they may not buy much more if prices are lowered. In contrast, those following a low fat diet may not buy much beef no matter how cheap it is. Certain consumers are very price sensitive. They will tend to buy whatever is cheapest —if beef is cheaper than chicken, they will buy beef, but they will not buy much beef if it is more expensive. Finally, the largest segment probably consists of consumers who are somewhat price sensitive. They will buy some beef at high prices, but they will buy increasingly more at lower prices.
Supply . In the short run, supply is determined by what is available. If there is a glut of beef, prices will come down, and prices will
increase if there is a shortage. In the long run, producers can adjust their production levels. Often, adjustments take a long time. To increase production of beef, you first have to raise stock. You may also have to build barns or acquire more land to hold the livestock. By the time production has been increased, prices may be on the way down. It may also be difficult to decrease production since a lot of resources have already been invested in production capacity. If prices of wheat go down, it may be difficult for a farmer to sell land that he or she no longer finds useful to plant. Costs come both in fixed and variable categories. Fixed costs are costs that are not affected by the quantity produced. The mortgage on
a farm costs the same regardless of how much is planted, and the loan payments on manufacturing equipment are the same regardless of how much it is used. Variable costs, in contrast, depend on the quantity produced . If a farmer produces less wheat, he or she will need to buy less seed. Some costs are in a gray area. Labor costs may or may not go down with decreased production, especiall y in the short run. Because fixed costs cannot be changed in the short run, firms may find it optimal to produce a product even though it will lose money. If variable costs, but not all fixed costs, are covered, the firm will lose more by not producing. Even if revenue is less than variable costs, farmers may be forced to produce due to pre-existing contracts. Changes in supply and demand. Supply may change due to changes in the market such as:
The size of the current year’s crop.
Changes in the population. As population increases, demand for certain products may change. Even if the overall population
is not affected, there may be large changes in the sizes of different segments. For example, U.S. population growth has been modest, but Asian immigration has increased dramatically, creating more demand for rice and pork.
Changes in income or wealth . During recessions, consumers tend to cut down on their spending. It is difficult to cut down
much on basic food products, but people may reduce consumption of luxuries and upscale brands.
Changes in tastes and p references. The U.S. population has grown more diverse and many “ethnic” fo ods have spread to other
groups. There is, for example, a large demand for Chinese and Mexican food among white Americans. This growth may happen at the expense of traditional foods such as potatoes and hamburgers.
Changes in the prices of substitutable products. If there is an abundant harvest of corn, the demand for sugar is going to
decline even if there is no change in sugar supply or the demand for sweeteners. Corn syrup can be substituted for sugar as a sweetener, so if this is more economical, fewer manufacturers will buy sugar. Future price expectations. If it is expected that a product will increase in time—e.g., if it is predicted that there will be a bad harvest next year—speculators may hold back inventory rather than selling it, thus decreasing supply.
Market/Clearing Prices. A market, or clearing, price is set when the market matches supply and demand. If the price is too low, more
quantity will be demanded than what is supplied, and the price will rise. If the price is too high, there will be a surplus and the price will decline. This clearing price allocates the product to those who value it the most (though not necessarily to those who “deserve” it). Macroeconomic Influences on Prices . A common concern in the U.S. and in many other countries is that food prices are too low. At
market prices, it is complained, farmers will not be able to make a profit and therefore run a danger of going out of business. Sometimes, governments will attempt interventions to raise prices or otherwise af fect farmers‟ revenue. One method is a subsidy, or “negative tax” whereby farmers are given extra payments from the government. For example, at one time, certain chicken growers, for every dollar worth of meat they sold, received a subsidy of $1.01. Thus, the effective price paid to the farmer was $2.01. In this case, of course, this extra price was not passed on down the channel. As an alternative, a government may buy up product at the open market, thus increasing demand, until prices hit a desired level. Alternatively, supply can be curtailed by quotas —e.g., only certain farmers are allowed to grow a certain amount of tobacco, and there are limits on how much of certain products (e.g., sugar) can be imported. In certain countries and in war time, certain products may be rationed. Here, no matter how much someone is willing to pay, he or she can only buy a limited amount of scarce goods. Price controls, limiting the maximum that can be charged for a product, can also be imposed, but these have the very serious consequence that production will decrease —it will not be profitable to produce as much product as is demanded at the artificially low price. Shortages are then likely to occur. Consumer Response to Price. Both manufacturers and retailers make decisions as to optimal prices to charge consumers. Ultimate price
decisions in the United States are, of course, made by the retailer, but manufacturers make promotional and other decisions that influence retailer decisions. Ways to Change Prices. One obvious way to increase the price of a product is to increase the “sticker” price— the price that is actually
charged for a container. Consumers, however, often react strongly to such obvious price increases —especially if competitors have not yet raised their prices, too. Other methods have therefore been devised. To understand how these methods work, first consider the idea that Resources Given Up Price = ----------------------------------Value Received
Increasing the sticker price changes the numerator —what the consumer sacrifices. Other approaches focus on the denominator. One approach involves reducing the quantity provided in a container. Instead of raising a sticker price of a can of coffee from $3.49, the content can be reduced from, say, 11 to 9 ounces. Alternatively, one can change quality . Candy makers, when the prices of chocolate went up, used less chocolate and more “gooey” stuff. Finally, terms and service can be changed. This usually does not happen in consumer food products, where this is not relevant. However, a seed or fertilizer store might stop giving farmers ninety interest free days to pay for purchases. Price Discrimination. As we saw in our examination of components of the demand curve, some consumers value a product more than
others and are willing to pay more. Marketers then are interested in getting each customer to pay as much as he or she is willing. It is infeasible to ask consumers how much they value a product and then charge that amount, but sneaky ways have been devised to charge certain customers more. In explicit price discriminations, only certain customers are eligible for a lower price —e.g., student or senior citizen discounts. More common is implicit price discrimination. Anyone who wants to can cut a coupon out of the newspaper, but not all customers bother. Products can be put on sale periodically. Those consumers who care more about saving money than getting their preferred brand will switch, but others will pay full price. Consumer Price Response and Awareness. An interesting study showed that most consumers, in shopping for frequently purchased
product categories, did not do much price comparison. Consumers, on the average, inspected only 1.2 items before making a selection, spending only twelve seconds before moving on. Only 21.6% claimed to have compared prices, and only 55.6% answered within 5% accuracy when asked about the price of the product they had just picked up. This seems to suggest that consumers to not pay much attention to prices. On the other hand, we know from scanner data that consumers respond a great deal to price changes. It appears that rather than looking at prices per se on every shopping occasion, consumers may check prices only periodically (say, every ten shopping times) or rely on cues in the environment —e.g., buy whatever brand is on sale. A study found that many consumers did, indeed, pay attention only to the fact that a product was on sale (the promotion “signal”). These consumers would select a brand regardless of whether the actual discount were small (e.g., 2%) or large —say 25%. Odd-even Pricing. Most supermarkets tend to use the so-called “odd” prices—those ending in .99 or .95—rather than round dollar
figures. Many believe that this practice is intended to make prices seem lower than they are. For example, $2.99 could be seen as “two dollars plus „change‟” rather than “almost three dollars.” Research shows that consumers are slightly more likely to purchase at these odd prices, but the effect is not large. Odd prices may send a signal that a product is a “bargain.” This may be good for some low involvement products such as flour, but it may be bad for premium quality brands where an even price may signal higher quality. A premium wine may therefore be better priced at $28.00 than at $27.99. A study conducted in the 1970s showed that restaurant patrons at that time responded more favorably to odd prices when the price was less than $7.00 but better to even prices when the price was higher. Thus, the price of $4.99 should be chosen instead of $5.00 but $11.00 should be chosen over $10.99. (Adjusting for inflation, these figures should probably be roughly doubled toda y). Odd prices, by the way, are believed not to have been invented to deceive consumers. Early on, there was a concern that dishonest store clerks might not ring up purchases for customers who paid the exact amount due and did not ask for receipt s. If the clerk had to give the customer change, he or she had to ring up the purchase to do so, however. Estimating Consumer Willingness to Pay. It is extremely difficult to estimate how much a consumer will be willing to pay for a new
product. Focus groups and questionnaires asking this question will generally not provide useful answers. People have difficulty determining how they would actually behave in a hypothetical situation. What they think and what they would actually do often do not “jive.” In practice, one of the few viable methods is experimentation —e.g., selling a product in certain test stores at different prices and seeing responses. One can test different price levels in a laboratory where consumers are asked to shop for a basket of goods, but this is a bit farther removed from reality. Conjoint analysis, a method where consumers rate a number of combinations of product attributes, including price (e.g., healthy, $2.99, poor taste vs. unhealthy, $3.99, superior taste) may be used. Here, the consumer rates the overall combination—how good is this offering?—and a statistical technique is then used to “decompose” the effects of the variables tested, including price. For existing product categories, it may also be possible to develop computer models based on scanner data and other market information. Competition in Agricultural Markets. Farmers generally face commodities markets. A product produced by one farmer is considered
essentially equivalent to a product of the same grade produced by another. Farmers are thus price-takers. They can sell all they can produce at the market price, but they have no individual bargaining power to raise prices. In the consumer goods markets, markets can be either competitive, monopolistically competitive, or oligopolistic. In an oligopoly, a few large manufacturers dominate. For example, in the cola drinks market, Coke and Pepsi have most of the power. Each will influence the market a great deal. If one raises prices, the other can raise prices, too, and not worry too much about losing market share. In categories where there are several large competitors, the market structure is monopolistic competition. There are, for example, numerous manufacturers of ice cream. If one lowers its price or introduces a new product, this may significantly affect sales of other brands. Certain large brands still have a great deal of bargaining power, however. Dreyers, for example, can charge a lot more for its ice-cream than a lesser known brand based on its brand image.
How to make a good presentation:
Think about the presentation beforehand. It is short-changing the organisers of the event and your audience if you only think about what you're going to say the day before or while travelling to the event. If necessary, clarify with the organisers exactly what is required of you and what facilities you will require.
Do use PowerPoint if the facilities are available. Although some speakers seem to have taken an aversion to PowerPoint, it is so convenient and ensures that your presentation has a clear structure and something for your listeners to take away.
Be very clear about how much time you have - and stick to that time in preparing and delivering your presentation. It's very difficult to 'cut' a PowerPoint presentation at the event itself, so it's a great mistake to run out of time. Most presenters prepare too much material; but nobody ever complains that a presentation was too short (it always allows more time for questions).
Be very clear about your key message - and ensure that everything in your presentation is both consistent with, and suppportive of, that key message. You should be able to articulate t he message in a phrase or a sentence and indeed you might want to use that phrase or sentence in one of your first slides, or one of your last, or even both.
E-mail your presentation to the event organisers in advance . Ask them to load it onto a laptop, run it through, check that it looks fine, and confirm that with you. Then you don't have to worry about the technology when you arrive at the venue; you can concentrate on the delivery of your material. Also it enables the event's organisers to run off copies of your slides, so that they are available to them in good time.
Make copies of your slides available . It is a matter of preference whether you do this at the beg inning of your presentation or at the end. If your listeners have copies at the beginning, they can take notes simply by annotating the slides, instead of having to note down all the information on the slides. On the other hand, you might feel that, if they can see in advance the slides you are going to use, you lose the element of control or surprise. It might depend on the content of the presentation: if you are going to show detailed tables or graphs with lots of figures, your audience will probably find it easier to have a copy on their lap. It might depend on the circumstances of the presentation: if there is a large auddience, people at the back may not be able to see the screen clearly and would really appreciate having copies of the slides.
Ensure that the slides look good . This does not necessarily mean that they look flashy - although suitable pictures or illustrations are very effective - but it does mean using a consistent format and typeface and readable colours plus giving each slide the logo of the organisation you are representing and a chronological number.
The first slide should announce the title of your presentation , the event and date, and your na me and position. This may seem terribly obvious, but many speakers miss off some of this basic information and then weeks later listeners (or their colleagues back at the organisation) are not clear who made the presentation or when. You should try to make the title catchy, so that you immediately have the interest of your audience. A challenging question works well - for instance, a presentation on the global economic cr isis might ask: "Is this the end of capitalism as we've known it?" Or a play on words works too - for example, a presentation on next generation broadband could be titled "The Slow Arrival Of Fast Broadband" .
The second slide should seize the attention of your audience for your presentation. It could be the central proposition of your presentation or a conventional wisdom that you wish to challenge or a relevant or witty quote from a leader in your field. If it is amusing or controversial or both, so much the better.
The third slide should set out the structure of your presentation . The default structure should consist of three themes that you intend to examine. For a very short presentation, there might only be time for two; if you want to look at more than five areas, write a book instead.
Each theme should be the subject of a small number of slides . Again, a good working assumption is that three slides for each theme is about right. Less than two and it isn't substantial enough to be a separate theme; more than five and it should probably be broken up into two themes.
Each slide should have a clear heading . A question is often a good way of winning attention - but, in that case, make sure you answer the question in the body of the slide.
Each slide should normally contain around 25-35 words , unless it is a quote ( when you might use more) or contains an illustration (when you will probably use less). Too many words and your audience will have trouble reading the material; too few words and you're likely to be flashing through the slides and spending too much time clicking the mouse.
Each bullet point should consist of an intelligible phrase , rather than merely a word or two that is meaningless on its own or conversely a complete sentence that is better delivered orally. So, for instance, do use "Focus on profitable and growing markets" rather than simply "Focus" or "Markets" or "It is necessary to focus on th ose markets which are profitable and growing rather than those which are loss-making and declining" . Consider this test: your slides should make sense and be useful to someone who was not present at your presentation.
Make appropriate use of pictures . It's a good idea to break up text with illustrations and it is true that a picture is worth a thousand words.
The last slide should set out all appropriate contact details : certainly e-mail address and possibly snail mail address, the web site of your organisation, and any personal website or weblog if you have one
10 effective tips to make powerpoint presentation:
1. Write a script. A little planning goes a long way. Most presentations are written in PowerPoint (or some other presentation package) without any sort of rhyme or reason.
That‘s bass-ackwards. Since the point of your slides is to illustrate and expand what you are going to say to your audience. You should know what you intend to say and then figure out how to visualize it. Unless you are an expert at improvising, make sure you write out or at least outline your presentation before trying to put together slides.
And make sure your script follows good storytelling conventions: give it a beginning, middle, and end; have a clear arc that builds towards some sort of climax; make your audience appreciate each slide but be
anxious to find out what‘s next; and when possible, always leave ‗em wanting more.
2. One thing at a time, please. At any given moment, what should be on the screen is the thing you‘re talking about. Our audience will almost instantly read every slide as soon as it‘s displayed; if you have the next four points you plan to make up there, they‘ll be three steps ahead of you, waiting for you to catch up rather than listening with interest to the point you‘re making. Plan your presentation so just one new point is displayed at any given moment. Bullet points can be revealed one at a time as you reach them. Charts can be put on the next slide to be referenced when you get to
the data the chart displays. Your job as presenter is to control the flow of information so that you and your audience stay in sync.
3. No paragraphs. Where most presentations fail is that their authors, convinced they are producing some kind of stand-alone document, put everything they want to say onto their slides, in great big chunky blocks of text.
Congratulations. You‘ve just killed a roomful of people. Cause of death: terminal boredom poisoning. Your slides are the illustrations for your presentation, not the presentation itself. They should underline and reinforce what you‘re saying as you give your presentation — save the paragraphs of text for your
script. PowerPoint and other presentation software have functions to display notes onto the presenter‘s scr een that do not get sent to the projector, or you can use notecards, a separate word processor document, or your memory. Just don‘t put it on the screen – and for goodness‘ sake, if you do for some reason put it on the screen, don‘t stand with your back to your audience and read it from the screen!
4. Pay attention to design. PowerPoint and other presentation packages offer all sorts of ways to add visual ―flash‖ to your slides: fades, swipes, flashing text, and other annoyances are all too easy to insert with a few mouse clicks. Avoid the temptation to dress up your pages with cheesy effects and focus instead on simple design basics:
Use a sans serif font for body text. Sans serifs like Arial, Helvetica, or Calibri tend to be the easiest to read on screens.
Use decorative fonts only for slide headers, and then only if they’re easy to read. Decorative fonts – calligraphy, German blackface, futuristic, psychotic handwriting, flowers, art nouveau, etc. – are hard to
read and should be reserved only for large headlines at the top of the page. Better yet, stick to a classy serif font like Georgia or Baskerville.
Put dark text on a light background. Again, this is easiest to read. If you must use a dark background – for instance, if your company uses a standard template with a dark background – make sure your text is
quite light (white, cream, light grey, or pastels) and maybe bump the font size up two or three notches.
– it will look better and be easier to follow. Align text left or right. Centered text is harder to read and looks amateurish. Line up all your text to a right-hand or left-hand baseline
Avoid clutter. A headline, a few bullet points, maybe an image – anything more than that and you risk losing your audience as they sort it all out.
5. Use images sparingly There are two schools of thought about images in presentations. Some say they add visual interest and keep audiences engaged; others say images are an unnecessary distraction.
Both arguments have some merit, so in this case the best option is to split the difference: use images only when they add important information or make an abstract point more concrete.
While we‘re on the subject, absolutely do not use PowerPoint‘s built -in clipart. Anything from Office 2003 and earlier has been seen by everyone in your audience a thousand times – they‘ve become tired, usedup clichés, and I hopefully don‘t need to tell you to avoid tired, used -up clichés in your presentations. Office 2007 and non-Office programs have some clipart that isn‘t so familiar (though it will be, and soon) but by now, the entire concept of clipart has about run its course – it just doesn‘t feel fresh and new anymore.
6. Think outside the screen. Remember, the slides on the screen are only part of the presentation – and not the main part. Even though you‘re liable to be presenting in a darkened room, give some thought to your own presentation manner –
how you hold yourself, what you wear, how you move around the room.You are the focus when you‘re presenting, no matter how interesting your slides are.
7. Have a hook. Like the best writing, the best presentation shook their audiences early and then reel them in. Open with something surprising or intriguing, something that will get your audience to sit up and take notice. The
most powerf ul hooks are often those that appeal directly to your audience‘s emotions – offer them something awesome or, if it‘s appropriate, scare the pants off of them. The rest of your presentation, then, will be
effectively your promise to make the awesome thing happen, or the scary thingnot happen.
8. Ask questions. Questions arouse interest, pique curiosity, and engage audiences. So ask a lot of them. Build tension by posing a question and letting your audience stew a moment before moving to the next slide with the answer.
Quiz their knowledge and then show them how little they know. If appropriate, engage in a little question-and-answer with your audience, with you asking the questions.
9. Modulate, modulate, modulate. Especially when you‘ve done a presentation before, it can be easy to fall into a drone, going on and on and on and on and on with only minimal changes to your inflection. Always speak as if you were speaking to throughs. If you still can‘t a friend, not as if you are reading off of index cards (even if you are). If keeping up a lively and personable tone of voice is difficult for you when presenting, do a couple of practice runget it right and presentations are a big part of your job, take a public speaking course or join Toastmasters.
10. Break the rules. As with everything else, there are times when each of these rules – or any other rule you know – won‘t apply. If you know there‘s a good reason to break a rule, go ahead and do it. Rule breaking is perfectly
acceptable behavior – it‘s ignoring the rules or breaking them because you just don‘t know any better that leads to shoddy boring presentations that lead to boredom, depression, psychopathic breaks, and
eventually death. And you don‘t want that, do you?
Market Research technique: Primary vs. secondary research. There are two kinds of market research: Primary research refers to the research that a firm conducts for its own needs (e.g., focus groups, surveys, interviews, or observation) while secondary research involves finding information compiled
by someone else. In general, secondary research is less expensive and is faster to conduct, but it may not answer the specific questions the firm seeks to have answered (e.g., how do consumers perceive our product?), and its reliability may be in question. Secondary sources. A number of secondary sources of country information are available. One of the most convenient sources is an
almanac, containing a great deal of country information. Almanacs can typically be bought for $10.00 or less. The U.S. government also publishes a guide to each country, and the handbook International Business Information: How to Find It, How to Use It(HF 54.5.P33 [1998] in the Reference Department of the Gelman Library), provides leads on numerous sources by topic. Stat-USA, a database compiled by the U.S. Department of Commerce and available through the Gelman Library (you can access it through the “Links” section of my website), contains a great deal of statistical information online. Excellent full text searchable indices to periodicals include Lexis-Nexis and RDS Business and Industry, also available through Gelman. Several experts may be available. Anthropologists and economists in universities may have built up a great deal of knowledge and may be available for consulting. Consultants specializing in various regions or industries are typically considerably more expensive. One should
be careful about relying on the opinions of expatriates (whose views may be biased or outdated) or one‟s own experience (which may relate to only part of a country or a certain subsegment) and may also suffer from the limitation of being a sample of size 1. Hard vs. soft data. “Hard” data refers to relatively quantifiable measures such as a country‟s GDP, number of telephones per thousand
residents, and birth rates (although even these supposedly “objective” factors may be subject to some controversy due to diff ering definitions and measurement approaches across countries). In contrast, “soft” data refers to more subjective issues such as country history or culture. It should be noted that while the “hard” data is often more convenient and seemingly objective, the “soft” data is frequently as important, if not more so, in understanding a market. Data reliability. The accuracy and objectivity of data depend on several factors. One significant one is the motivation of the entity that
releases it. For example, some countries may want to exaggerate their citizen s‟ literacy rates owing to national pride, and an organization promoting economic development may paint an overly rosy picture in order to attract investment. Some data may be dated (e.g., a census may be conducted rarely in some regions), and some countries may lack the ability to collect data (it is difficult to reach people in the interior regions of Latin America, for example). Differences in how constructs are defined in different countries (e.g., is military personnel counted in people who are employed?) may make figures of different jurisdictions non-comparable. Cost of data. Much government data, or data released by organizations such as the World Bank or the United Nations, is free or
inexpensive, while consultants may charge very high rates. Issues in primary research. Cultural factors often influence how people respond to research. While Americans are used to market
research and tend to find this relatively un-threatening, consumers in other countries may fear that the data will be reported to the government, and may thus not give accurate responses. In some cultures, criticism or confrontatio n are considered rude, so consumers may not respond honestly when they dislike a product. Technology such as scanner data is not as widely available outside the United States. Local customs and geography may make it difficult to interview desired respondents; for example, in some countries, women may not be allowed to talk to strangers.
International Distribution Promotional tools. Numerous tools can be used to influence consumer purchases:
Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the Internet. Price promotions—products are being made available temporarily as at a lower price, or some premium (e.g., toothbrush with
a package of toothpaste) is being offered for free.
Sponsorships
Point-of-purchase—the manufacturer pays for extra display space in the store or puts a coupon right by the product
Other method of getting the consumer’s attention—all the Gap stores in France may benefit from the prominence of the new
store located on the Champs-Elysees. Promotional objectives. Promotional objectives involve the question of what the firm hopes to achieve with a campaign —“increasing
profits” is too vague an objective, since this has to be achieved through some intermediate outcome (such as increasing market share, which in turn is achieved by some change in consumers which cause them to buy more). Some common objectives that firms may hold:
Awareness. Many French consumers do not know that the Gap even exists, so they cannot decide to go shopping there. This
objective is often achieved through advertising, but could also be achieved through favorable point-of-purchase displays. Note that since advertising and promotional stimuli are often afforded very little attention by consumers, potential buyers may have to be exposed to the promotional stimulus numerous times before it “registers.”
Trial. Even when consumers know that a product exists and could possibly satisfy some of their desires, it may take a while
before they get around to trying the product—especially when there are so many other products that compete for their attention and wallets. Thus, the next step is often to try get consumer to try the product at least once, with the hope that they will make repeat purchases. Coupons are often an effective way of achieving trial, but these are illegal in some countries and in some others, the infrastructure to readily accept coupons (e.g., clearing houses) does not exist. Continued advertising and point-of-purchase displays may be effective. Although Coca Cola is widely known in China, a large part of the population has not yet tried the product.
Attitude toward the product. A high percentage of people in the U.S. and Europe has tried Coca Cola, so a more reasonable
objective is to get people to believe positive things about the product—e.g., that it has a superior taste and is better than generics or store brands. This is often achieved through advertising.
Temporary sales increases. For mature products and categories, attitudes may be fairly well established and not subject to
cost-effective change. Thus, it may be more useful to work on getting temporary increases in sales (which are likely to go away the incentives are removed). In the U.S. and Japan, for example, fast food restaurants may run temporary price
promotions to get people to eat out more or switch from competitors, but when these promotions end, sales are likely to move back down again (in developing countries, in contrast, trial may be a more appropriate objective in this category). Note that in new or emerging markets, the first objectives are more likely to be useful while, for established products, the latter objectives may be more useful in mature markets such as Japan, the U.S., and Western Europe. Constraints on Global Communications Strategies. Although firms that seek standardized positions may seek globally unified campaigns,
there are several constraints:
Language barriers: The advertising will have to be translated, not just into the generic language category (e.g., Portuguese)
but also into the specific version spoken in the region (e.g., Brazilian Portuguese). (Occasionally, foreign language ads are deliberately run to add mystique to a product, but this is the exception rather than the rule). Cultural barriers. Subtle cultural differences may make an ad that tested well in one country unsuitable in another —e.g., an ad that featured a man walking in to join his wife in the bathroom was considered an inappropriate invasion in Japan. Symbolism often differs between cultures, and humor, which is based on the contrast to people‟s experiences, tends not to travel well. Values also tend to differ between cultures —in the U.S. and Australia, excelling above the group is often desirable, while in Japan, “The nail that sticks out gets hammered down.” In the U.S., “The early bird gets the worm” while in China “The first bird in the flock gets shot down.” Local attitudes toward advertising. People in some countries are more receptive to advertising than others. While advertising
is accepted as a fact of life in the U.S., some Europeans find it too crass and commercial.
Media infrastructure. Cable TV is not well developed in some countries and regions, and not all media in all countries accept
advertising. Consumer media habits also differ dramatically; newspapers appear to have a higher reach than television and radio in parts of Latin America.
Advertising regulations. Countries often have arbitrary rules on what can be advertised and what can be claimed.
Comparative advertising is banned almost everywhere outside the U.S. Holland requires that a toothbrush be displayed in advertisements for sweets, and some countries require that advertising to be shown there be produced in the country. Some cultural dimensions:
Directness vs. indirectness: U.S. advertising tends to emphasize directly why someone would benefit from buying the
product. This, however, is considered too pushy for Japanese consumers, where it is felt to be arrogant of the seller to presume to know what the consumer would like.
Comparison: Comparative advertising is banned in most countries and would probably be very counterproductive, as an
insulting instance of confrontation and bragging, in Asia even if it were allowed. In the U.S., comparison advertising has proven somewhat effective (although its implementation is tricky) as a way to persuade consumers what to buy.
Humor . Although humor is a relatively universal phenomenon, what is considered funny between countries differs greatly, so
pre-testing is essential. Gender roles . A study found that women in U.S. advertising tended to be shown in more traditional roles in the U.S. than in Europe or Australia. On the other hand, some countries are even more traditional —e.g., a Japanese ad that claimed a camera to be “so simple that even a woman can use it” was not found to be unusually insulting. Explicitness. Europeans tend to allow for considerably more explicit advertisements, often with sexual overtones, than
Americans.
Sophistication. Europeans, particularly the French, demand considerably more sophistication than Americans who may react
more favorably to emotional appeals—e.g., an ad showing a mentally retarded young man succeeding in a job at McDonald‟s was very favorably received in the U.S. but was booed at the Cannes film festival in France. Popular vs. traditional culture. U.S. ads tend to employ contemporary, popular culture, often including current music while those in more traditional cultures tend to refer more to classical culture. Information content vs. fluff . American ads contain a great deal of “puffery,” which was found to be very ineffective in
Eastern European countries because it resembled communist propaganda too much. The Eastern European consumers instead wanted hard, cold facts. Advertising standardization. Issues surrounding advertising standardization tend to parallel issues surrounding product and positioning standardization. On the plus side, economies of scale are achieved, a consistent image can be established across markets , creative talent can be utilized across markets, and good ideas can be transplanted from one market to others. On the down side, cultural differences, peculiar country regulations, and differences in product life cycle stages make this approach difficult. Further, local advertising professionals may resist campaigns imposed from the outside—sometimes with good reasons and sometimes merely to preserve their own
creative autonomy. Legal issues. Countries differ in their regulations of advertising, and some products are banned from advertising on certain media (large
supermarket chains are not allowed to advertise on TV in France, for example). Other forms of promotion may also be banned or regulated. In some European countries, for example, it is illegal to price discriminate between consumers, and thus coupons are banned and in some, it is illegal to offer products on sale outside a very narrow seasonal and percentage range.
