Accounting and Finance Foundations

This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensee. Saylor URL: http://www.saylor.org/books Saylor.org 1 Preface Principles of Marketing teaches the experience and process of actually doing marketing—not just the vocabulary. It carries five dominant themes throughout in order to expose students to marketing in today’s environment: 1. Service-dominant logic—This textbook employs the term “offering” instead of the more traditional first P—product. That is because consumers don’t sacrifice value when alternating between a product and a service. They are evaluating the entire experience, whether they interact with a product, a service, or a combination. So the fundamental focus is providing value throughout the value chain, whether that value chain encompasses a product, a service, or both. 2. Sustainability—Increasingly, companies are interested in their impact on their local community as well as on the overall environment. This is often referred to as the “triple bottom line” of financial, social, and environment performance. 3. Ethics and social responsibility—Following on the sustainability notion is the broader importance of ethics and social responsibility in creating successful organizations. The authors make consistent references to ethical situations throughout chapter coverage, and end-of-chapter material in most chapters will encompass ethical situations. 4. Global coverage—Whether it is today’s price of gasoline, the current U.S. presidential race, or midwestern U.S. farming, almost every industry and company needs strong global awareness. And today’s marketing professionals must understand the world in which they and their companies operate. 5. Metrics—Firms today have the potential to gather more information than ever before about their current and potential customers. That information gathering can be costly, but it can also be very revealing. With the potential to capture so much more detail about micro transactions, firms should now be more able to answer, “Was this marketing strategy really worth it?” and “What is the marketing ROI?” and finally, “What is this customer or set of customers worth to us over their lifetime?” Saylor URL: http://www.saylor.org/books Saylor.org 2 Chapter 1 What Is Marketing? What makes a business idea work? Does it only take money? Why are some products a huge success and similar products a dismal failure? How was Apple, a computer company, able to create and launch the wildly successful iPod, yet Microsoft’s first foray into MP3 players was a total disaster? If the size of the company and the money behind a product’s launch were the difference, Microsoft would have won. But for Microsoft to have won, it would have needed something it’s not had in a while—good marketing so it can produce and sell products that consumers want. So how does marketing get done? 1.1 Defining Marketing LEARNING OBJECTIVE 1. Define marketing and outline its components. Marketing is defined by the American Marketing Association as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” [1] If you read the definition closely, you see that there are four activities, or components, of marketing: • Creating. The process of collaborating with suppliers and customers to create offerings that have value. • Communicating. Broadly, describing those offerings, as well as learning from customers. • Delivering. Getting those offerings to the consumer in a way that optimizes value. • Exchanging. Trading value for those offerings. Saylor URL: http://www.saylor.org/books Saylor.org 3 The traditional way of viewing the components of marketing is via the four Ps: 1. Product. Goods and services (creating offerings). 2. Promotion. Communication. 3. Place. Getting the product to a point at which the customer can purchase it (delivering). 4. Price. The monetary amount charged for the product (exchange). Introduced in the early 1950s, the four Ps were called the marketing mix, meaning that a marketing plan is a mix of these four components. If the four Ps are the same as creating, communicating, delivering, and exchanging, you might be wondering why there was a change. The answer is that they are not exactly the same. Product, price, place, and promotion are nouns. As such, these words fail to capture all the activities of marketing. For example, exchanging requires mechanisms for a transaction, which consist of more than simply a price or place. Exchanging requires, among other things, the transfer of ownership. For example, when you buy a car, you sign documents that transfer the car’s title from the seller to you. That’s part of the exchange process. Even the term product, which seems pretty obvious, is limited. Does the product include services that come with your new car purchase (such as free maintenance for a certain period of time on some models)? Or does the product mean only the car itself? Finally, none of the four Ps describes particularly well what marketing people do. However, one of the goals of this book is to focus on exactly what it is that marketing professionals do. Value Value is at the center of everything marketing does (Figure 1.1). What does value mean? Saylor URL: http://www.saylor.org/books Saylor.org 4 Figure 1.1 Marketing is composed of four activities centered on customer value: creating, communicating, delivering, and exchanging value. When we use the term value, we mean the benefits buyers receive that meet their needs. In other words, value is what the customer gets by purchasing and consuming a company’s offering. So, although the offering is created by the company, the value is determined by the customer. Furthermore, our goal as marketers is to create a profitable exchange for consumers. By profitable, we mean that the consumer’s personal value equation is positive. The personal value equation is value = benefits received – [price + hassle] Hassle is the time and effort the consumer puts into the shopping process. The equation is a personal one because how each consumer judges the benefits of a product will vary, as will the time and effort he or she puts into shopping. Value, then, varies for each consumer. One way to think of value is to think of a meal in a restaurant. If you and three friends go to a restaurant and order the same dish, each of you will like it more or less depending on your own personal tastes. Yet the dish was exactly the same, priced the same, and served exactly the same way. Because your tastes Saylor URL: http://www.saylor.org/books Saylor.org 5 varied, the benefits you received varied. Therefore the value varied for each of you. That’s why we call it a personal value equation. Value varies from customer to customer based on each customer’s needs. The marketing concept, a philosophy underlying all that marketers do, requires that marketers seek to satisfy customer wants and needs. Firms operating with that philosophy are said to be market oriented. At the same time, market- oriented firms recognize that exchange must be profitable for the company to be successful. A marketing orientation is not an excuse to fail to make profit. Firms don’t always embrace the marketing concept and a market orientation. Beginning with the Industrial Revolution in the late 1800s, companies were production oriented. They believed that the best way to compete was through product innovation and by reducing production costs. In other words, companies thought that good products would sell themselves. Perhaps the best example of such a product was Henry Ford’s Model A automobile, the first product of his production line innovation. Ford’s production line made the automobile cheap and affordable for just about everyone. The production era lasted until the 1920s, when production-capacity growth began to outpace demand growth and new strategies were called for. From the 1920s until after World War II, companies tended to be selling oriented, meaning they believed it was necessary to push their products by heavily emphasizing advertising and selling. Consumers during the Great Depression and World War II did not have as much money, so the competition for their available dollars was stiff. The result was this push approach during the selling era. In the post–World War II environment, demand for goods increased as the economy soared. Some products, limited in supply during World War II, were now plentiful to the point of surplus. Consumers had many choices available to them, so companies had to find new ways to compete. During this time, the marketing concept was developed, and from about 1950 to 1990, businesses operated in the marketing era. Saylor URL: http://www.saylor.org/books Saylor.org 6 So what era would you say we’re in now? Some call it the value era: a time when companies emphasize creating value for customers. Is that really different from the marketing era, in which the emphasis was on fulfilling the marketing concept? Maybe not. Others call today’s business environment the one-to- one era, meaning that the way to compete is to build relationships with customers one at a time and seek to serve each customer’s needs individually. Yet is that substantially different from the marketing concept? Still others argue that this is the time of service-dominant logic and that we are in the service- dominant logic era. Service-dominant logic is an approach to business that recognizes that consumers want value no matter how it is delivered, whether it’s via a product, a service, or a combination of the two. Although there is merit in this belief, there is also merit to the value approach and the one-to-one approach. As you will see throughout this book, all three are intertwined. Perhaps, then, the name for this era has yet to be devised. Whatever era we’re in now, most historians would agree that defining and labeling it is difficult. Value and one-to-one are both natural extensions of the marketing concept, so we may still be in the marketing era. To make matters more confusing, not all companies adopt the philosophy of the era. For example, in the 1800s Singer and National Cash Register adopted strategies rooted in sales, so they operated in the selling era forty years before it existed. Some companies are still in the selling era. Many consider automobile manufacturers to be in the trouble they are in because they work too hard to sell or push product and not hard enough on delivering value. Creating Offerings That Have Value Marketing creates those goods and services that the company offers at a price to its customers or clients. That entire bundle consisting of the tangible good, the intangible service, and the price is the company’s offering. When you compare one car to another, for example, you can evaluate each of these dimensions—the tangible, the intangible, and the price—separately. However, you can’t buy one Saylor URL: http://www.saylor.org/books Saylor.org 7 manufacturer’s car, another manufacturer’s service, and a third manufacturer’s price when you actually make a choice. Together, the three make up a single firm’s offer. Marketing people do not create the offering alone. For example, when the iPhone was created, Apple’s engineers were also involved in its design. Apple’s financial personnel had to review the costs of producing the offering and provide input on how it should be priced. Apple’s operations group needed to evaluate the manufacturing requirements the iPhone would need. The company’s logistics managers had to evaluate the cost and timing of getting the offering to retailers and consumers. Apple’s dealers also likely provided input regarding the iPhone’s service policies and warranty structure. Marketing, however, has the biggest responsibility because it is marketing’s responsibility to ensure that the new phone delivers value. Creating and managing offerings will be the focus of Chapter 5 "Market Segmenting, Targeting, and Positioning" and Chapter 6 "Creating Offerings" in this book. Communicating Offerings Communicating is a broad term in marketing that means describing the offering and its value to your potential and current customers, as well as learning from customers what it is they want and like. Sometimes communicating means educating potential customers about the value of an offering, and sometimes it means simply making customers aware of where they can find a product. Communicating also means that customers get a chance to tell the company what they think. Today companies are finding that to be successful, they need a more interactive dialog with their customers. For example, Comcast customer service representatives will watch consumer Web sites like Twitter. When they observe consumers “tweeting” (posting) problems with Comcast, the customer service reps will post resolutions to their problems. Similarly, JCPenney has created consumer groups that talk among themselves on JCPenney-monitored Web sites. The company might post questions, send samples, or engage in other activities designed to solicit feedback from customers. Figure 1.2 Saylor URL: http://www.saylor.org/books Saylor.org 8 A Porsche Boxster can cost three times as much as a Pontiac Solstice, but why is it worth more? What makes up the complete offering? Source: Wikimedia Commons. Companies use many forms of communication, including advertising on the Web or television, on billboards or in magazines, through product placements in movies, and through salespeople. Other forms of communication include attempting to have news media cover the company’s actions (part of public relations [PR]), participating in special events such as the annual International Consumer Electronics Show in which Apple and other companies introduce their newest gadgets, and sponsoring special events like the Susan G. Komen Race for the Cure. Delivering Offerings Marketing can’t just promise value, it also has to deliver value. Delivering an offering that has value is much more than simply getting the product into the hands of the user; it is also making sure that the user understands how to get the most out of the product and is taken care of if he or she requires service later. Value is delivered in part through a company’s supply chain. The supply chain includes a number of organizations and functions that mine, make, assemble, or deliver materials and products from a manufacturer to consumers. The actual group of organizations can vary greatly from industry to industry, and include wholesalers, transportation companies, and retailers. Logistics, or the actual transportation and storage of materials and products, is the primary component of supply chain management, but there are other aspects of supply chain management that we will discuss later. Exchanging Offerings Saylor URL: http://www.saylor.org/books Saylor.org 9 In addition to creating an offering, communicating its benefits to consumers, and delivering the offering, there is the actual transaction, or exchange, that has to occur. In most instances, we consider the exchange to be cash for products and services. However, if you were to fly to Louisville, Kentucky, for the Kentucky Derby, you could “pay” for your airline tickets using frequent-flier miles. You could also use Hilton Honors points to “pay” for your hotel, and cash back points on your Discover card to pay for meals. None of these transactions would actually require cash. Other exchanges, such as information about your preferences gathered through surveys, might not involve cash. When consumers acquire, consume (use), and dispose of products and services, exchange occurs, including during the consumption phase. For example, via Apple’s “One-to-One” program, you can pay a yearly fee in exchange for additional periodic product training sessions with an Apple professional. So, each time a training session occurs, another transaction takes place. A transaction also occurs when you are finished with a product. For example, you might sell your old iPhone to a friend, trade in a car, or ask the Salvation Army to pick up your old refrigerator. Disposing of products has become an important ecological issue. Batteries and other components of cell phones, computers, and high-tech appliances can be very harmful to the environment, and many consumers don’t know how to dispose of these products properly. Some companies, such as Office Depot, have created recycling centers to which customers can take their old electronics. Apple has a Web page where consumers can fill out a form, print it, and ship it along with their old cell phones and MP3 players to Apple. Apple then pulls out the materials that are recyclable and properly disposes of those that aren’t. By lessening the hassle associated with disposing of products, Office Depot and Apple add value to their product offerings. KEY TAKEAWAY The focus of marketing has changed from emphasizing the product, price, place, and promotion mix to one that emphasizes creating, communicating, delivering, and exchanging value. Value is a function of the benefits Saylor URL: http://www.saylor.org/books Saylor.org 10