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University of South Africa
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MNM1503/1/2018–2020

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CONTENTS

Page
PREFACE iv

Topic 1: The nature of marketing 1

Study unit 1: Introduction to marketing 2

Topic 2: The marketing environment 27

Study unit 2: The modern marketing environment of business 28

Topic 3: Marketing information and marketing research 61

Study unit 3: Marketing information 62
Study unit 4: Marketing research 82

Topic 4: Consumer behaviour and market segmentation 115

Study unit 5: Consumer behaviour 116
Study unit 6: Market segmentation, market targeting and product positioning 137

Topic 5: The marketing mix 171

Study unit 7: Product decisions 174
Study unit 8: Distribution decisions 205
Study unit 9: Pricing decisions 242
Study unit 10: Promotion decisions 263

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PREFACE

Dear MNM1503 Student

We have great pleasure in welcoming you to the module Introduction to Marketing

(MNM1503). We would like you to share our enthusiasm for this field of study and as a
first step, we urge you to read this preface in detail. Refer to it as often as you need to,
since it will definitely make studying this module a lot easier. The field of marketing is
extremely dynamic and challenging. The learning content and activities contained in this
study guide will give you opportunities to explore the latest developments in the field
of marketing and help you to discover the field as it is practised today.

1 AIM OF THIS MODULE

The aim of this module is to enable you to understand the basic principles of marketing.
We will endeavour to explain marketing concepts and terms to first-year students, people
who are involved in and need marketing in their daily activities, and people who are
aspiring to a career in marketing.

2 LEARNING OUTCOMES OF THIS MODULE

After completing this module, you should be able to do the following:

• Demonstrate an understanding of the nature and basic principles of marketing.

• Explain and illustrate all the variables in the components of the marketing environment.
This includes:
– investigating the micro-environment, market environment and macro-environment
of marketing
– developing a marketing information system
– conducting marketing research
– performing market segmentation, targeting and positioning
– analysing the behaviour of consumers
• Explain and illustrate the elements of the marketing mix, namely: product,
marketing communication, distribution and price.
• Explain the integration of the elements of the marketing mix.

3 OVERVIEW OF THIS MODULE

Every company that is profit driven should have a marketing department that is responsible
for the company’s marketing activities. Marketing is an integral part of any company,
because it defines the needs and wants of customers and directs the company’s resources
to meet these needs and wants in the consumer market. It is the responsibility of marketers
to provide products/services that will satisfy these different needs and wants. Marketers

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should therefore divide the consumer market into various groups with similar needs and
wants.

Rapid changes in the marketing environment in recent years have raised awareness of the
significance of marketing. All businesses operate in the marketing environment, which
consists of both internal and external environments. For marketers to implement marketing
decisions, they require information about the characteristics, needs and purchasing
patterns of their target markets. Marketing research and information systems provide
information, and their effectiveness is measured by improvements in the marketer’s
ability to make decisions. The product decision is the first of the four decision-making
areas (also referred to as instruments) of the marketing mix. The distribution channel is
the marketing instrument that delivers the products to the end-consumers. Promotion is
one of the areas of marketing that has had tremendous change because of environmental
factors such as increased competition and changes in the promotional tools available
to markets. Furthermore, price is the only marketing instrument that generates income
for the business. Finally, promotion decisions are crucial for every marketing endeavour,
and it is important to ensure that all the correct promotional tools are incorporated in
the marketing activities of the organisation.

The content of this study guide is comprehensive and as a student, you are encouraged
to read additional information from other academic and marketing sources that you find
relevant to the subject matter.

4 STUDY MATERIAL FOR THIS MODULE

The study material for this module consists of this study guide, recommended books/
journal articles and several tutorial letters. The tutorial letters and study guide will be sent
to you during the year. In addition to the study guide, you are encouraged to consult
other sources such as those available in the Unisa Library.

Please consult Tutorial Letter 101 for the details of your recommended additional resources.

5 APPROACH TO LEARNING AND TEACHING IN THIS

MODULE
The purpose of this study guide is to give you the opportunity to put into practice the
theoretical concepts introduced in the prescribed book and at the same time do a few
exercises and questions that will help you to prepare for the examination. It is essential
that you work through the study guide because this will improve your chances of doing
well in the examination. However, there is no substitute for being thoroughly familiar
with the theory discussed in the prescribed book. Your study guide and tutorial letters
complement each other in that the study guide assists in the learning process, but studying
it on its own and ignoring the tutorial letters will not guarantee success in the examination.

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5.1 Suggestions on how to approach your studies for this module
Tutorial Letter 101 and the study guide contain explanations of how you should approach
the learning and other resources and how you can use these to your benefit, for example
how to make the best use of SMSs, peer collaboration groups, learning centres and career
counselling. As a distance education student, you need to know how to manage your
time and whom to contact about academic and administrative matters.

5.1.1 Studying
The sections that have to be studied are clearly indicated and form the basis of the
assignments and examination. To be able to do the activities and assignments for this
module, to achieve the learning outcomes and to pass the examination, you need a
thorough understanding of the content of these sections in the study guide. To understand
the study material properly, you have to accept responsibility for your own studies and
realise that learning is far more than mere memorisation. You will be expected to show
that you understand and are able to apply the information, not just remember it.

5.1.2 Reading
In some parts of the study guide, you will be instructed to read a section in the prescribed
book or the study guide. This means that you should note the content of this section
because it usually provides useful background information or offers another perspective
or further examples. It will give you some context, improve your ability to take notes and
enhance your understanding.

You will need to spend at least 120 hours on this module. This includes approximately
40 hours of reading and studying the study material, 40 hours of doing the activities
and assignments, and 40 hours of preparation for the examination. We encourage you
to follow the proposed schedule with the allocated time for the various topics, study
units and other activities that is supplied in Tutorial Letter 101. You are welcome to read
more widely than the study guide and the tutorial letters; you can also conduct your own
research to gain a deeper understanding of the concepts covered in the study guide.

Test your understanding of the ideas that you learn about in this module by doing your
best to apply them to real-life situations.

5.2 Importance of completing the activities, assignments and self-assess-

ment questions

5.2.1 Activities
There are various types of activities in this study guide. You will be required to:

• reflect on the work covered

• complete the assessment questions
• do self-assessment

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We consider the completion of the activities in the study guide and the assignments
crucial to your successful completion of this module. Firstly, the activities in the study
guide will help to reinforce your learning; secondly, they will give you an idea of the type
of application questions that will be asked in the examination.

5.2.2 Assignments
The assignments for this module are in Tutorial Letter 101. The completion of assignments
is crucial to helping you achieve the learning outcomes. By completing the assignments,
you will get a feel for the type of questions you can expect in the examination and
obtain first-hand feedback from the lecturer. The assignment questions also give you the
opportunity to apply the theory to a case study or a practical situation relating to your
workplace. We will inform you of the purpose of each assignment and which module
outcomes will be assessed in the assignment. We will also supply the assessment criteria
so that you can understand how to approach and answer specific questions.

The details of the assignments and their assessment criteria as well as the format of and
requirements for the examination are provided in Tutorial Letter 101.

5.2.3 Assessment questions

At the end of each section, is a list of possible assessment questions based on the work
covered in that section. We advise you to work through these questions diligently, since
they provide useful opportunities to prepare for possible examination questions. Self-
assessment plays a vital role in the mastery of learning outcomes and you should therefore
complete the self-assessment activities in the study guide.

Most of the answers to these questions are in the study guide. We believe that you should
not be faced with any surprises in the examination. It is therefore in your own interest to
work through all the assessment questions. To do well in the essay questions, you have
to structure your answers logically. Also, use appropriate headings and subheadings and
include a bibliography at the end of your essay. Guidelines on the technical presentation
of assignments are in Tutorial Letter 301.

5.2.4 Assessment of the module

During the semester, you will be assessed on your assignments; whereas in the examination
at the end of the semester, you will be assessed against transparent assessment criteria
relating directly to the outcomes for the module. The compulsory assignment mark(s),
together with your final assessment, will count towards your total mark. Further details of
the assessment and examination requirements for this module are in Tutorial Letter 101.

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6 EXAMINATION

6.1 Prescribed material

All the study material is relevant for the examination. Besides understanding the theoretical
principles, we will expect you to be able to apply these principles to a practical situation
in a given case study or scenario.

6.2 Format of the examination paper

The duration of the examination will be two hours. The paper will comprise several short
questions or multiple-choice questions worth 70 marks. There will be no essay questions
in the examination for this module.

6.3 Answering examination questions and the allocation of time

You have to prepare thoroughly for the examination. When answering examination
questions, always write neatly, use point form where possible, leave a blank line between
paragraphs and underline keywords if you have time. Start each question on a new page
(but write on both sides of the page). This will make your answers more readable and will
ensure that the lecturer does not overlook anything. Make it easy for the examiner to read
and understand your work. Remember: What we cannot read, we cannot mark properly.
The time limitation means that you have to plan your time carefully. Do not waste time
with long introductions and summaries, and do not include a bibliography in an answer
to an examination question. Practical application means more than simply mentioning the
name of a particular company; you must apply the theoretical principles to the operations
of the business in the given case study or scenario.
On the cover page of the examination answer book, write the numbers of the questions
that you have answered, in the order in which you answered them.

7 KEY CONCEPTS IN THE ASSIGNMENTS AND THE

EXAMINATION
When we formulate assignment and examination questions, we word them in specific
ways so that you can know exactly what is expected of you. For example, we may ask you
to list, describe, illustrate or demonstrate something; compare two things; or construct,
relate, criticise, recommend or design something.

Below is an explanation of the various levels of cognitive thinking that we will expect
you to apply, and the kinds of instructions that we will give you with regard to each. This
system is known as Bloom’s taxonomy.

• Knowledge. This is essentially memorisation and the recall of information. At its simplest,
it involves recalling facts or terminology such as names, dates and definitions. It may
also involve recalling principles and generalisations, or ways of doing things. Outcomes/

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 instructions written at this level typically have verbs (words that tell you what you
have to do) such as “name”, “list”, “define”, “label”, “select”, “state”, “write”, “describe”,
“identify” and “recall”.
• Comprehension. This involves making sense of things, instead of simply remembering
them. Comprehension usually requires that you translate information into your own
words. Outcomes/instructions written at this level typically have verbs such as “convert”,
“illustrate”, “distinguish”, “interpret”, “rewrite”, “discuss”, “give examples” and “summarise”.
• Application. This is the ability to use information and ideas in new situations, such as
solving problems that have a single or best answer. Outcomes/instructions written at
this level typically have verbs such as “calculate”, “demonstrate”, “construct”, “compute”,
“solve”, “relate”, “show”, “use” and “apply”.
• Analysis. This is the ability to examine information systematically in order to identify
the main ideas, the relative hierarchy of those ideas and the relations between the
ideas. Outcomes/instructions written at this level typically have verbs such as “analyse”,
“differentiate”, “categorise”, “classify”, “relate”, “illustrate”, “outline”, “compare”, “contrast”,
“discriminate”, “explain” and “hypothesise”.
• Synthesis. This is the ability to construct something new by combining several pieces
of information to make a coherent whole (such as a plan). Outcomes/instructions
written at this level typically have verbs such as “plan”, “adapt”, “combine”, “create”,
“compile”, “compose”, “construct”, “model”, “revise”, “design”, “develop”, “formulate”
and “organise”.
• Evaluation. This is the ability to make judgements about the quality or value of things
(either with reference to internal evidence or external criteria). Outcomes/instructions
written at this level typically have verbs such as “assess”, “judge”, “choose”, “criticise”,
“rate”, “argue”, “justify”, “evaluate”, “decide”, “recommend” and “conclude”.
In this module, you will be asked to operate on all levels of Bloom’s taxonomy. Please
make sure that you know what is expected of you in each question.

8 USE OF ICONS
The icons that are used in this study guide are listed below, together with an explanation
of what each means:

Icon Description

Learning outcomes. The learning outcomes indicate what aspects of

the particular topic or learning unit you have to understand. You should
be able to demonstrate your understanding.

Key concepts. The key concepts indicate which terms or keywords are
important for a particular learning unit.

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 Activity. This icon refers to activities that you must do to develop a
deeper understanding of the learning material.

Assessment. When you see this icon, you will be required to test your
knowledge, understanding and application of the material you have
just studied.

Feedback. This icon indicates that you will receive feedback on your
answers to the self-assessment activities.

Summary. This icon indicates that a brief statement will be provided

that summarises the main points discussed in each study unit.

Time-out. This icon indicates that you should take a rest, as you have
reached the end of a study unit or topic.

9 IMPORTANT ADVICE
The likelihood of your success will be improved if you take note of the following hints:

• Study the prescribed study material conscientiously according to the guidelines

provided.
• Discuss the subject matter with colleagues and specialists.
• Do the activities.
• Prepare your compulsory assignments so that you can submit them on time and also
make an effort to do the non-compulsory assignments.
• Apply your knowledge in practice.
• Prepare properly for the examination.

10 WHAT YOU CAN EXPECT FROM UNISA

You can expect us to do the following:

• Provide you with up-to-date and relevant study material that is regularly compared
with and benchmarked against similar local and international programmes.

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• Ensure that the study material is in line with the needs of industry and commerce by
consulting regularly with the profession and with industry leaders and government
officials.
• Assist you by giving you the opportunity to develop competencies and skills at a
certain level. You will be assessed according to the level descriptors of Level 5 of the
National Qualifications Framework.
• Support you whenever you require assistance. You may contact your lecturers by
making an appointment to see them in person, telephoning them or contacting them
via e-mail or the internet. We understand that distance learning is more challenging
than attending a residential university.
• Provide you with clear indications of what we expect from you in terms of your
assessment.
• Provide prompt feedback on assignments. We will return your assignment and our
feedback within three weeks of the due date, if you submit an assignment on or before
its due date.
We trust that you will enjoy your studies. We are certainly looking forward to being your
partners in this exciting endeavour.

Best wishes

Your lecturers

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(xii)
Topic 1
The nature of marketing

AIM
Our aim in this topic is to enable you to understand the nature and role of marketing as
well as the evolution of marketing thought.

LEARNING OUTCOMES

On completion of this topic, you should be able to:

• define the term “marketing”
• explain the exchange process in marketing
• explain the role of the internet in the exchange process
• identify the gaps between a business and its customers that should be bridged
• distinguish between the different marketing activities of transferring of a market-
ing offer to buyers
• explain primary, auxiliary and exchange marketing activities
• explain the role of the marketing function in the organisational structure

TOPIC 1 Study unit 1: The nature of marketing

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Study unit 1
Introduction to marketing

Contents

Overview
Learning outcomes
Key concepts
1.1 Introduction
1.2 Overview of marketing
1.2.1 Exchange and marketing
1.2.2 Gaps between production and consumption
1.3 Marketing activities
1.4 Marketing orientations
1.5 Relationship marketing: A broader view of the market
1.5.1 Expansion of the market offering
1.6 Management tasks in marketing
1.7 Summary
1.8 Case study with questions
1.9 Reflection
1.10 References
1.11 Self-assessment questions

OVERVIEW
This study unit, which is the base or foundation of this module, is aimed at giving you a
solid introduction to the nature of marketing. It is important to understand how marketing
is intertwined with companies/organisations and how individuals are affected by marketing
in everyday life. In marketing, human beings are called consumers. Consumers are
individuals with certain needs and wants, and have the ability to purchase certain products
and/or services to satisfy their needs. Consumers have the capability of consuming certain
products of companies and are able to influence the behaviour of all counterparts involved
in the production process. It is important that retailers observe and study the behaviour
of consumers in order to offer the right product at the right time, in the right place and
for the right price to the target market.

In the field of marketing, exchange plays a vital role; exchange and marketing work
interchangeably. Buyers and sellers have an “exchange” relationship, which means that
sellers have to offer a certain product or service to buyers in exchange for money. Sellers
have to offer something of value to buyers in exchange for money. This exchange creates
the gaps that have to be filled in the production process. There are different gaps retailers
have to fill to ensure that the production process runs smoothly until the end product
reaches the consumer. When the products emerge from the production process, sales

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orientations come into place to ensure that sellers use the correct techniques to sell the
products to the end-consumers. Furthermore, it is essential that a market is created for
the products that the seller produced and where the buyer can make a purchase.

The marketing process plays a vital role in ensuring that sellers follow designated protocol
when marketing products. It is therefore advised that sellers develop certain relationships
with both the buyers and the suppliers in the industry, and with everyone involved in
the distribution channels. The management of companies has to perform certain tasks
to enable the marketing process to be efficient. The marketing team is responsible for
ensuring that the produced goods are sold to the end-consumers and that the company
maximises profitability.

This study unit will unfold as follows:

LEARNING OUTCOMES

After completing this study unit, you should be able to

• define and discuss the concept of marketing
• explain the role of the marketing function in the organisational structure
• explain the exchange process in marketing
• identify gaps between a business and its customers that should be bridged

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 • distinguish between the different marketing activities of transferring of a marketing
offer to buyers: primary, auxiliary and exchange marketing activities
• discuss the different marketing orientations, the product concept, sales orientation
and the marketing concept
• explain relationship marketing and give a broad overview of the market, expansion
of the market offering and a bigger market
• understand the marketing process and how to use it in a company
• discuss the management tasks in marketing

KEY CONCEPTS
• marketing
• exchange
• marketing mix (4Ps)
• marketing gaps
• marketing orientations
• product concept
• sales orientation
• marketing concept
• relationship marketing
• market
• market offering
• bigger market
• marketing process
• marketing function
• management tasks

1.1 INTRODUCTION
Although attention is given to marketing as an important aspect of a company/organisation’s
success, many managers are aware of the role marketing plays in achieving organisational
objectives. The concept of marketing is still vague to many. According to Van Rensburg
(2014), marketing ensures that the products and services of a company are promoted
and sold to the end-consumer. When one talks about promotion, many people assume
that it is all about advertising. However, marketing includes market research, targeting,
sales promotion, personal selling, social media and broadcast, customer relationship
management, public relations, publicity, sponsorship, networking and direct marketing.
Marketing has to match the right message to the right person.

Thus, marketing is used by organisations to create value. Companies have to ensure that
there is alignment between the company’s offering and the value for which the consumers
pay a price. In other words, the company must give the consumer value for money. This
is where the concept of exchange comes in – the consumers need a product or service
with good value, and must be willing to spend money in exchange for receiving the
desired product/service. It is crucial that to understand that marketing is one of the main
functions of a business, and companies need the marketing function to ensure that the
products and/or services produced reach the end-consumer.

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Before we discuss marketing in more detail, you must first understand the meaning of
marketing and how it fits into the whole organisational structure.

1.2 OVERVIEW OF MARKETING

The general question that arises is: What is marketing and what does it entail? Can you
still recall the concepts mentioned in the introduction and overview of this module? Can
you relate marketing to your everyday life? If you work for a company or own one, can
you think about how marketing fits into the other functions of the business? Well, hold
those thoughts for a moment and let us look at the concept of marketing, what it entails,
the marketing activities and how marketing fits into the organisational structure.

There are many definitions of marketing in different textbooks, academic journals and
articles; on academic websites; and in newspapers and sometimes magazines, but you
will notice that most of the definitions cover the same plot. For example, Cant (2014)
defines marketing as a process whereby products and services are managed from the
production stage to the consumer. Another definition comes from the American Marketing
Association (AMA), which describes marketing 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” (AMA 2016:1).

Marketing comprises four key elements: price, promotion, place and product. Marketing
attracts consumers, designs desirable experiences for consumers, creates an offering aimed
at satisfying the needs and wants of consumers, ensures that the products produced by
the company reach consumers, assists companies in selling their products and maximising
their profitability, and so on.

For the purpose of this module, the broad definition of marketing is:

“Marketing is a process where an organisation, in its drive to meet its organisational

goals, focusses on meeting customers’ needs and wants, by means of offering the
right product, at the right price, at the right place, and by using the right marketing
communication channels and which, in this process, strives to establish relationships
with customers and to develop and grow these relationships with relevant stakeholders
in an ever-changing environment” (Cant, Van Heerden & Ngambi 2013:3 & 4).

It is not necessary to memorise this definition, nor is it compulsory to use it. However, it
is essential that you make sure that the definition you choose to use covers an exchange
process, needs and wants, the 4Ps, establishing relationships with stakeholders,
organisational goals that need to be met and meeting consumer demands in an ever-
changing competitive environment.

Marketing is a very common yet significant concept for every consumer. Often, people are
surrounded by different marketing perceptions in everyday life. Many people associate
marketing with advertising, irrespective of how narrowly defined this may be. Although
the two concepts are not similar and do not have the same meaning, they are intertwined.
The main focus of marketing is on satisfying consumers’ needs. It is the aim of every

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company/organisation to provide a product or service to a customer in exchange for
money and to consequently maximise profits. Hence, we say that the core marketing
aspects are: needs/wants, products/services, value satisfaction and quality, and exchange
transactions and relationships.

Take a look at the two pictures below and think for a moment what they mean to you. These
pictures depict marketing in its simplest form. They depict different facets of marketing
and enable us to conceptualise marketing. In a business environment, marketing plays
an important role in assisting businesses to ensure that consumers buy their products
and/or services. As many experts say, there is no use to produce products if there are
no consumers who will purchase those products. Marketing comes into play to help the
business sell the products to the end-consumers.

Companies and organisations should offer customers the right product, in the right place
and at the right price by using the right promotional elements to reach the target market.
Undeniably, there are service-based organisations, but marketing plays the same role in
these organisations as in product-based organisations to ensure that the consumers of
the services actually purchase the services from such organisations. It is safe to assume
that every organisation, product/service based, needs marketing as one of the major
functions of the business.

It is also important that you understand how marketing fits into the organisation and
how different departments work together to assist the organisation in achieving its goals.
The figure below illustrates the marketing function in the organisation, and the different
subdepartments of marketing that work together to support the marketing efforts of the
organisation. This structure is important as it illustrates how marketing is subdivided and
how marketing activities are created to fill the marketing gaps and concepts.

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Figure 1.1: The marketing function in the organisation
Source: Adapted from Lamb, Hair and McDaniel (2012)

In general, Figure 1 indicates how marketing is intertwined with the other functions of the
business. The subdepartments of marketing depicted in the figure are briefly discussed
below.

• Advertising. In an organisation, advertising involves designing written, verbal or

digital messages to reach the target market. The aim of advertising is to arouse
consumer interest through the selected medium and stimulate the target market
to purchase the products and services of the company. The advertising department
is responsible for branding; radio and television, written media, word of mouth and
internet advertisements; and all other advertisements desired by the organisation.
• Market research. This refers to an ongoing investigation into the needs/wants of
targeted prospective and current consumers. The role of market research is to
enable the organisation to investigate changing consumer demands and inform
the organisation accordingly in order to produce product or render services that are
relevant to the consumer. This department also informs the organisation about the
fierce and changing competition in the market.
• Product management. After the market research has been conducted, this department
ensures that the right product is produced to suit consumer needs. It is the responsibility
of every business to ensure that the right product of the right value, quality and standard
is produced in an attempt to satisfy the needs/wants of consumers. Packaging also
plays a role, as some companies use packaging as a source of branding.
• Promotions. Although some companies combine promotions and advertising,
large companies prefer them as separate departments. The promotions department
deals with marketing the “end-product”, which has already gone through the production
process, to consumers. Promotion techniques that are regularly used by companies
include sales promotions, personal selling, sampling, contests, rebates, usable benefits,
coupons, product combinations, quantity gifts, refunds and discounts. Companies
use sales promotion techniques to attract more consumers to purchase products and
often stimulate consumer loyalty through these programmes.
• Sales. This department is responsible for ensuring that the necessary systems are put in
place to enable the company to sell its products to the end-consumer. Selling products

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 (sales) differs from one company to the next and includes pricing, presentations of
products, displaying, merchandising, closing deals and pitching to new clients. Sales
are a very important component of a business, as it ensures that the business sells its
products and revenue is created.
• Relationship marketing. Every organisation needs to build real and life-long relationships
with all the stakeholders. This includes customers, the public/community, suppliers,
shareholders, employees, investors and everyone involved with the company at large.
When strong relationships are built, organisations have to ensure that consumers are
treated as gold and given priority, which means satisfied consumers. When consumers
are satisfied with the products/services they receive from a company, it is easy for
them to be loyal to the organisation.
Now that you understand how the marketing function fits into the organisation, it is
important that we unpack the 4Ps of marketing mentioned in the previous sections.
Currently, they are referred to as the 7Ps of marketing, namely price, product, place,
promotion, people, processes and physical evidence. For the purpose of this module,
we will only focus on the 4Ps: product, place, price and promotion. These are the four
components of the marketing mix that are relevant and of importance to this module.
The elements of the marketing mix are discussed in the next section.

1.2.1 Marketing mix (4Ps)

The marketing mix is the process of putting together a correct combination of the right
product, at the right price, in the right place and with the right promotion (Shilbury 2014).
In a nutshell, the marketing mix assists companies in ensuring that they produce the
right product that matches the consumer’s expectations and needs, valued at the right
price, by using the right promotional techniques suitable for the product and delivered
at the right place.

Figure 1.2: The elements of the marketing mix (4Ps of marketing)

Source: Adapted from Jain (2010)

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The marketing mix elements are briefly:

Product (or a service in the case of service companies). This is a product that a company
has manufactured to meet the needs and demands of customers.

Price. This refers to the amount that the consumer is anticipated to pay when purchasing
a particular product (or service). The price of a product normally affects how the product
sells in the market.

Promotion. This involves all the marketing techniques and strategies the company uses to
sell the produced products. It includes samples, personal selling, contests, rebates, usable
benefits, coupons, product combinations, quantity gifts, refunds, discounts, advertising,
public relations and special offers.

Place. This refers to how the product is made available to the end-consumer. Distribution
plays a major role in how the product is transported from the production phase to the
end-consumer.

Activity 1.1

(1) Use the phrases and concepts in the following wordle (word cloud) to compile
your own definition of marketing.

(2) View this short video1 for a great overview of the marketing mix: https://www.
sophia.org/tutorials/marketing-mix-the-4ps-product.
Then complete the following activities.

1 Note that the video has been hyperlinked and it can also be found in the Additional resources
folder on the MNM1503 module site.

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 (a) Define marketing.
(b) Discuss the elements of the marketing mix, and refer to the examples provided
in the video to come up with your own examples.

1 Feedback

(1) Did you manage to use all the phrases and concepts in your definition?
• If yes, well done. You are now ready to proceed with the study unit.
• If you could not use all the phrases and concepts, do not despair. It only means
that you need more practise. Refer back to the definition and complete the task.
Remember the age-old saying that practice makes perfect.

Marketing can be defined as the management of exchange relationships, activities and

processes organisations use to create, communicate, deliver and exchange offerings that
have value to customers’ needs. Marketing includes the 4Ps, which are also called the
marketing mix.

The elements of the marketing mix are:

1. Product. This refers to the commodity that an organisation produces to sell to the
consumers in exchange for money. The product sold to the consumer has to add
value and satisfy a particular need/want of the consumer. An example is a bottle
of purified water that the Soweto Company sells to consumers in very hot weather.
The bottle of water is the right product that is suitable for the consumer’s need at
that given time.
2. Place. This refers to the location where the product will be delivered for the
convenience of the consumer. It includes the packaging, storage and transportation

10
 of the product. After products undergo all the processes of production and are
ready to be sold to the end-consumer, systems have to be put in place to enable
the transaction. Again using the example of the bottled purified water: To sell the
water, the Soweto Company has to transport the bottles of water from its production
depot in Soweto to where the users are – all the places where the consumers can
easily get hold of the bottled water (at the spaza shops in and around Soweto, at
the Soweto marathon and so on).
3. Price. When the products are produced and ready to be sold to consumers, the
company evaluates the costs incurred when producing the products, adds the profit
markup that will enable the company to make a profit and sells the products at a
selling price that is normally higher than the cost price. The price of the product is
normally equivalent to the value of the product. An example is setting the price of
bottled water at R10, when the cost price was R5 and the profit will be R5.
4. Promotion. These are all the efforts of the business to promote the produced products
to consumers. It includes samples, rebates, coupons and freebees. An example is
when the Soweto Company gives all the people who participate in the Soweto
marathon a small bottle of water as a sample of the water the company sells.
Our discussion of the elements of the marketing mix gave you a broad overview of the
most important aspects of marketing. The marketing elements cover the basic things
companies should take cognisance of when producing products aimed at satisfying
customer needs. Now that you understand the marketing elements, we can move on to
exchange in the marketing process.

1.2.2 Exchange and marketing

Now that you understand the definition of marketing, the marketing elements and how
marketing is connected with the other functions of the business, it is important that
we explain the concept of exchange in the marketing process. The diagram below is a
simplified representation of exchange in marketing. The most important aspects of the
exchange process are the consumer, the supplier, products/services and money. All these
are essential for a transaction to take place.

Figure 1.3: The exchange process

Source: Adapted from Lamb (2012)

11 MNM1503/1
Exchange is defined as all the actions/undertakings when people give up something in
exchange for something else (Cant, Strydom, Jooste & Du Plessis 2006). For an exchange
to take place in the business world, the customer gives up money to receive a product/
service. In the past, before money was created to simplify the exchange process, people
exchanged products for products (bartering). Money has value; people have to work to
earn money and then use the money to purchase products and services to satisfy their
needs and wants.

Nowadays, money is used in different forms: we have coins, paper money, plastic money
(credit/debit cards) and so on. The concept of exchange permits us to not only to use
money, but also to barter – people can exchange one product for another, such as
exchanging a pair of red sandals with your friend for a pair of white sneakers so that you
can run a marathon.

Exchange can happen under many circumstances, in different places and at any time.
However, the following conditions must exist for an exchange to take place:

• A minimum of two individuals/parties must be involved.

• Each individual must have a valuable item or something of value in which the other
party is interested.
• The two parties must be willing and able to communicate with each other, and the
one party must be able to deliver the products exchanged to the other party.
• There must be freedom for any of the parties to either accept or reject the other
party’s offer.
• Both parties must be willing to deal with the counterpart.
Marketing experts believe that under normal circumstances, an exchange process takes
place because a market exists. A market is a place where buyers and sellers meet to
exchange products, pay money for service and make transactions. For a market to take
place, it is important that the abovementioned conditions exist.

For example, a beautiful lady walks up to you in a mall to sell you an expensive branded
handbag. You have been shopping around for a navy blue branded handbag for long
but with no luck, and now you find that the lady is selling the exact bag that you were
looking for. When she approaches you to make a sale, she tells you that the handbag
costs R900. You look at the bag and check the quality – genuine leather, looks new and
it has the features that you want in a handbag. You take a moment to think about it,
then you negotiate with the lady to decrease the price of the handbag to R600 because
you are not sure if the handbag was stolen. The lady deliberates and then finally agrees
to sell you the handbag for R600. Both parties agree; you pay the lady R600, she gives
you the handbag and both parties are satisfied. In this example, all the conditions of an
exchange process have been met.

Now that you understand exchange and marketing, we will discuss the gaps that exist
between production and consumption in detail so that you have a clear perspective of
the processes involved from the production phase to consumption.

12
1.2.3 Gaps between production and consumption
Gaps between production and consumption exist because the place where the product
is produced may differ from the place where the product will be consumed or sold to
the consumer. The same principle applies to the services industry – the place where the
service provider is situated may differ from the place where the service has to be rendered.
The distance between the producer of the product and the consumer is referred to in
marketing as a “gap”. Different gaps between producers and consumers exist, and it is
the responsibility of the seller to ensure that the gaps are filled.

There are five common types of gaps in marketing:

• Time gap. This refers to the difference between the period when the product is produced
and the period when the product is consumed by the customer. Companies that
produce seasonal products have to ensure that proper systems are in place to supply
their products to consumers whenever the need arises. A good example of the time
gap is South African farmers who produce vegetables and fruits and then distribute
them to wholesalers, retailers and consumers. The farmers have to ensure that the fruits
and vegetables that can only be produced at certain times of the year are available
to consumers throughout the year. These farmers use special refrigeration to store
perishable products so that they can be distributed to consumers throughout the year.
• Space gap. This refers to the geographical/physical distance between the producers and
consumers that could affect the delivery of products to the end-consumers. In the case
of jewellery shops situated in Bloemfontein (Free State), the diamonds are mined and
produced in Kimberly (Northern Cape) and gold is sourced from Gauteng. Companies
that mine diamonds in Kimberly and gold in Gauteng will have to put systems in place
to transport the diamonds and gold to Bloemfontein so that the jewellery shops can,
for example, manufacture wedding rings. Furthermore, after the jewellery shops in
Bloemfontein have produced the wedding rings, they can distribute them to their
clients all over South Africa and export them to other countries.
• Information gap. It is crucial that prior to a purchase, consumers have sufficient
information about the product or service they intend to buy. Companies have to
make the information available to consumers to help them make a decision to
purchase a particular product. Such information may include the details of the product,
specifications, terms and conditions, prices and so on. For example, a Mashonisa
(loan shark) that borrows money to the residents of Port Elizabeth has to ensure that
information is sent to the targeted clients, including the interest rates, amount limits,
availability of the cash, repayment terms, and terms and conditions.
• Ownership gap. This occurs when the consumer has finally managed to pay all that is
due for the product purchased; the consumer can now officially own the product. An
example of this is Mr Sechaba who purchased a vehicle at ZKW Motors on credit for a
repayment period of 72 months. Only when Mr Sechaba has paid all the 72 repayment
instalments, with interest, can he officially be the owner of the vehicle.
• Value gap. When a product is sold to a consumer, the seller determines the value of the
product in monetary terms and communicates the perceived value to the consumer.
This means that the price that the consumer will pay for the product must be aligned
to the value that the consumer believes the product is worth. The seller and the buyer’s
perceived value of the product must be equal. For example, Steven wants to buys a

13 MNM1503/1
 pair of shoes priced R400 at an open market. The quality and standard of the materials
used to produce the shoe must be of the same value that Steven thinks the shoes are
worth. If Steven thinks that R400 is the right value of the shoes, he will go ahead and
buy the shoes. This means that both parties will be content and in agreement of the
price and value of the product.

Activity 1.2

After studying Section 1.2.3 of this study guide, complete the following activity:

There are five gaps between production and consumption. In the following table,
Column A contains the different gaps discussed above and Column B contains
different scenarios/examples pertaining to the gaps. Match the gaps in Column A
with the scenarios in Column B.

COLUMN A COLUMN B
Information gap Motor vehicle manufacturers supply consumers with
cars that have features such as airbags, special engine
capacities, ABS brakes and navigation systems. Consumers
value these cars for their features.
Space gap A seasonal product such as winter clothing is produced
throughout the year but only used in winter.
Time gap A company uses only print media such as newspapers to
advertise its products. The print media contain information
such as the different branches of the company globally
and its products and price lists.
Ownership gap A company that produces wool is based in Durban and
Johannesburg. Its customers are found in all the provinces
of South Africa. The gap could be bridged by establishing
branches in the other provinces.
Value gap When a customer purchases a car on an instalment basis,
the dealer will repossess the car if the customer does not
meet his or her payment obligations.

2 Feedback

COLUMN A CORRECT ANSWERS – matched to COLUMN B

Information gap A company uses only print media such as newspapers to
advertise its products. The print media contain information
such as the different branches of the company globally
and its products and price lists.

14
 Space gap A company that produces wool is based in Durban and
Johannesburg. Its customers are found in all the provinces
of South Africa. The gap could be bridged by establishing
branches in the other provinces.
Time gap A seasonal product such as winter clothing is produced
throughout the year but only used in winter.
Ownership gap When a customer purchases a car on an instalment basis,
the dealer will repossess the car if the customer does not
meet his or her payment obligations.
Value gap Motor vehicle manufacturers supply consumers with cars
that have features such as airbags, special engine capacities,
ABS brakes and navigation systems. Consumers value these
cars for their features.

Now that you know the different gaps between production and consumption, we will
briefly discuss the different marketing activities.

1.3 MARKETING ACTIVITIES

In marketing, different activities are used to bridge the gaps between production and
consumption. In Section 1.2.3 (the previous section), we explained the gaps in detail and
how sellers can mitigate them to the benefit of the company. The marketing activities
are the primary, auxiliary and exchange activities.

Figure 1.4: The marketing activities

Source: Adapted from Cant (2014)

15 MNM1503/1
Cant (2014:7) defines marketing activities as “those activities used to transfer the market
offering to the buyer”. The different types of marketing activities involve the following:

• Primary activities. Transport plays a vital role in the primary activities. This includes
all forms of transportation, from non-motorised (for example, horses and walking) to
motorised transportation (for example, trucks, cars and buses).
• Auxiliary activities. These activities are sourcing and supplying information,
standardisation and grading, storage, financing and risk taking:
– Sourcing and supply information. It is important that the sellers have information
about the target market – who and where the buyers are. Companies can conduct
marketing research to obtain such information, and sell the products that the
consumers need, want and demand.
– Standardisation and grading. In the production process, certain products have to be
designed and produced in a manner that ensures that certain standards are met
for quality purposes. This includes electronic and agricultural products, as electron-
ics must be approved by the South African Bureau of Standards and agricultural
products must be graded before they are sold to consumers.
– Storage. As we mentioned in the previous section, storage closes the time gap.
Companies that sell seasonal products have to factor in the costs of storing the
products for a particular period of time to be used in the next season. For exam-
ple, a clothing manufacturer may have to store winter clothes during the summer
season and only take the clothes to the shops when the winter season commences.
– Financing. This includes all the costs of transferring the products from the sellers
to the buyers, especially during the exchange process. These costs are normally
financed by financial institutions. It also includes the costs incurred when the buy-
ers need to make credit purchases.
– Risk taking. The owner who has purchased a particular product from a company
runs the risk of the product getting lost, stolen or damaged. The importance of
taking out insurance to mitigate risks comes into play.
• Exchange activities. These activities occur in the process of buying and selling products.
Ownership of products is transferred from one individual to another. Buying activities
are normally handled by the purchasing department to ensure that all the systems are
put in place to give the buyer the necessary support during the process of purchasing
the products. Selling is also regarded as one of the most important activities in
marketing as it involves all the mechanisms that help sellers to sell products to the
end-consumer.

Activity 1.3

Eddie-Agric produces mealies in Limpopo and needs to understand how to use

marketing activities in his company. Briefly discuss the marketing activities applicable
to Eddie-Agric and give an example of each.

16
3 Feedback

• Primary activities. Transport plays a vital role in the primary activities. This includes
all the forms of transportation that Eddie-Agric needs to transport his agricultural
produce from one place to the other before, during and after the production
process. Eddie-Agric needs trucks and trailers to transport the produce from the
place of cultivation to where the consumers are situated.
• Auxiliary activities:
– Sourcing and supply information. It is important for the company to have
all the necessary information about where and who their customers are.
Eddie-Agric needs to know that it is selling fresh produce to all the markets
and spaza shops in Limpopo, and whether the customers prefer vegetables
fresh or frozen.
– Standardisation and grading. This refers to all the processes of grading ag-
ricultural produce of companies such as Eddie-Agric. Eddie-Agric needs to
have their tomatoes and potatoes graded prior to selling these products to
the consumers. The tomatoes and potatoes have to be tested to determine
whether they satisfy the standards set by the agricultural boards of South
Africa.
– Storage. This activity closes the time gap as it allows seasonal products to be
stored until demanded by the consumer. Eddie-Agric can plant and cultivate
mealies in summer and store it in order to sell it throughout the year to con-
sumers who want to eat mealies anytime of the year, irrespective of whether
it is only cultivated in summer.
– Financing. This includes all the costs of transferring the products from the
sellers to the buyers, especially during the exchange process. Eddie-Agric can
make an arrangement with the bigger markets to supply them with vegetables
and fruits throughout the year, and also use credit as part of an arrangement
to be paid later by the debtors.
– Risk taking. For companies that produce products, there is always the risk
of having products stolen, lost, perishing or damaged. Eddie-Agric needs
insurance for all their products, especially products stored in different ways.
• Exchange activities. These are activities related to the buying and selling products
that Eddie-Agric have to perform to allow the smooth exchange between them
and the consumers. Ownership can only be transferred after Eddie-Agric sells the
products to the consumers.

Do all the marketing activities make sense to you? Do you understand how these activities
are vital in marketing? Now we will discuss marketing orientations and all the concepts
relating to it.

1.4 MARKETING ORIENTATIONS

These may be regarded as the new approaches that bring new thinking to marketing
in organisations. The new marketing thinking are categorised by different marketing
management theories and are also referred to as alternative marketing concepts.

17 MNM1503/1
Figure 1.5: The marketing concepts
Source: Lamb, Hair & McDaniel (2012)

Marketing concept

The marketing concept is defined as a viewpoint that governs all marketing initiatives.
Currently, the common marketing concept is to build and maintain life-long relationships
with the customers of the organisation (Jain 2010:41). The marketing concept is centred
on the five principles: customer, production, sales, marketing and societal marketing.
These are also referred to as the marketing orientations (Lamb, 2012:4–6). There are five
marketing orientations:

1. Customer orientation. This entails all the actions intended to satisfy the needs/wants
of the customer. Companies must ensure that the customer is offered a product/
service that suits the needs/wants of the customer.
2. Production orientation. According to the production concept, consumers’ main
priority is to have products that are readily available at an affordable price. This
viewpoint focuses on the internal capabilities of the company, such as its human
resources, machinery and equipment, management and motivated employees. An
organisation weighs its own resources and capabilities to establish what it can do
best, what it can offer and its competitive advantage– what it can produce using
lesser resources than competitors and win the market, with the main purpose of
having readily-available products for consumers at an affordable price. Companies
that use the production concept believe that consumers want inexpensive products
that are easily accessible. The production concept thrives on the ability to increase
output while decreasing costs.
3. Sales orientation. The main focus of this concept is ensuring that the company sells its
products and/or services irrespective of whether or not the targeted individuals need
the products/services. The aim of this concept is to use selling techniques to ensure

18
 that the products are sold to the customers. People will purchase products and/or
services only if the company promotes the products/services. The sales orientation
therefore focuses on aggressive sales techniques to attract existing and prospective
consumers to buy the products of the company. The selling concept assumes that
consumers look for aggressive sales and promotions from companies. Many times,
marketing tactics driven by the selling concept are based on the company’s need
to sell rather than consumers’ need to purchase.
4. Marketing orientation. The marketing concept is referred to as a managerial philosophy
that organisations need to focus on meeting consumer needs. It is connected to
the customer orientation, and maintains that all the systems and human resources
of the company are directed towards satisfying the needs/wants of consumers.
This includes the social and economic rationalisation that an organisation exists to
satisfy customer wants/needs while meeting the goals of the business. Marketing
is the promotion of business products/services to a target audience. Examples of
marketing include television commercials, billboards on the side of the road and
magazine advertisements.
5. Profit orientation. This marketing concept holds that an organisation has to design its
products and services in line with the organisational goals. Every organisation’s goal
is to offer consumers the correct products and services, and consequently maximise
profits. Organisations normally set targets for themselves pertaining to return on
investment (ROI), revenues, profitability and return on equity. All these systems are
established by organisations to assist in creating revenue and achieving profit targets.
6. Societal marketing orientation. This orientation concentrates on the needs/wants of the
target market and providing more value than that of the competitors. This orientation
also focuses on societal well-being by ensuring that the company produces products
that are environmentally friendly and not harmful to the community/society. Some
people refer to this as corporate social responsibility. This concept includes green
marketing.
– Green marketing involves all the activities of promoting the products and ser-
vices of the company. It emphasises that the organisation has to design its
promotional efforts in an environmentally-friendly manner. This means that
product modifications, production processes and packaging methods must be
performed in an environmentally-friendly manner with the well-being of society
in mind. The marketing efforts of the company should not endanger the lives of
the community in any way.

Activity 1.4

Sebolelo IT & Computer Solutions sells and fixes computers of small, medium and
large organisations. It orders its materials from particular suppliers and then sells the
products to individuals and other companies requiring computers and information
technology (IT) solutions. Explain how Sebolelo IT & Computer Solutions can use
the product concept as one of the marketing orientations of its business operations.

19 MNM1503/1
4 Feedback

Businesses that have invested in a good product concept are of the opinion that the most
important priority for consumers is the quality of a product. Many customers search for
innovative solutions and continuously seek out the latest technological developments in
the industry. Many companies in the IT industry use the product concept, and frequently
update and release new products to the market. It is important for IT firms such as Sebolelo
IT & Computer Solutions to make strong decisions on how often to release new products.
Releasing too often can leave customers frustrated that there are very few changes; not
releasing updates often enough can leave customers feeling that the company is out
of date. Sebolelo IT & Computer Solutions must review customer needs and implement
changes as quickly and efficiently as possible.
Learning about the different marketing concepts/orientations must have opened your eyes
to how companies can use marketing orientations to the best advantage of the company.
If used well, organisations can offer consumers the right products aimed at satisfying
their needs and maximise profits. Next, we briefly discuss relationship marketing as we
discussed it earlier under the subdepartments of the marketing department.

1.5 RELATIONSHIP MARKETING: A BROADER VIEW OF THE

MARKET
Lamb (2012) defines relationship marketing as an analytical process with the main
focus on the creation and maintenance of life-long relations between the organisation
and all the stakeholders of the business, such as the customers, employees, shareholders,
investors, government, community, suppliers and general public. Relationship marketing
mends all the marketing strategies undertaken by the organisation to produce products
and satisfying consumer needs. The efforts of a company are generally centralised around
building relationships with these stakeholders to encourage sustainability and growth.
Relationship marketing provides a broader look at the market – a place where buyers and
sellers meet to exchange money for products/services. Let us now look at the expansion
of the market offering.

1.5.1 Expansion of the market offering

It is understood that relationship marketing embraces the marketing mix or four major
elements of marketing, namely: product, price, promotion and place. However, these four
elements are insufficient to ensure that the company achieves consumer satisfaction.
Remember that companies put effort into retaining customers and ensuring maximum
profitability. Therefore, it is important that we also look at the two other elements of
marketing: people and processes, which work well together to enable relationship
marketing to take effect in the organisation.

• People. These include the employees who need the necessary knowledge and skills in
customer service to be able to render the best service to the customers of the business.

20
 Good customer service leads to customer satisfaction; satisfied customers are loyal to
the company and loyalty enables marketing relationships to be formed easily. When
an organisation is successful, the employees who provided good customer services
will also reap the rewards and have prosperity.
• Processes. These include the fundamental rations of the production process, the
administration facilities and the marketing activities of the company. When good
systems are in place to blend production, administration and marketing, the organisation
is able to produce customised products and services that are aligned to the needs/
wants of the consumers.
• Physical evidence. Although it is known in marketing that services are intangible,
customers tend to depend on physical cues to help them evaluate a product prior
to purchasing it. The role of the marketer is to design and implement the tangible
evidence. Physical evidence is the material part of service.
A bigger marketing offering is ideal for most organisations. Although relationship
marketing indicates a wider view of the market, it is also crucial that organisations adopt
an individualised customer approach. When this approach is used, it will be easier for
companies to maintain close relations with their customers, and consequently achieve
improved relationship marketing. Cant (2014:12) argues that it is essential that organisations
adopt micro-segmentation for the following three reasons:

1. a simple change in recent developments due to innovation and technology

2. an increase in the level of complexity and knowledge of consumers, creating higher
expectations
3. an increase in competition between sellers and products
Finally, an introduction to marketing is incomplete without discussing the management
tasks in marketing.

1.6 MANAGEMENT TASKS IN MARKETING

In general business management, the management tasks remain consistent – and this also
applies to marketing. The management tasks comprise planning, organising, controlling/
evaluating, leading and implementing. Marketing management therefore includes:

• identifying the strengths, weaknesses, opportunities and threats of the business

• conducting marketing research, compiling the research data and providing feedback
to the management team
• selecting a target market, segmentation and positioning
• deciding on the product offering aimed at satisfying consumer needs
• deciding on the prices of the products, as well as the distribution channels
• deciding on the different promotional and communication methods to be used in
the company
• deciding on the selection and training of the marketing team
• organising and leading all the processes in the marketing department
• controlling the marketing process from beginning to end

21 MNM1503/1
The major marketing management tasks can be summarised as follows:

• Planning. This involves organising information and analysing issues that form part
of the strategic decisions of the organisation. Planning includes conducting a SWOT
(strengths, weaknesses, opportunities and threats) analysis and using the results of
the analysis to the best benefit of the organisation. During this phase, the marketing
managers set marketing objectives, select appropriate marketing and communication
instruments, and obtain the resources needed to produce an offering that is aligned
to consumer needs and demands.
• Organising. Organising and coordinating include creating an organisational structure
that is suitable for the implementation of the marketing decisions aimed at achieving
the marketing objectives. The marketing activities are then grouped rationally, and
allocated to the different structures and individuals who will take care of the processes.
• Implementation. This task involves organising, controlling and coordinating appropriate
systems to effect the set objectives of the marketing managers. After all the plans have
been put in place, it is crucial that the organisation puts into practice all the marketing
strategies that were planned. This includes providing leadership to all the individuals
involved in the implementation process.
• Control/evaluation. The main aim of controlling and evaluation is to establish alignment
between the set performance targets and the marketing plans, objectives and goals of
the organisation. Marketing managers have to put systems in place to ensure efficient
reporting structures that will enable the smooth running of the processes, and have
to ensure that all the parties involved play their role in the whole process.
• Leading. This involves multiple tasks, including recruitment, communication and
motivation of the staff members involved in the marketing process. This task is crucial
as it allows the employees to stay focused on the set objectives and goals.

1.7 SUMMARY
Marketing is crucial for the survival of the business. An organisation has to
produce goods and services that are designed with the consumer in mind.
It is essential to offer consumers products and services that will satisfy their
needs. The elements of marketing are core in enabling marketing managers
and organisations to reach the organisational goals.
Organisations have to understand the different marketing activities and
use recent developments to engage the different concepts of marketing
and production in the company. Understanding exchange in the marketing
process enables organisations to offer value to the customers, reach
consumer demands and maximise profits. Equally important, organisations
have to build longer lasting relationships with all the stakeholders of the
business.

1.8 CASE STUDY WITH QUESTIONS

Read the case study below and answer the questions that follow.

22
 Queen-King Tlali Trading
Queen-King Tlali Trading (Q-KTT) specialises in agricultural and construction businesses
in different areas where consumers have different needs, demographics, behavioural
characteristics and attitudes toward the equipment they use. Over time, it found that
some farmers in India needed more nimble tractors capable of making very tight
turns. In response, Q-KTT developed small manoeuvrable tractors for this segment.
Q-KTT’s marketers recognised that American hobby farmers have similar needs – and
now it exports its smaller, India-made tractors to the United States. Q-KTT’s marketers
know that some construction firms prefer to rent rather than buy graders and other
equipment, either to save money or because their projects do not always require the
use of graders. Q-KTT, therefore, offers graders for rent that are designed for occasional
users who need to learn the controls on the fly, and specialised technicians are made
available to render those services to consumers who want to rent.

Questions

1. Use a diagram to illustrate where marketing fits into the organisational structure of
Q-KTT and discuss the subdepartments of marketing that Q-KTT can use to market
its agricultural equipment.
2. Discuss marketing activities that Q-KTT can use to bridge the gaps between the
producer and the consumer, and give examples relating to the Q-KTT case study.
3. Identify and describe the elements of marketing that Q-KTT can use in the marketing
process.

1.9 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. Define marketing and explain the marketing mix and the marketing concept in detail.
2. Can you define marketing in different ways?
3. Identify the core aspects of the definition of marketing.
4. What are the elements of the marketing mix? Give examples of each.
5. Use a diagram to illustrate where marketing fits into the organisation.
6. Discuss the marketing activities that can be used to bridge the gaps between the
producer and the end-consumer.
7. Identify and describe the gaps that exist between production and consumption.
Give your own practical example of each gap.
8. Describe the marketing orientations and concepts, and how they can be used in an
organisation.
9. Deliberate on relationship marketing as a broader view of the market.
10. Briefly discuss the management tasks in marketing, and give an example of each task.

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1.10 REFERENCES
AMA (American Research Association). 2008. https://archive.ama.org/archive/AboutAMA/
Documents/American%20Marketing%20Association%20Releases%20New%20Defi-
nition%20for%20Marketing.pdf (accessed 5 March 2017).
Cant, MC. 2014. Marketing: An introduction. 2nd edition. Cape Town: Juta & Co.
Cant, MC, Strydom, JW, Jooste, CJ & Du Plessis, PJ. 2006. Marketing management. 5th edi-
tion. Cape Town: Juta & Co.
Cant, MC, Van Heerden, CH & Ngambi HC. 2013. Marketing management: A South African
perspective. Cape Town: Juta
Jain, A. 2010. Principles of marketing. New Delhi: VK (India) Enterprises.
Lamb, CW. 2012. Marketing. 4th edition. Mason, OH: South Western Cengage Learning.
Lamb, CW, Hair, JH & McDaniel, C. 2012. Essentials of marketing. 7th edition. Mason, OH:
South-Western Cengage Learning.
Van Rensburg, R. 2014. Strategic marketing. Cape Town: Juta.

1.11 SELF-ASSESSMENT QUESTIONS

Question 1
. . . can be defined as the process of planning and executing the conception, pricing,
promotion and distribution of ideas, products and services to create exchanges that
satisfy individual and organisational goals.
(1) Advertising
(2) Marketing
(3) Marketing management
(4) Business management

Question 2
In the marketing process, there are gaps between production and consumption. When
a company uses print media to attract customers, which type of gap will it bridge?
(1) information gap
(2) assortment gap
(3) ownership gap
(4) quantity gap

Question 3
Which ONE of the following does NOT form part of the main marketing activities that
bridge the gap between buyers and sellers?
(1) primary
(2) production
(3) auxiliary
(4) exchange

Question 4
The evolution of marketing thinking resulted in a reorientation of management thinking
which is referred to as marketing concepts. Which ONE of the following does NOT form
part of the marketing concept?

24
(1) customer
(2) systems
(3) supply chain
(4) profit

Question 5
Management tasks in marketing consist of planning, organising, leading and control.
Which management style refers to a leader who uses inspiration and charisma to stimu-
late employees’ performance?
(1) transformational
(2) contingent reward
(3) laissez-faire
(4) autocratic

Question 6
. . . is a concept that maintains that businesses are part of the larger society in which
they exist and are accountable to society for their performance.
(1) System orientation
(2) Customer orientation
(3) The marketing concept
(4) Social responsibility

Question 7
There are several departmental functions in an organisation. The . . . function generates
income from sales and is responsible for the marketing process.
(1) information
(2) marketing
(3) public relations
(4) human resources

Question 8
The main focus of . . . is on the maintenance of long-term relationships between the
organisation, government, public, suppliers of raw materials, employees, and current
and potential consumers.
(1) marketing activities
(2) the systems orientation
(3) relationship marketing
(4) the marketing process

Question 9
There are several departmental functions in an organisation. The . . . function generates
income from sales and includes the coordination of the four elements of marketing (4Ps).
(1) information
(2) marketing
(3) public relations
(4) human resources

25 MNM1503/1
Question 10
Marketing managers have to perform management tasks and take decisions. The fol-
lowing action BEST describes the implementation task.
(1) doing a SWOT analysis
(2) setting objectives
(3) providing leadership
(4) setting evaluation criteria

26
Topic 2
The marketing environment

AIM
Our aim in this topic is to enable you to understand the components of the marketing
environment and how the variables of the micro-environment, market environment and
macro-environment influence a business.

LEARNING OUTCOMES

On completion of this topic, you should be able to predict how the variables of
the micro-environment, market environment and macro-environment influence a
specific business.
More specifically, you should be able to
• identify the components of the marketing environment
• describe the variables of the micro-environment
• explain how the variables of the market environment influence a business
• explain how the variables of the macro-environment influence a business
• conduct a SWOT analysis to determine the internal strengths and weaknesses as
well as the external opportunities and threats of a business

TOPIC 2 Study unit 2: The modern marketing environment of business

27 MNM1503/1
Study unit 2
The modern marketing environment of business

Contents

Overview
Learning outcomes
Key concepts
2.1 Introduction
2.2 Components of the marketing environment
2.3 Variables of the micro-environment
2.3.1 Strategic direction
2.3.2 Resources
2.3.3 Marketing mix
2.3.4 Marketing management
2.4 Variables of the market environment
2.4.1 Customers
2.4.2 Suppliers
2.4.3 Competitors
2.4.4 Intermediaries
2.5 Variables of the macro-environment
2.5.1 Political/legal environment
2.5.2 Economic environment
2.5.3 Social environment
2.5.4 Technological environment
2.5.5 International environment
2.5.6 Natural environment
2.6 SWOT analysis
2.6.1 Internal environment issues: Strengths and weaknesses
2.6.2 External environment issues: Opportunities and threats
2.7 Environmental scanning
2.8 Conclusion
2.9 Case study with questions
2.10 Reflection
2.11 References
2.12 Self-assessment questions

OVERVIEW
This study unit focuses on the marketing environment, which influences the planning,
implementation and control of marketing activities. The marketing environment of an
organisation is made up of a number of components that are broadly classified into three
main environments: the micro-environment, the market environment and the macro-
environment. An organisation needs a thorough understanding of these environments

28
to be able to draw on its internal strengths, understand the dynamics of the markets,
respond to competitive forces and exploit opportunities to ensure its sustainability.

Therefore, organisations that fail to fully understand the operations of forces in their
marketing environment will most definitely fail to respond adequately to the changing
needs and lifestyles of consumers, competitive pressures, technological forces and so on.
As future marketing managers and entrepreneurs who will be expected to contribute
meaningfully to the performance of organisations, it is important that students understand
and develop competence in evaluating the marketing environment and assessing the
impact of factors and/or forces on the marketing activities of their organisations.

This study unit is presented as follows:

LEARNING OUTCOMES

After completing this study unit, you should be able to assess how the variables of
the micro-environment, marketing environment and macro-environment influence
the operations of a specific organisation.
More specifically, you should be able to
• explain the concept of the marketing environment

29 MNM1503/1
 • identify the three main components of the marketing environment
• identify and explain the variables of the micro-environment
• identify and explain the variables of the market environment
• describe the main variables of the macro-environment
• explain the term “SWOT analysis”
• explain the importance of conducting a SWOT analysis
• explain the term “environmental scanning”
• outline the importance of environmental scanning

KEY CONCEPTS
You have to master the following key concepts to achieve the learning outcomes
for this study unit:
• marketing environment
• micro-environment
• market environment
• macro-environment
• suppliers
• competitors
• consumers
• SWOT analysis
• environmental scanning

2.1 INTRODUCTION
All organisations operate in an environment. The environment in which business
organisations operate is generally referred to as the business environment. This denotes
all the internal and external factors of an organisation, such as its mission and vision
statements, employees, customers, suppliers and regulatory bodies that directly or
indirectly affect its operations. Therefore, it is very important that organisations understand
the factors in the business environment in order to be able to make the right decisions
that will guarantee their overall performance. In most cases, the environment in which
an organisation operates sets the standards, and organisations then conform to these
standards in order to survive and remain relevant.

For example, most governments and pressure groups advocating environmental

sustainability are appealing for businesses to heed the call by producing environmentally-
friendly products. A number of businesses have responded by producing green products.
It is expected that in future, companies that do not heed the call will suffer irreparable
damage to their brands. Hence, it is obvious that in order for an organisation to remain
profitable, it has to interact meaningfully with its environment and use the outcomes to
align its operations. For this reason, it is important to understand the environment of the
organisation and the factors in the environment that influence its operations.

In the following sections, we discuss the three main marketing environments and the
variables of each environment.

30
2.2 COMPONENTS OF THE MARKETING ENVIRONMENT
Marketing is one of the most important functions of a business. As noted in Study unit
1, marketing brings funds into the business by creating value for consumers and in so
doing contributes to the overall performance of the organisation. Marketing operations
are, however, not carried out in a vacuum; they are carried out in an environment. The
environment in which marketing activities take place can be described as the marketing
environment. In other words, the marketing environment indicates the sources of factors
that influence the planning, implementation and control of marketing activities within
an organisation. The marketing environment influences an organisation’s ability to create
value for customers as well as build and maintain relationships with them.

When carrying out marketing functions, marketers do not only interact with people and
processes within their organisations but also encounter external forces that influence
their efforts to satisfy their customers. The marketing environment is broadly classified
into three key components:

1. micro-environment
2. market environment
3. macro-environment

These three components of the marketing environment are represented in Figure 2.1.

Figure 2.1: The marketing environment

Source: Bates et al (2009:15)

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From the figure, it can be seen that the micro-environment is bounded by the market
environment and the macro-environment. As the name implies, the micro-environment is
the smallest component of the three marketing environments and it is usually referred to
as the business. The market environment and the macro-environment are both outside
the perimeter of the business (micro-environment) and they influence the operations of the
business (micro-environment). Therefore, it is safe to say that the market environment and
the macro-environment are part of the external environment of the business, whereas the
micro-environment is the internal environment of the business. The micro-environment has
some influence on the market environment, but no influence on the macro-environment.
Generally, these environments are interrelated as they cannot be isolated from each
another. The environments also witness rapid changes and changes affect the operations
of businesses and, more particularly, their managerial processes and decisions.

In the following sections, we look at the three components of the marketing environments
in detail.

Activity 2.1

(1) Define the concept “marketing environment”.

(2) Identify the three key components of the marketing environment.
(3) State the level of control that the marketing department of an organisation has
on the three components of the marketing environment identified in Question 2.

5 Feedback

The marketing environment can be defined as the sources of factors that directly or
indirectly influence the planning, implementation and control of marketing activities
within an organisation.
The three key components of the marketing environment are:
(1) the micro-environment
(2) the market environment
(3) the macro-environment

The level of control that the marketing department has on the marketing environment
is indicated in the following table:

Marketing environment Level of control

Micro-environment Absolute control
Market environment Some level of control
Macro-environment No control

32
2.3 VARIABLES OF THE MICRO-ENVIRONMENT
As noted earlier, the micro-environment is the business itself and it includes all the
resources that the business has as well as everything that happens inside the business.
The micro-environment is sometimes also called the decision-making environment
(Bates et al 2009:16). This is because this environment is influenced directly or indirectly
by decision-makers within the business who plan and allocate the necessary resources
needed to implement the plan and in so doing influence the growth and the future
existence of the business. The micro-environment is made up of a number of variables.
Some of the key variables of this environment are presented in Figure 2.2.

Figure 2.2: Key variables of the micro-environment

Now let as look at the variables of the micro-environment in detail.

2.3.1 Strategic direction

Strategic direction is defined in terms of the organisation’s vision of where it is heading,
the business in which it is involved and the objectives it wishes to achieve (Harrison &
St John 2010:82). It sets the roadmap and provides the guidelines for the organisation’s
operations. The major components of an organisation’s strategic direction include its
vision, mission and strategic objectives.

2.3.1.1 Vision statement

A vision statement is a glimpse of an organisation’s philosophy, values and dreams
(Stuart 1994:28). It articulates the organisation’s strategic intent and summarises what
the organisation wants to accomplish in the future (Ogbor 2009:289). Vision statements
provide a roadmap and serve as a vehicle for success by forcing managers to zero in
on the priorities and core values of their business. It is important to have a clear vision
statement because it sets the tone for the development of a comprehensive mission
statement. Table 2.2 outlines what a vision statement is and what it is not.

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Table 2.2: What a vision statement is and what it is not

A vision statement is… A vision statement is not…

• a statement of a long-term idealised • fully achieved in practice
future
• focused on how the organisation will • a mission
impact or provide value for customers
• shared with others • a strategy
• a short-term or long-term goal
• an internal plan or approach to deal
with a crisis
• a marketing tagline

Source: Kirkpatrick (2006:4)

The following are some examples of vision statements of well-known companies. You
should do research to get more insight into other organisations’ vision statements.

Vodacom
Best network, best value, best service.
Google
Never settle for the best.
Tiger Brands
To be the most admired, branded, FMCG Company in emerging markets
Nedbank
To be Africa’s most admired bank by all our stakeholders – our staff, clients, shareholders,
regulators and the communities that we live in.

2.3.1.2 Mission statement

A mission statement seeks to answer the question “What business is our organisation
in?” In other words, a mission statement is a clear and concise statement that explains
an organisation’s reason for existence. It identifies what the organisation stands for and
outlines the basic philosophy underlying its operations (Ferrell & Hartline 2010:33). A good
mission statement requires little explanation to understand what the company does
(Kirkpatrick 2006:4). Unlike a vision statement which seeks to answer the question “What
do we want to become?” a mission statement answers the question “What business are
we in?” Examples of mission statements of leading brands are:

34
 Woolworths Holdings Limited
To be the first choice for customers who care about value, innovation and sustainability
in the southern hemisphere
Google
To organise the world’s information and make it universally accessible and useful

According to Ferrell and Hartline (2010:33), a well-formulated mission statement for any
organisation, business unit within the organisation or a sole proprietorship should answer
the following five basic questions:

1. Who are we?

2. Who are our customers?
3. What is our operating philosophy?
4. What are our core competencies or competitive advantage?
5. What are our responsibilities with respect to being a good steward of our human,
financial and environmental resources?

A mission statement that answers these questions sets the tone for the development of
a good marketing plan. Without a good mission statement, it would be difficult to come
up with a good marketing plan that will deliver value to customers and earn profit for
the organisation.

Before you continue with the next section, conduct online research on
South Africa’s leading brands. Identify their vision and mission statements,
and scrutinise these.

Examine whether their vision and mission statements answer the questions
“What do we want to become”? and “What business are we in?” respectively.

2.3.1.3 Goals and objectives

After developing the vision and mission statements, the next stage of the strategic planning
process is the development of goals and objectives (Albon, Iqbal & Pearson 2016:207).
Goals are generally defined as “observable and measurable end results having one or more
objectives to be achieved within a more or less fixed timeframe” (Mohammed 2013:14).
Goals are usually stated in terms that do not have to be measurable but are generally
attainable at some future time. Moreover, goals are ambitious and idealistic but feasible.
Goals frequently begin with verbs (action words) such as “to develop”, “to provide”, “to
establish”, “to improve” and “to increase”, Examples of Telkom’s strategic goals are:

35 MNM1503/1
 • To exponentially increase our ability to offer IT services that are responsive to current
and future connected strategies and include compelling cloud-based and data centre
services. Our proposed acquisition of BCX, which the South African Competition
Commission has recommended for approval by the Competition Tribunal (subject
to certain conditions), would allow us to rapidly achieve this goal.
• Retain and recruit the talent we need to deliver against our strategy and provide
an environment that supports innovation and continuous improvement

Contrary to goals, objectives are statements of expected outcomes that are measurable
and timebound. Singh and Gupta (2016:124) emphasise that a good objective should be
clear, specific, measurable, timebound, realistic and represents a commitment. Clearly
written objectives facilitate the evaluation of performance.

2.3.2 Resources
Resources are the endowments within an organisation that are used to produce goods
and services to satisfy the target market and make a profit. These resources range from
capital, labour (skills) and infrastructure to the technology that an organisation uses
to improve its efficiency, reduce wastage and satisfy the target market profitably. The
resources within an organisation are internal variables and the organisation has absolute
control over how it manages its resources.

The availability of adequate resources within an organisation enables it to counter threats

and exploit opportunities in its environment (Grant 2016:177). Therefore, there is a direct
link between the availability of resources within an organisation and its competitive
advantage (LaPlaca & Newton 2011:181). For example, Coca Cola has a large marketing
budget; it is able to run advertisements and other promotional programmes consistently,
thereby building a strong competitive advantage in its international markets. Without
adequate resources, an organisation cannot hire suitably qualified personnel who can
come up with good marketing strategies. And even if they do manage to come up with
good marketing strategies, funding will still be required to implement the marketing
strategies in order to rake in profit for the organisation. For these reasons, the availability
of resources within an organisation is a critical component of the internal environment
that determines the extent to which the organisation can compete in the marketplace.

2.3.3 Marketing mix

The marketing mix is described as “the set of marketing tools that the firm uses to pursue
its marketing objectives in the target market” (Parment, Kotler & Armstrong 2016:9). The
marketing mix fundamentally consists of four variables which are commonly referred to
as the “4Ps”: Product, price, place and promotion. We discussed these elements of the
marketing mix in the previous unit (Study unit 1). Recent developments in the discipline
of marketing have expanded the 4Ps to 7Ps by adding people, process and physical
evidence. Understanding the composition of the marketing mix is very important because

36
it serves as a valuable link between an organisation and its target market, and forces the
organisation to follow a consumer-oriented marketing approach (Dutta & Sahha 2015:28).

Every organisation has the flexibility to determine its own marketing mix to satisfy the
needs and wants of its target market in order to generate profit. It is important to note
that the marketing mix forms the core of any organisation’s marketing efforts aimed at
satisfying the needs and wants of the target market efficiently and economically. Because
these needs and wants change with time, it is important that the organisation conducts
periodic reviews of the elements of its marketing mix to make sure that they are aligned
with customers’ changing needs/wants. Because the marketing team of an organisation can
change the elements of the marketing mix in response to the changing needs and wants
of the target market and changes in the other variables of the marketing environment,
we say that the management of the organisation has control over the marketing mix.

2.3.4 Marketing management

Marketing management is one of the important functions of management in looking
after the marketing system of the organisation. Parment et al (2016:4) define it as “the
art and science of applying core marketing concepts to choose target markets and get,
keep, and grow customers through creating, delivering, and communicating superior
customer value”. Marketing management relies on the co-ordination of the marketing
Ps to achieve an effective consumer response.

Therefore, marketing management is a creative management function that contributes

significantly to the success of the organisation by understanding customers’ needs and
wants and developing products and/or services to satisfy those needs and wants, and
in doing so make a profit for the organisation. The marketing management function
also co-ordinates the resources of production, determines the distribution of products/
services and directs the nature of efforts required to sell to the end-consumers in a way
that will create value for the organisation (Pillai, Bagavathi & Kala 2012:52). Marketing
management is, therefore, an important management function that ensures the flow of
products and services from the producers to the end-consumers. Marketing management
is the conscious effort to achieve the desired exchange outcomes with target markets
(Parment et al 2016:10). To achieve this, marketing management carries out a number of
functions. Some of these important functions are:

• Marketing research. This is the careful and objective study of product design, markets
and marketing activities such as physical distribution, warehousing, advertising and
sales management. Its main objective is to provide managers with factual information
to aid marketing decisions and strategies.
• Product planning and development. This involves the identification, development
and commercialisation of new products to address needs/wants and make a profit for
the organisation. It also entails modifying new products and withdrawing unprofitable
ones.
• Standardisation and grading. Standardisation is the process of setting up standards and
manufacturing products in line with the standards. It includes the process whereby
standards are assured. Standardisation ensures uniformity in terms of size, shape, design

37 MNM1503/1
 and colour. Grading is a process of standardisation which ensures that products are
sorted into grades on the basis of some predefined characteristics such as quality and
size. These processes help to establish quality levels and make it easier for consumers
to compare different offers (Panda 2009:170).
• Packaging. Packaging is one of the most important marketing functions, because
packaging can make or unmake a product. Basically, marketers use packaging to
contain a product, protect it and – especially – to identify it. Moreover, packaging is
not only one of the most important consumer attention-seeking tools but is also an
excellent way to distinguish one’s product from those of competitors. Therefore, to
facilitate the sale of a product, it is important that marketers elect packages that are
unique and capable of grabbing the attention of the target market.
• Promotion management. Promotion is aimed at communicating an organisation’s
offering to the target audience and to obtain feedback where possible. It is therefore
an important tool that marketers use to create awareness and motivate consumers to
buy their products or services. Without this important marketing function, buyers will
probably not be aware of an organisation, its products/services and how those products/
services will provide value to them. Promotion can take the form of advertising, where
an organisation informs its target audience about what it stands for, the availability of
its products/services and where they can be obtained. Promotion can also be in the
form of sales promotion, where marketers offer short-term incentives to consumers
or channel members to facilitate the sales of their products/services. In promotion
management, marketers have to take wide-ranging decisions with regard to the kind
of promotion, channel, type of media, frequency of the promotion, budget and so on.
• Distribution management. When a product is produced, in most cases it passes through
a number of intermediaries that each passes it down to the next organisation in the
chain before it reaches the final destination – which is the end-consumer or end-user.
These intermediaries (sole selling agents, wholesalers, retailers and so on) move the
product from the producer to the end-consumer. Their activities have an impact on
the quality, price and availability of the product to the end-user, hence it is important
that marketers manage the distribution channel efficiently.
• Management of the sales force. Personal selling is one of most important activities of
marketing which ensures that the organisation secures the revenue needed to keep the
business running. It therefore goes without saying that if the sales force is not properly
managed and motivated to achieve their sales target, the needed revenue will not be
generated and the organisation will eventually run into cash flow problems. The sales
force also represents the image of the organisation, as they reach out to customers,
introduce products/services to them and encourage purchases. For these reasons, it
is important for the marketing managers to ensure that the sale force is adequately
trained and sufficiently motivated.

Activity 2.2

(1) Explain why the micro-environment is also referred to as “the business”.

(2) Identify the key variables of the micro-environment.
(3) Differentiate between a vision statement and a mission statement.
(4) Describe the key functions of marketing management.

38
6 Feedback

(1) The micro-environment is also referred to as the business because it comprises all
the variables within the business enterprise.
(2) The key variables of the micro-environment are:
• strategic direction
• resources
• marketing mix
• marketing management
(3) A vision statement spells out the organisation’s strategic intent and summarises what
the organisation wants to accomplish in the future, whereas a mission statement is
a clear and concise explanation of an organisation’s reason for existence. In other
words, a vision statement articulates what an organisation wants to become in the
future while a mission statement emphasises the core business of the organisation
in the present.
(4) Marketing management is a creative management function that co-ordinates the
resources of production, determines the distribution of products/services and directs
the nature of efforts required to sell to the end-consumers in a way that will create
value for the organisation. Marketing management carries out a number of functions:
• marketing research
• product planning and development
• promotion management
• pricing management
• standardisation and grading
• distribution and channel management
• sales force management
• customer relationship management

In the next section, we discuss the market environment.

2.4 VARIABLES OF THE MARKET ENVIRONMENT

The market environment is found outside the business organisation. It is important to note
that the business organisation has limited control over the variables of this environment.
Some important variables of this environment are presented in Figure 2.3.

Figure 2.3: Variables of the market environment

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2.4.1 Customers
According to Drucker (2007:29), the purpose of a business is to create a customer. The
customer is the function of every business and it is the customer who keeps the business in
existence. Hence, customers are integral to the success of all organisations and the ability to
identify and meet their needs is widely regarded as one of the keys to organisational survival
and prosperity (Lincoln & Murphy 2016:177). It is therefore important that organisations
devote time and effort to understanding the factors that influence customer demand,
and devise ways to satisfy customer demands. This idea emphasises the philosophy of
customer sovereignty, where resources are allocated to produce goods/services to satisfy
customer demands.

Customers are important to organisations in a number of ways. Luck (2012:47) identifies

the importance of customers to organisations as follows:

• Customers are the only source of revenue for most organisations.

• If customers stopped buying from a business or defer to a competitor, the survival of
the organisation may be threatened.
• A customer who is dissatisfied may tell many more friends or other customers about
his/her negative experience than a satisfied customer will tell about a good experience.
• It is far cheaper and profitable to retain a customer than to recruit a new customer
because of the lifetime revenue stream involved.
• Customers’ preferences can change quickly but when they are anticipated, they can
easily be influenced by the marketer.
An organisation may have different categories of customers, including individuals,
households, industries, government agencies, non-government agencies and other
institutions. For example, the customers of a car dealership may include individuals,
government agencies, public transport enterprises, private transport companies, taxi
owners, non-governmental organisations and pressure groups. The different categories
of customers have different expectations. It is therefore important that organisations
segment their market into distinct groups that can be satisfied effectively with their
marketing mix. Organisations that neglect and fail to manage customer expectations
do so at their peril.

2.4.2 Suppliers
Suppliers are a very important force in the business environment. The role of suppliers
is to supply raw materials and other inputs that the organisation requires for further
processing to provide outputs in order to satisfy the needs and wants of the target
market. Suppliers play a key role in the performance of organisations; therefore, supplier
management is of the utmost importance for organisational success. For example, if the
raw materials supplied by the suppliers are of inferior quality, the final products are also
likely to be of poor quality and organisations may lose key customers. Moreover, when
suppliers become unreliable, organisations may be forced to maintain high inventories
– leading to rising operational costs.

40
In situations where the raw materials are expensive and inconvenient to transport,
organisation may have to consider setting up their enterprises close to the suppliers.
Other factors which may necessitate setting up enterprises close to suppliers are: few
choices of suppliers, business buys little and frequently, and inputs (raw materials) are
perishable (Campbell & Craig 2012:94).

2.4.3 Competitors
In today’s business climate, very few organisations (if any) are able to operate without
facing some form of competition, whether they are business enterprises, government
departments or non-governmental organisations. Competition is therefore fundamental
to the operations of almost all organisations. One of the most practical ways to examine
the level of competition for a business is finding out the number competitors in the
same industry (Markman & Phan 2011:41). Businesses usually have no competitors, a few
competitors or many competitors. These situations are illustrated in Table 2.3.

Table 2.3: Common types of market competition

NUMBER of Do the competitors supply

Example
competitors the same products/services?
Monopoly None No Metrorail service
Oligopoly Few Yes Cement producers
Monopolistic Many No South African
competition cellular network
industry
Perfect Many Yes Agricultural
competition markets, eg wheat
and milk

Source: Adapted from Mankiw (2011:331)

The type of competition in the industry where the business operates to a large extent
determines how it behaves. For example, if a business has no competitors (monopoly), it
has the freedom to operate how it wants. However, if a business operates in an industry
where there are a large number of competitors, it has to adopt a customer-oriented
focus to ensure that it cultivates and maintains customer loyalty. As noted earlier, many
businesses are facing competition and this constrains their growth potential. However,
a creative marketing department can shape and influence the competitive environment
by making sure its strategies, plans and tactics constantly reflect changing trends and
opportunities in the market environment.

Oldroyd (2012:61) offers the following guidelines to understand and deal with competition
in the industry:

• No organisation can make decisions without reference to its competitive environment.

• Even a monopoly must be concerned about potential entrants or effective substitutes.

41 MNM1503/1
• Pricing must take into consideration what the target market can afford and the reactions
of competitors.
• The more competitors there are and the closer their product offering, the more
sensitively sales respond to a relative change in price.
• Price wars may occur from time to time, but non-price competition using branding
and other product and promotional tactics should be the norm.

What do you consider to be the type of market competition prevailing in

the following industries?

• banking industry
• mining industry
• clothing and textile industry
• fast-moving consumer goods industry
• education and training industry

2.4.4 Intermediaries
Another variable of the market environment of organisations is marketing intermediaries.
Intermediaries are firms that assist the company in promoting, selling and distributing its
products to end-users (Prasad 2010:286). The role of intermediaries is more pronounced
in situations where a business does not sell its products/services directly to the end-users.
Intermediaries are the following (Jain, Trehan & Trehan 2014:14):

• Middlemen. They include wholesalers, retailers and departmental stores.

• Marketing agencies. These include advertising agencies, consultancy firms, media firms
and market research firms.
• Financial intermediaries. These provide finance for marketing activities and insure
business risks. They include banks, insurance companies, financial institutions, money
markets and capital markets.
• Physical intermediaries. These are firms that assist in stocking and transporting the
manufactured goods to the end-consumer. They include warehouses and transport
agencies.
Intermediaries serve as a direct link between the organisation and the end-consumers.
Therefore, an organisation must have strategies in place to forge a good relationship with
its intermediaries because a disturbance in this important link with consumers will have
dire consequences for the organisation.

Activity 2.3

(1) Indicate the importance of customers in the market environment of businesses.

(2) Indicate the importance of suppliers to an organisation.

42
7 Feedback
(1) The importance of customers to businesses include:
• Customers are the only source of revenue for most organisations.
• The survival of any business is likely to be threatened by an inadequate customer
base.
• Customers provide ideas for the development of products and services.
• Loyal customers provide a regular stream of revenue for companies.
• In some cases, satisfied customers act as brand ambassadors.
(2) The importance of suppliers to an organisation are as follows:
• The quality of materials supplied by the suppliers may affect the final products.
• The prices at which suppliers supply raw materials have an effect on the final
price the consumer pays.
• The quantity of raw materials supplied affects the quantity of manufactured
products available to the end-consumer.
• The timing of raw materials supplied to the manufacturer will affect the produc-
tion schedule and the time when the manufactured goods will be available to
the end-consumer.

2.5 VARIABLES OF THE MACRO-ENVIRONMENT

An organisation also operates in a larger macro-environment that poses threats that
must be addressed and presents opportunities that must be exploited in order for the
organisation to be successful. As noted earlier, the variables of the macro-environment
are generally uncontrollable, which means the organisation cannot influence these
forces. The acronym PESTIN (PPolitical/legal; EEconomic; SSocial; TTechnological;
IInternational; NNatural) is generally used to describe the variables of the macro-
environment. The factors in the macro-environment are presented in Figure 2.4.

Figure 2.4: Variables of the macro-environment

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These variables are discussed below.

2.5.1 Political/legal environment

The political environment comprises laws, government agencies and pressure groups that
influence and limit the operations of various organisations and individuals within society
(Kotler, Burton, Deans, Brown & Armstrong 2013:136). This environment is characterised
by volatility. Change is quite often the norm in the political environment. The role and
impact of the political environment on businesses stretch beyond the making of laws. The
size of the public sector and all its departments affect the operations of businesses – be it
as suppliers, customers, policy makers or regulators. Government policy sets the climate
for business and a change in government can significantly affect the policy direction of
the state and have an impact on business operations. The level of taxes to be paid by
businesses is politically decided by government officials. Businesses have a keen interest
in the relative tax burden of businesses and corporate tax rates as well in the nature and
size of government spending on products and services. Moreover, governments set the
standard requirements for products and services that are sold and delivered to citizens.
Policies on cleanliness and environmental sustainability are set, and the implementation of
ethical business practices is closely monitored by state agencies (Young & Pagoso 2008:56).

Business organisations must be mindful of the political risk presented by the political
environment in which they trade. Political risk “arise from actions of national governments
which interfere with or prevent business transactions or change the terms of agreement, or
cause the confiscation of wholly or partially owned foreign business property” (Weston &
Sorge 1972:60). In third world countries where there are rampant changes in government,
sometimes through unconstitutional means, political risk is said to be high. This is true
of corruption, factional fighting and disregard for the rule of law, which cause major
problems for business operations. Political stability is important for investors, who wish
to minimise their risks. Multinational companies are unwilling to invest in any economy
experiencing political or labour unrest. For example, foreign direct investment flows into
South Africa dropped by 31.2% to US$5.8 billion in 2014, down from US$8.3 billion in 2013
(Mail & Guardian 2015). This significant drop was attributed to labour unrest.

On Wednesday, 9 December 2015, President Jacob Zuma dismissed Nhlanhla

Nene as the minister of finance in his government. Conduct an internet
search to identify the effects of this political decision on the economy.

2.5.2 Economic environment

The economic environment in which a business operates exerts a significant influence
on its activities. The economic environment consists of broad factors that directly or
indirectly affect the economy and its participants, including business enterprises. Some
of the major economic factors are discussed below.

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2.5.2.1 Inflation rate
Inflation is loosely defined as a sustained increase in the general level of the prices of
products and services. When inflation increases, every Rand you have buys a smaller
quantity of a product/service. Consumer price inflation (CPI) and producer price inflation
(PPI) are the two basic measures of inflation in South Africa. According to Statistics South
Africa (Stats SA), the CPI and PPI for December 2016 were 6.8% and 7.1% respectively (Stats
SA 2017a). A high inflation rate does not auger well for business growth. High inflation
rates lead to higher cost of borrowing for businesses in need of loans for expansion. When
a country experiences a sustained rise in inflation relative to other countries, its exports
are less competitive in global markets and consequently it may have less export orders,
worsening unemployment and the balance of trade deficit. In addition, raising inflation
can instigate employees to agitate for higher salaries to protect their income, which may
lead to labour unrest and reduced business profits. High and volatile inflation is also not
good for business confidence, partially because businesses cannot be certain of what their
costs and prices are likely to be. This uncertainty may give rise to a lower level of capital
investment spending. Inflation and interest rates are often mentioned in the same breath.

2.5.2.2 Interest rate

The South African Reserve Bank (SARB) defines interest rates as “prices for loanable/funds
– prices of funds invested, lent out or borrowed for various periods of time” (SARB 2007:2).
In South Africa, the interest rate is determined by the SARB’s Monetary Policy Committee.
As of January 2017, the SARB maintained its benchmark repo rate (the rate at which it lends
money to commercial banks in the event of a shortfall in funds) at 7%. High interest rates
increase the cost of borrowing for both individuals and businesses. Thus, if the interest
rate is too high, many businesses may be reluctant to borrow money for expansion. For
this reason, in most advanced countries such as the United States (US), Canada, the United
Kingdom and Japan, interest rates are deliberately kept low (usually ranging between
-0.10% and 1%) in order to stimulate economic activities. It must, however, be noted that
in countries where there is a low savings ratio (such as South Africa), governments raise
interest rates with the aim of encouraging savings.

2.5.2.3 Currency exchange rate

The currency exchange rate is the price of one nation’s currency in terms of another
nation’s currency, for example the price of the South African Rand (ZAR) in terms of the
US Dollar (USD). Thus an exchange rate has two components: the domestic currency
(ZAR) and the foreign currency (USD). The ZAR reached a record low of 0.67 in June
1973 and an all-time high of 16.84 to the USD in January 2016 (Trading Economics 2017).
Currency exchange rates play a significant role in businesses that export products or
import raw materials. When the Rand depreciates (devalues), it makes exports cheaper
– so the prices of South African products on international markets become cheaper and
South African exporting companies may be able to export more. However, companies
importing raw materials will have to spend more ZAR to import the same quantity of
products. Moreover, when the ZAR depreciates against the USD and the oil price on the
world market remains constant or increases, the price of petrol and diesel in South Africa

45 MNM1503/1
will have a corresponding increase. This increase has a direct effect on the transportation
costs of companies. Thus, when the Rand depreciates, it increases the cost of imported
products, raw materials, transportation and so on. Therefore, businesses must monitor
the economic environment, anticipate fluctuations in the currency exchange rate and
have adequate plans in place to mitigate the impacts on their operations.

2.5.2.4 Unemployment rate

The unemployment rate is defined as the percentage of the total labour force that is not
employed and is actively seeking employment. In South Africa the unemployment rate
increased to 27.1% in the third quarter of 2016, the highest since 2004 (Stats SA 2017b).
A high unemployment rate in a country has negative implications for businesses. When
people do not have jobs, they have less money to spend. Thus high unemployment
weakens the purchasing power of consumers, leaving businesses with less sales turnover.
Moreover, businesses are often impacted by social problems (for example crime) associated
with high unemployment. The relatively high crime rate that South African businesses
experience can be linked to the high unemployment. This often forces businesses to
reinforce their security measures, adding to their operational costs.

2.5.2.5 Level of (discretionary) income

Discretionary income is the earnings left for spending, investing or saving after paying
taxes and personal necessities such as food, shelter and clothing. This income is usually
spent on luxury items, vacations, and non-essential products and services. The level of
income that consumers receive has positive and negative effects on businesses. When
consumers’ discretionary income increases, they are inclined to spend and thus demand
more products and services. A decrease in consumers’ discretionary income results in
them cutting back on their spending and thus the demand for products and services
declines. Generally, when consumers’ discretionary income is low, less spending occurs and
businesses are unable to generate enough sales turnover to meet their running expenses.

From the foregoing, it is clear that the forces in the economic environment pose a challenge
to the survival and performance of businesses. It is therefore important that business
managers develop the skills to anticipate changes in the economic environment and
adjust the business plans and operations to reflect these changes in order to minimise
the impact of economic factors on their businesses.

2.5.3 Social environment

Another important component of the macro-environment is the social environment. It
is said to be perhaps the most difficult environment for marketers to be able to identify,
evaluate and respond to (Oldroyd 2012:43). This environment comprises changes in
population characteristics, education levels, culture, social inequality, lifestyle, race
relations, attitudes and believes. How we live, think and behave is the product of complex
cultural conditioning by family, friends, church/mosque/shrine, school, work and the various
media. This conditions with whom we interact, what we buy, when we buy it, where we

46
buy it, and whether we want to buy with cash or on credit. South Africa is a multicultural
society (“Rainbow Nation”), which makes the social environment even more complicated
for businesses because the social environment is made up of diverse subgroups of people
with their own unique values, beliefs and customs.

Demographic and family role changes may not be noticeable, but their long-term impact
has far-reaching implications for businesses. The trend of more black people becoming
economically active and joining the formal economy, the trend of more females joining
the workforce and becoming independent, and the growing youthful population will
generate massive changes in the social system over time and determine the patterns of
work and spending.

Businesses must be able to notice changes in the social environment and adapt to it,
otherwise they will not survive. For example: Consumers are becoming more aware of
environmental sustainability and there is a move towards energy conservation. This is
gradually creating a need for hybrid cars. Therefore, automobile manufacturing companies
must adapt to these changes if they are to remain in business.

2.5.4 Technological environment

Technology has become part of our everyday life. It is difficult – if not impossible – to
escape its effects in our day to day activities. Due to its pervasive impact on our lives, the
rate at which developments is taking place is quite astounding. Evidence of this is seen
in the various makes of smartphones, laptops, tablets, application software, computer
hardware, and other consumer and industrial technologies that are introduced almost
every day. For this reason, the technological environment is arguably the most dynamic
of all the business environments.

Technological developments have had a profound impact on transforming existing

business ventures as well as creating new ones. Technology is important for businesses
for a number of reasons. First, most business organisations convert inputs (raw materials)
into outputs (finished products/services) to serve their customers. Through technology,
businesses are able to use their resources more efficiently and increase their outputs
substantially than they use their inputs, contributing to an increase in productivity.
Second, with technology, businesses are able to make quick and accurate decisions. Most
successful businesses conduct comprehensive marketing research to gather information
to assist management decision making. This research can, for example, be done through
online surveys, focus groups, blogs and social media. Online tools do not only provide
quick information for decision making, but also produce accurate information by reducing
the risk of human error. Third, technological developments have created a new platform
for businesses to reach their target markets through the use of digital marketing. Digital
marketing is a contemporary approach to marketing that uses tools like search engine
optimisation, pay per click, blogging, discussion for a mobile marketing, internet marketing,
social media marketing and so on to market products and services to customers even
beyond the geographic boundaries of the business. Fourth, information technology has
revolutionised the administration of businesses. Most businesses now have computerised
systems for organising and keeping records, monitoring employees and productivity,

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reducing their reliance on the cumbersome processes of manual filing and physical
monitoring.

Judging from the above, it would be impossible for businesses to remain in operation
and achieve long-term growth without aligning its operations with current technological
developments. For organisations that do not want to embrace and integrate the emerging
technologies to streamline their processes and deliver better products and services to
their customers, technological developments pose a significant threat to their existence.

Which technological developments most affect you as a student and in

what way(s) do they affect you?

2.5.5 International environment

Some businesses are increasingly seeking markets beyond their geographic boundaries to
either sell their finished products (export) or buy materials, plant and equipment (import).
These businesses are keenly interested in what happens in international markets. In fact,
some scholars even emphasise that businesses that do not engage in international trade
cannot ignore the forces in the international environment because they directly or indirectly
impact their business operations. For example, South African trade agreements with China
have led to the importation of many cheap Chinese textile products that resulted in the
collapse of many local textile industries that may not have ventured into international
trade. Key variables in the international environment include globalisation, the global
financial crisis, international agreements and declarations, and international terrorism.

Many countries have policies and regulations that restrict or restrain international trade
with the aim of protecting local industries. This practice is commonly referred to as trade
protectionism. Some common protection methods are tariffs, quotas and embargoes.
Countries implement protectionist measures to protect infant and strategic industries,
safeguard non-renewable natural resources, save local jobs, deter unfair competition
and save the local environment. Firms that depend on exports could be adversely
affected by protectionist practices. Moreover, political factors like wars and tension
between countries could have adverse effects on trade between organisations in these
countries. For example, in 2014, the US, the European Union (EU) and other countries and
international organisations imposed sanctions against individuals, businesses and officials
from Russia and Ukraine. Russia responded by imposing measures against a number of
countries, including a total ban on imports from countries such as the US, EU member
states, Australia, Norway and Canada.

Businesses (especially those that are interested in venturing into foreign markets for
the purposes of exporting or importing) first have to understand government policies
and regulations, and socio-cultural forces in their preferred host markets if they are to
become successful.

48
 Shortly after assuming office as the 45th president of the US, Donald Trump
banned travel, targeting immigrants, from seven predominantly Muslim
countries in Africa (Libya and Somalia) and the Middle East (Iran, Iraq, Syria
and Yemen). How did this ban affect trade between businesses in these
countries and the US?

2.5.6 Natural environment

This environment includes geographical and ecological factors such as natural resources
(for example bodies of water, forests, crude oil, coal, gold, diamonds, aluminium and other
minerals) and climatic conditions. These resources are not in infinite supply as they can
be depleted. Weather and climatic conditions affect the location of certain industries,
for example the sugarcane farms and coal-mining industries in KwaZulu-Natal and the
wineries in the Western Cape. Export companies tend to be situated near airports and
harbours to minimise transportation costs.

Because these resources are finite, they can be in short supply – which leads to escalating
prices of raw materials. For example, when there is a shortage in the supply of coal,
Eskom will find it difficult to produce adequate electricity to supply homes and industry
and the electricity tariff are likely to rise as a consequence. Eskom should therefore be
able to anticipate that the supply of coal will be depleted in the foreseeable future and
should begin looking for alternative forms of raw materials (solar, biogas and nuclear) to
generate electricity. All businesses should be aware of this potential limitation and have
adequate plans in place to respond to future shortages in their raw material supplies.

An important factor that impacts the sustainability of our natural resources is pollution.
Environmental pollution includes water pollution, air pollution and land pollution,
which distort the ecological balance. The governments of various countries have passed
legislation and set up agencies to closely monitor the implementation of legislation
to control pollution and conserve the environment. Businesses must be aware of the
impact of their activities on the environment, efforts to conserve the environment, and
government legislation and regulations in this regard.

2.6 SWOT ANALYSIS

To devise a strategic marketing plan, the organisation’s marketing department has to
conduct a situation analysis. A SWOT analysis is an important tool for conducting a situation
analysis. The acronym SWOT stands for strength, weaknesses, opportunities and threats.
The basic assumption behind a SWOT analysis is that the marketing department must
align its internal activities with external realities in order to be successful (Pahl & Richter,
2009:14). Thus a SWOT analysis provides a framework for analysing strengths and weakness
in the internal environment and opportunities and threats in the external environment.
This analysis enables the department to focus on its strengths, minimise its weaknesses,
deal with the threats and exploit the opportunities. It investigates the current state of
the marketing department at any given time, in a forward-looking manner as opposed

49 MNM1503/1
to a retrospective one. The power of a SWOT analysis is in its simplicity. It enables the
department to collect results that can be easily communicated to the public.

Figure 2.5: The SWOT analysis grid

2.6.1 Internal environment issues: Strengths and weaknesses

Conducting a SWOT analysis begins with a review of the internal environment of the
marketing department to identify the strengths and the weaknesses within the department.
When considering the strengths and weaknesses, all the aspects of the micro-environment
(including the strategic direction, resources, marketing mix and marketing management)
should be reviewed. A strength is an inherent capability within an organisation/marketing
department to gain strategic advantage, while a weakness is an inherent limitation or
constraint that creates disadvantage for the organisation/marketing department (Saleem
2010:2). To ascertain the strengths within the marketing department, the following
questions must be answered:

• What advantages does our organisation have (for example financial strength)?
• What does our organisation/marketing department do better than its competitors?
• What unique or lowest-cost resources can our marketing department draw upon that
our competitors do not have?
• What do the forces in our market environment see as our strength?
• What is our organisation’s unique selling proposition?
Sources of weaknesses within the organisation may be goals the organisation have to
achieve but could not achieve and internal constraints. Examples of questions that must
be answered to identify limitations are:

• What shortage of resources does the marketing department currently have?

• What are the weaknesses in the planning and implementation of the elements of the
marketing mix?
• What are the weaknesses in the manufacturing systems?

50
• What are the weaknesses in the organisation’s competencies?
• Which departments are not working together as a unit/team?
• Are there uneconomical operations?
• Are there limitations in appropriate plan location and layout?
• Are the plan and machinery obsolete?

2.6.2 External environment issues: Opportunities and threats

An opportunity is a favourable situation in the external environment that the organisation
can exploit to improve its market position. Sources of market opportunities include:

• identification of a new market niche

• emerging technology/smarter techniques for business operations
• rising market demand
• favourable economic trends, for example a growing economy and reduction in the
interest rate
• potential new uses for products/services
• favourable changes in government policy/legislation related to the industry
• changes in social patterns, population characteristics, lifestyles and culture
• local and international events
Threats are emerging or existing issues in the external environment that create obstacles,
problems or challenges which adversely affect business operations. Sources of threats
for an organisation are:

• unfavourable economic trends, for example inflation, recession, interest rate hikes and
unfavourable exchange rates
• unfavourable government policy/legislation
• emergence of new competitor(s)
• rapid technology development
In conclusion, the realistic identification of weaknesses and threats within an organisation’s
internal and external environments is the first step in overcoming them with a robust set of
strategies hinged on taking advantage of the strengths and exploiting the opportunities.
A SWOT analysis identifies the strengths, weaknesses, opportunities and threats within
an organisation’s business environment and assists managers in making strategic plans
and decisions. It is very important for businesses to have mechanisms in place to monitor
the environment in order to identify changes that may present opportunities and pose
threats to their survival. This process is called environmental scanning.

Activity 2.4

(1) Why is it necessary for a company to conduct a SWOT analysis?

(2) Conduct a SWOT analysis for a newly established consulting firm.

51 MNM1503/1
8 Feedback

(1) A SWOT analysis helps to present a fairly holistic picture of an organisation’s situa-
tion in order to determine where actions are required to exploit opportunities and
minimise threats in the environment.
(2) A SWOT analysis for a newly established consultancy firm could be as follows:

Strengths Weaknesses
• The firm has the ability to respond • The firm has little market presence
quickly to market needs as there is and reputation.
no red tape and the need for top • The firm is experiencing cash flow
management approval. problems which may persist into the
• The firm has a strong customer foreseeable future.
relationship management system • The firm has a small staff complement
because the small volume of work and many lack skills in specialised
leaves the employees with more areas.
time to devote to serving their • The firm is vulnerable to losing its
customers. highly skilled staff.
• The lead consultants of the firm have • The morale of most staff members
a strong reputation in the market. is low.
• The firm has low overheads, which
makes it possible to provide good
value to customers.
Opportunities Threats
• The market for the consulting • The rapid development in the
industry is expanding, with many industry is generally beyond the
opportunities for growth. technology capability of most firms
• Relatively few firms specialise in the in the industry.
consultancy services that the firm • Competitive activity by large
provides. businesses in the industry can easily
• Competitors in the industry are slow make the market unattractive for
to adopt emerging technologies. small firms.
• The government supports the • The slow economic growth will have
growth of small and medium-sized a negative impact on the demand
firms. for consultancy services.

2.7 ENVIRONMENTAL SCANNING

Marketing environmental scanning is the activity of obtaining information about the external
environment (Pride & Ferrell 2016:84). It is also seen an investigation into developments
within the environments of an organisation with the objective of obtaining insight into both
the current and future key success factors within the market as well as the organisation’s
own position (Nijssen & Frambach 2013:32). Through environmental scanning, businesses
are able to generate, disseminate and use information about customers and competitors
across the organisation (Davis 2008:54). Without environmental scanning, businesses

52
may not be able to discover changes in their external environment in order to identify
the threats and opportunities that come with these changes.

Ao, Yang and Gelman (2016:380) identify the following as the aims of environmental
scanning systems:

• detecting scientific, technical, economic, social and political trends and events that
are important to the institution
• defining the potential threats, opportunities or changes for the organisation implied
by the trends and events
• promoting a future orientation in the thinking of management and staff
• alerting management and staff to trends that are converging, diverging, speeding up,
slowing down or interacting
Environmental scanning may consist of the following: data search and collection,
information selection and filtering, classification and analysis, storage and retrieval, and
evaluation. This general framework is presented in Figure 2.6.

Figure 2.6: A general framework for conducting environmental scanning

Source: Davis (2008:54)

According to the framework, the process of environmental scanning should begin with the
mission and objectives of the organisation. Therefore, the procedure used in collecting,
analysing and disseminating the data should be informed by the mission and objectives of
the organisation in order for the information that is obtained through the environmental
scanning process to be useful. Selection and filtering procedures are very important in the
process in order to avoid information overload. This ensures that only pertinent information
is derived from the data. Environmental scanning uses a number of data collection
techniques, including focus groups, database research, personal interviews, telephone

53 MNM1503/1
survey, reading current periodicals and person-to-person networking. Some sources of
published external information that may be useful for the purposes of environmental
scanning include: newspapers and magazines (Sunday Times, Business Times, Financial Times
and Forbes Africa), government publications (census data, the National Development Plan
2030, economic survey, data and so on), institutional publications (Johannesburg Stock
Exchange reports and publications of Unisa’s Bureau of Market Research, Agricultural
Marketing and Economic Research Centre, trade and industry associations, and so on),
international publications (human development reports; world trade reports; and reports
of the Word Bank, Southern African Development Community, African Union and so on).

There are basically three approaches to environmental scanning that can be adopted
by organisations: irregular, periodic and continuous (Langford, Hancock, Fellows & Gale,
2014:114). These approaches are briefly discussed below.

• Irregular. This is an environmental scanning approach that is conducted on ad hoc

basis and in response to a crisis in the organisation. This approach is used when an
organisation needs specific information for planning assumptions and initiates.
• Periodic. This system to environmental scanning is used when management periodically
updates a previous environmental scan in preparation for an upcoming planning cycle.
• Continuous. Continuous environmental systems use an active environmental planning
system that collects information in a continuous cycle to systematically support the
organisation’s strategic planning.

Activity 2.5

(1) Briefly explain the concept of environmental scanning.

(2) Describe how an organisation can benefit from environmental scanning.
(3) Describe the three approaches to environmental scanning that an organisation
can adopt.

9 Feedback

(1) Environmental scanning is described as the analysis of the developments within

the environments of an organisation with the aim of obtaining insight into both
the current and future key success factors within the market and the organisation’s
own position in the market.
(2) An organisation can benefit from environmental scanning in the following ways:
• Environmental scanning helps organisations to identify scientific, technical, eco-
nomic, social and political trends and events within the marketing environment.
• Through environmental scanning, organisations are able to define potential
threats, opportunities or changes in the environment and determine how the
organisation has to respond to those changes.
• Environmental scanning helps to promote a future-thinking orientation among
the management and staff of the organisation.
• It helps the management and staff to be aware of trends converging, diverging,
speeding up, slowing down or interacting.

54
 (3) An organisation may adopt one of the following approaches to environmental
scanning:
• An irregular approach, where environmental scanning is conducted on an ad
hoc basis and in response to a crisis in the organisation.
• Environmental scanning can be conducted on a periodic basis, where information
is periodically updated in preparation for a future planning cycle.
• Continuous, where information is collected in a continuous cycle to support
strategic decision making.

2.8 CONCLUSION
Businesses operate within the business environment. The environment presents
opportunities and threats that promote and hinder the growth of the business. For this
reason, it is important to gain a sound understanding of the business environment. In
this study unit, we addressed the three components of the business environment and
explained their impact on the marketing management function of organisations.

2.9 CASE STUDY WITH QUESTIONS

Read the following case study and answer the questions that follow.

Khumalo and Associates

Khumalo and Associates is a law firm in the central business district of Johannesburg.
The firm specialises in immigration issues. It has two advocates and three attorneys
who are widely considered leading experts in immigration. The firm has committed
backroom staff and hard-working researchers who provide support to the legal team.
The firm has successfully segmented the market and designed immigration services
that focus on serving the needs of illegal immigrants, legal immigrants and asylum
seekers. Although the employees work hard, the firm has a backlog of cases as a result
of the resignations of two key research staff. This backlog is causing dissatisfaction
among clients and the existing staff have committed to working overtime to clear the
backlog. However, this arrangement is taking a toll on their health and has resulted
in them having to take frequent sick leave. It has also resulted in low staff morale.
The worsening political and economic situations in neighbouring countries such as
Malawi, Zimbabwe and the Democratic Republic of Congo are predicted to increase
the number of economic and political migrants coming to South Africa. Consequently,
many well-established and big legal firms are creating specialised divisions to provide
legal services to the immigrants. The government recently announced a tax cut for
small and medium sized businesses (SMEs) and plans to provide a range of facilities
to assist and promote the development of SMEs, which are seen as the key drivers of
economic growth.
Source: Maduku

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Questions

1. In the following table, classify the key issues in the case study under the three main
marketing environments:

Micro-environment Market environment Macro-environment

2. Propose the effect(s) that competitive activities in the market will have on the
operations of Khumalo and Associates.
3. From the case study, conduct a SWOT analysis for Khumalo and Associates.

2.10 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. What is the marketing environment?

2. How does the marketing environment influence business performance?
3. Why is it important for managers to gain a thorough understanding of the marketing
environment?
4. Describe the three main types of marketing environment.
5. Explain the scope of influence that each marketing department has.
6. What is a SWOT analysis?
7. Explain the importance of a SWOT analysis for marketing planning.
8. What is environmental scanning?
9. Why is it necessary for firms to scan their environments?
10. Describe the approaches to environmental scanning that an organisation may adopt.

2.11 REFERENCES
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centre: Motivation, management, and messiness. Collected Essays on Learning and
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Ao, S-L, Yang, G-L & Gelman, L. 2016. Transactions on engineering technologies. Singapore:
Springer Science and Business Media.
Bates, B, Botha, M, Botha, S, Goodman, S, Ladzani, W, De Vries, C & De Vries, L. 2009. Busi-
ness management – Fresh perspective. Cape Town: Pearson Education.
Campbell, D & Craig, T. 2012. Organisations and the business environment. 2nd edition.
Burlington, MA: Elsevier Butterworth-Heinemann.
Davis, JR. 2008. Does environmental scanning by systems integration firms improve their
business development performance? Published doctoral dissertation, Ann Abhor, MI:
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Grant, RM. 2016. Contemporary strategy analysis. 9th edition. London: TJ International.
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Jain, TR, Trehan, M & Trehan, R. 2014. Business environment. New Delhi: VK Global Publication.
Kirkpatrick, SA. 2016. Building a better vision statement – Extending research with practical
advice. London: Lexington Books.
Kotler, P, Burton, S, Dean, K, Brown, L & Armstrong, G. 2013. Marketing. 9th edition. Frenchs
Forest, NSW: Pearson.
Langford, D, Hancock, MR, Fellows, R & Gale, WA. 2014. Human resources management in
construction. Oxon: Routledge.
LaPlaca, PJ & Newton, F. 2011. Marketing strategies for a tough environment. Riverside Plaza,
IL: America Marketing Association.
Lincoln, ND & Murphy, MS. 2016. Customer success: How innovative companies are reducing
customer churn and growing recurring revenue. New York: Wiley.
Luck, D. 2012. Assessing the marketing environment. New York: Routledge.
Mail & Guardian. 2015. SA takes foreign direct investment hit. http://mg.co.za/article/2015-
06-25-sa-takes-foreign-direct-investment-hit (accessed 16 January 2017).
Mankiw, NG. 2011. Principles of microeconomics. 6th edition. New York: South-Western
Cengage Learning.
Markman, GD & Phan, PH. 2011. The competitive dynamics of entrepreneurial market entry.
Northampton, MA: Edward Elgar.
Mohammed, K. 2013. Principles of small business management: A look at critical business
success. New York: Xlibrics.
Nijssen, EJ & Frambach, RT. 2013. Creating customer value through strategic marketing plan-
ning – A management approach. 2nd edition. Singapore: Springer Science & Business
Media.
Ogbor, JO. 2009. Entrepreneurship in Sub-Sahara Africa: A strategic management perspective.
Bloomington, IN: AuthorHouse.
Oldroyd, M. 2012. CIM course book 03/04: The marketing environment. Oxford: Elsevier
Butterworth-Heinemann.
Pahl, N & Richter, A. 2009. SWOT analysis – Idea, methodology and practical approach.
Norderstedt: GRIN Verlag.
Panda, TK. 2009. Marketing management: Texts and cases, Indian context. 2nd edition. New
Delhi: Excel Books.
Parment, A., Kotler, P. & Armstrong, G. (2016). Principles of Marketing: Scandinavian Edition.
Essex: Pearson Higher Education.
Pillai, RSN, Bagavathi, MA & Kala, S. 2012. Marketing management. New Delhi: S Chad &
Company.
Prasad, V. 2010. Business environment. New Delhi: Gennext Publications.
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Statistics South Africa (Stats SA). 2017a. Inflation. http://www.statssa.gov.za/?page_
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2.12 SELF-ASSESSMENT QUESTIONS

Question 1
The environment in which businesses operate is generally referred to as the … .
(1) firm
(2) atmosphere
(3) business environment
(4) macro-environment

Question 2
The … is the environment in which marketing activities take place.
(1) marketing environment
(2) activity environment
(3) marketing mix
(4) company

Question 3
Which of the following is not one of the three main components of the business
environment?
(1) micro-environment
(2) market environment
(3) macro-environment
(4) policy environment

Question 4
Which of the following is not a variable of the micro-environment in marketing?
(1) natural resources
(2) vision statement
(3) marketing mix
(4) promotions management

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Question 5
Which of the following best describes a vision statement?
(1) a long-term goal
(2) strategic future intent
(3) a strategy
(4) a marketing tagline

Question 6
The question ”What business are we in?” is best answered by … .
(1) strategic direction
(2) the long-term goal
(3) the mission statement
(4) the operational plan

Question 7
The marketing department has absolute control over the variables in which of the
following?
(1) market environment
(2) macro-environment
(3) competitors
(4) micro-environment

Question 8
The variables of the market environment include … .
(1) marketing management
(2) suppliers
(3) distributors
(4) marketing agencies

Question 9
The management of businesses has no control over the forces in the … in marketing.
(1) micro-environment
(2) market environment
(3) economic environment
(4) macro-environment

Question 10
The … environment is generally considered the most dynamic environment of the
macro-environment.
(1) social
(2) technological
(3) economic
(4) political and legal

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60
Topic 3
Marketing information and marketing
research

AIM
Our aim in this topic is to enable you to understand the nature and role of a marketing
information system and marketing research.

LEARNING OUTCOMES

On completion of this topic, you should be able to explain the value of market in-
formation and marketing information systems to ensure valid marketing decisions.
More specifically, you should be able to
• explain why market information is needed for a successful marketing strategy
• distinguish between data and information
• explain how a marketing information system and a marketing decision support
system can help marketing managers to make decisions
• explain why marketing research is conducted

Study unit 3: Marketing information

TOPIC 3
Study unit 4: Marketing research

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Study unit 3
Marketing information

Contents

Overview
Learning outcomes
Key concepts
3.1 Introduction
3.2 Nature of marketing information
3.2.1 Definitions relating to marketing information
3.2.2 Marketing information system
3.3 Application of marketing information
3.3.1 Needs and uses of marketing information
3.3.2 Analysing the value of marketing information
3.4 Types of marketing information systems
3.4.1 Simple marketing information system
3.4.2 Extensive marketing information system
3.4.3 Marketing decision support system
3.5 Summary
3.6 Case study with questions
3.7 Reflection
3.8 References
3.9 Self-assessment questions

OVERVIEW
Marketing managers cannot make decisions if they do not have relevant and up-to-date
marketing information on which to base their decisions. In this study unit, we discuss
the nature of marketing information, how to use it and the systems that provide the
information. In the first section, you will learn about the definition, advantages and cost of
marketing information. In the second section, we explain why the marketing department
needs the information and how they use customer relationship management systems.
In the last section, we explain the different marketing information systems and other
systems that support management decision making.

62
This study unit will unfold as follows:

LEARNING OUTCOMES

After completing this study unit, you should be able to

• define and discuss the nature of marketing information
• explain the advantages and cost of marketing information
• discuss the uses of marketing information and give practical examples
• explain how marketing information is used for customer relationship management
• explain the simple and extended marketing information systems
• discuss the management of marketing information for decision making

KEY CONCEPTS
• marketing information
• data
• marketing information system
• marketing intelligence
• statistical subsystems
• internal reporting subsystem
• marketing decision support system

3.1 INTRODUCTION
Information is the bloodstream of an organisation. As a human being who cannot survive
without blood flowing through the veins that connects the different organs, so too can
an organisation (as a body) not survive if information does not connect all its different

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functions. Information does not only flow between the different functions, but is also
the lifeline between the organisation and the marketing environment.

Marketing information enables marketing managers to understand and analyse the

internal and external environments. They need to know how market forces affect the
company and its consumers, and what the needs, wants and demands of the target
market are. This helps management to make decisions that enables the organisation to
be sustainable and exist in the long term.

In order for management to make the right decisions, they need the right quality and
quantity of information at the right time. Vodacom is an example of a company that makes
the right decisions through managing marketing information. Soon after their 2016 ”Play
Every Day” promotion, they could published that the promotion was played 150 million
times by 16 million people and they had 80 million voice and data bundles allocated up
to 31 January 2017. Information such as this is only available when a company manages
information.

All businesses, large and small, need information about the marketing environment
in which they function. Small businesses, for example, keep basic information about
customers and file it in a filing cabinet or on personal computers; while large businesses
have the newest software, databases and other technology to manage their marketing
information.

In this study unit, we explain how organisations manage marketing information to be

able to make the right decisions.

3.2 NATURE OF MARKETING INFORMATION

Marketing information enables the organisation to function and interact with the different
environments. Without the right marketing information, marketing managers cannot make
decisions. They cannot, for example, analyse customers’ needs or decide on the right
product/service to offer to the market, the right price the market is willing to pay, how
they will communicate their offer to the market or how the offer will reach the market.

When we refer to marketing information, it is the physical information that is used for
decision making – the process that is used to collect information and the systems in
which the information is stored.

3.2.1 Definitions relating to marketing information

Marketing information is the process of acquiring and analysing information in order

to understand the market and determine the current and future needs, preferences,
attitudes and behaviour of the market, and to access changes in the business environment
that may affect the size and nature of the market in the future (Kotler & Armstrong 2010).

64
To understand marketing information, you first have to understand the difference between
information and data. If a marketer, for example, needs information about the preferences
of a female target market, the marketer first have to collect data from individual women
and then analyse the data to get information. The information is usually in the form of
averages and percentages that represent the target market. The data are collected through
research and marketing intelligence, and are then analysed and changed into information
which management can use. To transform and categorised the data, an organisation
uses a marketing information system and a system that can support it (namely a decision
support system).

The process above involves key concepts of marketing information, which are defined
below.

Definitions relevant to understand marketing information:

• Data refer to all the available statistics, opinions, facts and predictions (Wiid 2015).
• Information is the data component that is relevant to the decision in question.
Information is anything factual in a format that is suitable for decision making or in
a context that defines the relationship between two or more pieces of data.
• Marketing research: is the systematic design, collection, analysis and reporting of
data relevant to a specific marketing situation which an organisation faces (Kotler
et al 2012).
• Marketing intelligence is the systematic collection and analysis of publically available
information about competitors and developments in the marketing environment.
• A marketing information system is a structural process that is used to gather and
analyse data on a particular opportunity or threat in order to assist marketing
managers to make informed decisions (Cant 2013:61).
• A decision support system is a computerised system which helps marketing
management to obtain and use information that is relevant to specific decision-
making situations (Cant 2013:63).

These definitions are an integral part of this study unit.

3.2.2 Marketing information system

As stated above, according to Cant (2013), a marketing information system is a structural
process that is used to gather and analyse data on a particular opportunity or threat
in order to assist marketing managers to make informed decisions. The objective of
a marketing information system is to make relevant, useful and timeous information
available to marketing management on a continuous basis and in so doing reduce the
risk of making the wrong decisions (Wiid 2015).

The following figure is a representation of the people and activities involved in a marketing
information system. This figure also provides an overview of the topics discussed in this
study unit.

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Figure 3.1: The marketing information system
Source: Adapted from Armstrong (2015)

The components and activities of a marketing information system include the following:
• The users of the information. These are marketing managers and other information
users who need information for decision making.
• Assessing the information needs. The management have to decide on what kind of
information they need. The information should include all the possible internal and
external factors that can influence the organisation’s marketing efforts and results.
• Information sources. Information is collected from the dynamic and ever-changing
marketing environment, which include the micro-, market and macro-environments.
The data sources can be secondary or primary sources: secondary data are from sources
that already exist and primary data do not exist for a specific problem and have to be
collected for the first time.
• Analysing and using information. For information to be useful, it needs to be analysed
according to the benefits, cost and value of the information.
• Develop the needed information. The information is stored in a marketing information
system developed from internal databases, marketing intelligence, information analysis
and marketing research.
A marketing information system can also be seen as a typical system of interactive and
interdependent subsystems which function as a whole (Cant 2013). A typical system is
a transformation model that comprises three main components: inputs, transformation
and outputs.

Figure 3.2: Marketing information system: Inputs, transformation and output model

66
• Inputs. The inputs are the internal information, external information and information
collected from marketing research.
• Transformation. Data are transformed into information that can be used for decision
making. To process the data marketing models, information processing experts use
a decision support system.
• Outputs. The outputs are the information used for marketing decisions and the
marketing outcomes that include the reactions of consumers and competitors.
As with a typical system, the marketing information system follows a continuous process
whereby the outputs provide feedback to the input side. Decision making is also a
continuous process because as soon as information is received from the output side of
the model, it leads to more information that is needed to solve a new problem.

Before you continue with the next section of this study unit, click on the URL links below
to watch the YouTube videos on the marketing information system.

• https://www.youtube.com/watch?v=8bU6tsscv9c – What is a marketing information

system?
• https://www.youtube.com/watch?v=vF600oLu4_4 – Marketing information system
and marketing research
• https://www.youtube.com/watch?v=5oR5oiJADdw – Topic 4.2 Marketing information
system

3.3 APPLICATION OF MARKETING INFORMATION

Marketing information has no value if it cannot be use to enhance decision making.
Information is expensive and before marketing managers can collect it, they first have
to establish the kind of information they need and how they will use it. Thereafter, they
must weigh the cost of collecting the information against the benefits it will provide to
the decision-making process.

In this section, we discuss the needs and uses of information as well as analysis of the
value and cost of having information identified in the marketing information system.

3.3.1 Needs and uses of marketing information

The need for marketing information has become more important in the past decade
than ever before. Technological advances and the integration of global markets have
contributed to the fact that marketing managers need to be up to date with everything
that happens in the marketing environment. Information bridges the gap between the
market and the company, and serves as a link between the two (Cant 2013).

Without information, the planning, implementation and control of marketing activities

cannot be carried out. To perform these activities, marketers need information about the
different environments and answers to the questions in the following sections. (If you
think carefully about these questions, it will help you to understand the information in
other study units.)

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3.3.1.1 Internal environment
The marketing information system should provide all the needed information about an
organisation’s internal environment. Examples of questions about the internal environment
that provide marketing information are:

• What business should we be in?

• How will we compete against competitors in the market?
• What is our competitive advantage?
Without this information, marketing managers cannot decide which product or price to
offer to the target market.

3.3.1.2 Market environment

Answers to questions about the market environment provide marketing managers with
marketing intelligence. Marketing intelligence concerns information about consumer
needs, competitors, suppliers and intermediaries. Examples of questions relevant to
information stored in the marketing information system for marketing intelligence are:

• Who are our customers? What are their needs, preferences, attitudes and behaviour?
• What are the trends in the industry and related markets?
• Who are our competitors? What are their strengths, weaknesses and strategies?
• Who are the suppliers of the resources we need to produce goods and services?
• Who are the marketing intermediaries (such as retailers and wholesalers) that help
the company to promote, sell and distribute its products to the end-customers?
Without answers to the above questions, marketing managers cannot make decisions
about the marketing mix. A marketing manager cannot, for example, decide on the
features or benefits of a product, the price, the distribution or how the product will be
communicated to the target market if this information is not available in a marketing
information system.

3.3.1.3 Macro-environment
Information about the macro-environment which influences marketing strategies has
to be updated and stored in the marketing information system on a continuous base.
Marketing managers, for example, need information about the following questions to
stay competitive in a market:

• What are the newest technological changes that will influence the company’s operations?
How can the information be used to communicate with the target market?
• What natural resources are needed as inputs and affect the marketing activities? How
do natural resources influence the company’s product strategies?
• What are the economic factors that affect consumers’ buying power and spending
patterns?
• How might society’s values, perceptions, preferences and behaviour influence the
organisation?

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Without answers to all these questions, marketing managers are unable to bridge the
gap between the market and the organisation. However, when the information is used,
it has to reduce the possibility of incorrect or risky decision making and therefore has to
be timely, accurate and reliable (Cant 2013).

The two main sources of marketing information are marketing research and customer
relationship marketing. Customer relationship marketing is often referred to as database
marketing. A marketing database is a comprehensive collection of interrelated data serving
multiple applications and allowing timely and accurate on-demand retrieval of relevant
data (Koekemoer 2014:286).

Database marketing and customer relationship management systems are linked with
business intelligence systems. These systems enable companies to collect data from
the company’s website, social media, telephone, email and marketing material. This
data is used to learn more about the target market and current customers’ needs and to
communicate and build relationships with them.

The real value of marketing information is found in database marketing and the customer
insight it provides. Customer insights are the fresh understandings of customers and
the marketplace derived from marketing information that become the basis for creating
customer value and relationships (Armstrong 2014). Marketing information therefore
contributes to the main function of relationship marketing, which includes customer
retention, high customer commitment and high customer contact (Cant 2013).

Relationship marketing is very important for a business to survive in the long term. The
first orientation of the pure marketing concept requires that marketers build a long-term
relationship with customers. To do this, they have to aim all their marketing actions at
satisfying consumer needs, demands and preferences (Cant, Van Heerden & Ngambi 2010).
These cannot be satisfied if an organisation does not have information about consumers.

Activity 3.1

In the previous section, you learned that companies need information that is relevant
to the decisions they make. To get insight into the information companies in the retail
industry use, visit the “Supermarket & retailer for FMCGs, wholesalers and suppliers”
website at http://www.supermarket.co.za/.

Identify the information this organisation makes available to their subscribers in the
retail industry of South Africa and compare it with the information a retailer needs
from the different environments.

10 Feedback

Did you notice that they provide market information which retailers need for decision
making, such as:

69 MNM1503/1
 • What are the newest technological changes that have an influence on the com-
pany’s operations? How can the information be used to communicate with the
target market?
• Industry news to keep retailers abreast of the latest developments in the dynamic
retail industry, with daily updates and articles. An example of an article is “Cash
strapped consumers seek value not ‘specials’”, which provides information about
the market environment.
• Subscribers can email information about their new products to the website for
other subscribers to know. This provides supplier and competitive information.
• The buyer’s guide has articles and information on handling packaging, security,
shoplifting and warehousing. This provides information for internal decision
making.
• Events and promotions provide information about the retail industry and up-
coming events for the year. Food and wine shows all over the country, with their
dates and addresses, are listed on the website. This provides information about
the market environment.
• The monthly readership of the Supermarket & Retailers magazine is 70 000 read-
ers. The magazine provides monthly news about store trends, merchandising,
promotion ideas and operating efficiencies. The magazine provides information
about all the environments.

3.3.2 Analysing the value of marketing information

The real value of marketing information can only be obtained from a value appraisal that
involves an assessment of the information in terms of its contribution to marketing decision
making (Cant 2013). To do an assessment, management has to consider the advantages
of having a marketing information system, the benefits associated with the information,
and the cost incurred to gather and store the information. The formula used for a value
appraisal is Value (V) is equal to the benefits (B) derived from the information minus the
cost (C) of obtaining it: V = B–C.

3.3.2.1 Benefits of marketing information

According to De Queiroz and Oliveira (2014), the marketing information system supports
the marketing plan and decisions and helps to manage information. They identify the
following specific benefits of a marketing information system:

• It allows for the classification, analyses and distribution of relevant information in a

precise and timely fashion for decision-makers.
• It allows for the monitoring of the company’s results and the external environment.
• It contributes to reducing uncertainties in the decision-making process.
• It provides information on all the marketing activities regarding planning, promotion,
and sales of products for both customer satisfaction and organisational goals.
According to Armstrong and Kotler (2015), the real value of marketing information lies in
how it is used for the customer insight it provides. Companies that tap into information
technologies gain rich, timely customer insights at lower costs.

70
3.3.2.2 Cost and the value of marketing information
Marketing information is expensive to collect and to store. Before the management decides
to collect information, they first have to look at the cost and value of the information that
is needed. Cost has two components: direct cost and the cost of losing an opportunity.

• Direct cost is the Rand value associated with collecting and storing the information,
and it is relatively easy to calculate.
• The loss of an opportunity is not easy to calculate and it is often too late when a manager
realises that he or she does not have the right information to take advantage of an
opportunity. In this case, the information had no value.
Information has value when it can be tested against certain criteria. It has to be relevant,
useful, available, timeous, accurate and in the right format before it can add value to the
decision-making process. The following are short explanations of these criteria (Wiid 2015).

• Relevant. The information has to relate to the specific decision-making problem.

• Useful. The information must be available in a form that the user can understand and
apply.
• Available. The information must be available when the manager has to make a decision.
• Timeous. It must be up to date. Outdated information has not value for decision-makers.
• Accurate. The information has to be accurate. Incorrect information for the market
estimation of price setting can have detrimental consequences for an organisation.
If too many products are produced for a market, the company could have losses; if
there are not enough products, customers will be dissatisfied.
• Adequate. Information is expensive to collect and it needs to be available in the right
quality and quantity when making a decision. Too little information will not help
managers to make the right decision and too much information will waste company
resources.
• Right format. Information has to be in a format that is easy to access when it is required.
Examples of formats that help managers are Excel spreadsheets, graphs, models and
figures.

Activity 3.2

After studying the section above, visit the following websites, read the article and
follow the link to the Independent Agency Search and Selection Company’s (IAS)
website.
• https://www.mediaupdate.co.za/marketing/102470/ias-launches-a-list-database-of-
black-owned-agencies: “IAS launches A-list database of Black-owned Agencies”, 2016
• http://www.agencyselection.co.za/
Question: Do you think the organisation provides valuable information to marketers
in South Africa?

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 AGENCY SCOPE SOUTH AFRICA 2016
Creating a Database of Black-owned Agencies
This year, Spanish-based SCOPEN partnered with the IAS and has released
its in-depth research project that highlights 15 key trends in the South
African communication, marketing, procurement and advertising industry.
The research, entitled AGENCY SCOPE South Africa 2016, is comprised of
a series of analyses from the industry’s highest-level decision-makers and
is published exclusively for agencies. Over 70 marketers were interviewed
in all sectors in South Africa. Their views reflect the changes that are
affecting the industry. The executives that were interviewed are leaders
of companies with an average turnover of more than R5.8 billion in 2016.
The primary value of Agency Scope 2016 is that it will provide agencies
working with marketers’ first-hand information regarding the needs of
marketers. This will assist them with their new business prospects and
existing clients alike. 

11 Feedback

The article seems to have a lot of valuable information, but each marketer’s needs are
different and it is not to say that all marketers will benefit from the information. The value
of the information can be established with the formula V = B - C. If the information does
not provide a benefit to a specific marketer, it does not have any value. A marketer can
evaluate the information according to its relevance, usefulness, availability, accuracy
and if it is in the right format to decide if it adds value to the decision-making process.

3.4 TYPES OF MARKETING INFORMATION SYSTEMS

“A marketing information system is a continuing and interacting system of people,

equipments, and procedures to gather, sort, analyse, evaluate, and distribute the
pertinent, timely, and accurate information for use by marketing decision-makers to
improve their marketing planning, implementation, and control” (Kotler & Armstrong
2012).

The above definition is an extended definition of a marketing information system.

Armstrong and Kotler (2015) define a marketing information system as consisting of
people and procedures dedicated to assessing information needs, developing the needed
information and helping decision-makers to use the information to generate and validate
actionable customer and market insight.

72
All businesses, whether large or small, need a marketing information system. These systems
can be divided into two different kinds, namely extensive systems for large organisations
and simple systems for small businesses.

3.4.1 Simple marketing information system

Small businesses such as a local independent retailer or spaza shop need marketing
information to decide how best to satisfy their customers’ needs. A small business would
have a simple marketing information system that consists of routine data and data
collected for special purposes.

• Routine data. Routine data include information from internal and external sources.
Examples of internal sources are sales, stocks, debtors and creditors. Examples
of external sources are local population growth, competitive activities and trade
association statistics (Cant 2010).
• Special purposes data. This kind of data is collected when a small business identifies
an opportunity to expand the business or when the owner of the business identifies
a problem that may influence the existence of the business. An example of a problem
that cannot be solved without more information is when customers do not buy as
much as they used to. In this case, the business owner will need information that is
not available from the routine date and will have to do research. The research can be
done internally by people working for the business or by an external research company
that specialises in research.

Activity 3.3

Mary, one of your friends, started a business a year ago and her business is growing
very fast. She feels as if she is losing control of everything she has to remember and
asks you to help her organise all the information she has to manage.

What will you tell her to help her?

12 Feedback

You can tell Mary that she needs a simple marketing information system. She can either
keep and organise all her information in a filing cabinet or organise it using a computer.
She will need to organise the information into routine data (which she uses on a daily
base), such as information about her customers, debtors and creditors. To get more
information about the growing needs of her customers, she can collect special purpose
data by doing research. The research can be in the form of a survey or she can get a few
customers together to talk about their needs.

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3.4.2 Extensive marketing information system
When the marketing managers of large organisations make decisions, they cannot search
for information. The information has to available in the right quantity and at the time, when
it is needed. To have information available, organisations use information technology to
manage and store information in an extensive marketing information system.

An extensive marketing information system collects, organises and stores information in

subsystems, namely the internal reporting subsystem, marketing intelligence subsystem,
statistical subsystem and marketing research subsystem.

Figure 3.3: Components of the extensive marketing information system

3.4.2.1 Internal reporting subsystem

Information in the internal reporting subsystem is already available within the organisation
in the form of sales reports, stock records, and debtors and creditors statements (Wiid
2015). The information comes from many different departments in the organisation.
The operations department provides information on shipments and inventory, and the
marketing department provides information on customer demographics, psychographics
and buying behaviour.

Internal databases can be accessed quickly, but may be incomplete or in the wrong form
for marketing decision making. The data need to be adapted and integrated to provide
information marketing managers can use.

3.4.2.2 Marketing intelligence subsystem

Marketing intelligence is the systematic collection and analysis of publically available
information about competitors and developments in the marketing environment (Kotler
2013). Marketing intelligence helps marketing managers to assess and track competitors,
and it provides early warning of opportunities and threats.

Intelligence information can be collected from people inside or outside the organisation.
Examples of internal collectors are salespeople, engineers and scientists; examples of
external collectors are suppliers, resellers and key customers. Organisations can also
buy intelligence from external suppliers, use online databases and analyse competitors’
websites, their annual reports and press releases.

The following YouTube videos provide more information about marketing intelligence:

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• https://www.youtube.com/watch?v=hDJdkcdG1iA – What is business intelligence (BI)
• https://www.youtube.com/watch?v=N8F7eOqgH8Q – What are business intelligence/
overview and introduction?

3.4.2.3 Statistical subsystem

Statistical subsystems combine information from various databases and processes to
develop certain predictions, scenarios and models managers can use in decisions making.
A model can, for example, illustrate the probable effect that a change in price might have
on consumer behaviour. These models allow companies to ask “what if” questions and
the answers are immediately available (Cant 2010).

3.4.2.4 Marketing research subsystem

When organisations are in a situation where they need information that is not gathered
through other subsystems, they have to conduct marketing research for the specific
situation. Examples of projects involving marketing research are customer satisfaction
surveys and the investigation of opportunities. Unlike other subsystems, the marketing
research subsystem is used only when specific information is needed and each research
project has an explicit purpose and timespan (Wiid 2015).

3.4.3 Marketing decision support system

Developments in technological information gathering and storage have resulted in
“information overloads”. There is too much information available and there is the risk
that the right information is not available when it is needed. Marketing decision support
systems help managers with this problem.

A decision support system or marketing decision support system is a computerised

system which helps marketing managers to obtain and use information that is relevant
to specific decision-making situations (Cant 2013).

Decision support systems help to process information inputs to produce useful marketing
information (outputs). Pepsi – which monitors online discussions about its brands by
searching key words in tweets, blogs, posts and other sources – takes in a stunning six
million public conversations a day, more than two billion a year. This is far more than any
manager can digest (Armstrong 2015).

Decision support systems consist of the following parts (Cant 2013):

• Data system. A data systems captures and stores data that originate from internal and
external sources.
• Dialogue system. This part of the decision support system permits users to explore
the database by using the system models to produce reports that satisfy particular
information needs.
• Model system. The system is able to manipulate data and conduct analyses according
to the requirements of a specific user (Wiid 2015).

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Videos with more information on decision support systems are:

• https://www.youtube.com/watch?v=bBG08StvBHM – Decision support system and

research
• https://www.youtube.com/watch?v=gXQHOp_8LGI – DSS video.m4v

Activity 3.4

When marketers make decisions, they need statistics and facts about the newest
trends and changes in the different marketing environments.

See the following YouTube video to understand why marketers cannot ignore the
growth of social media and have to include it in their decision-making strategies.
The video is about the state of social media in South Africa and is available at: https://
www.youtube.com/watch?v=x1gf78i8ajw (Prana Business Consulting 2016).

• Identify the statistical information in the video that you think is important for mar-
keters to know.
• Can you think about a specific decision that might be influenced by the information
in the video?

13 Feedback

Information that is important for marketers are:

• There are 24.9 million internet users in South Africa.
• South Africa is the fourth fastest growing digital economy in the world.
• South Africa has an average of 2.4 cell phones per household.
• Marketers can reach 97% of adults through a cell phone.
• Social media are the number one application people use on their phones.
• Facebook is mostly used (11.8 users), followed by WhatsApp (10 million users).
• The average South African spends 21 minutes per day on Facebook.
• The number of users of Facebook increases from 53% to 65% in 2015.

A decision that might be influenced by the above statistics is that if a company does not
have a social media manager in their marketing department, they have to make the decision
to appoint one. Companies that want to stay competitive have to embrace social media.

3.5 SUMMARY
In this study unit, we explored the nature of marketing information, its
application, the different systems that are used and the management
of information. We defined marketing information and then discussed
the advantages, cost and value of information. In the second section, we
provided information about the uses and the application of information
for decision making and customer relationship management. Thereafter,

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 we discussed two marketing information systems, namely the simple and
the extended marketing information systems. The study unit ended with
a discussion on the marketing decision support system that manages
marketing information.
In the next study unit, we discuss marketing research – which covers the
collection and analysis of information.

3.6 CASE STUDY WITH QUESTIONS

Marketing managers of large and small businesses need to be up to -date with the latest
information on the market. The use of social media, for example, is growing and businesses
cannot ignore it when they make decisions about communicating with consumers and
customers. They have to adapt to the new trends if they want to stay competitive in the
market.

Read the article “Social media marketing: What can we expect for 2017” (B Dzhingarow,
2017) at http://www.bizcommunity.com/196/97.html and answer the following questions.

• Do you think the article provides important and valuable information for businesses?
• In which subsystem of the marketing information system will the information be stored?
• What information in the article do you think is important for marketing managers?

Answer:
We saw in the previous activity that social media are growing and marketing managers
need to embrace them. They cannot be ignored and marketers need to have as much
information about them as possible.

Businesses will store information, such as the information in the article, in the marketing
intelligence subsystem of the marketing information system.

Useful decision-making information from the article is:

• Influencer marketing is growing. It offers a low-cost, high-value proposition

for companies. One of the benefits of working with influencers is that they already
have a close following and are masters in social media marketing.
• Visual content is one of the biggest trends in social media marketing. Livestreaming
is considered one of the top trends.
• Interactive content is growing in importance. Marketers have to add sharing buttons
on the pages hosting interactive content and add hashtags and brand names to the
link to keep visitors engaged.
• Trend information, such as the above, helps marketing managers to keep abreast of
new market developments and identify new technological areas that are growing in
importance.
The above information can be used to plan more effective social media strategies and to
identify factors that might influence the organisation’s long-term survival. Marketers still
need to analyse the information according to the value it provides in decision making.

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3.7 REFLECTION
Before you continue with the next study unit, reflect on the following questions:
1. Do you have a clear understanding of the importance of marketing information for
decision-makers? Do you understand the different parts of a marketing information
system?
2. Do you have a practical understanding of the different needs and uses of a marketing
information system? Can you provide examples of information marketers need in
decision making? Would you be able to discuss the value of information?
3. Do you understand the difference between a simple and an extensive marketing
information system? Would you be able to explain the different subsystems of an
extensive marketing information system?
4. What did you find interesting in this study unit? Why?
5. How long did it take you to work through this study unit? Are you still on schedule
or do you need to adjust your study programme?

3.8 REFERENCES
Armstrong, G & Kotler, P. 2015. Marketing: An introduction. 12th edition. Pearson Education
Inc. Essex England.
Cant, MC. 2010. Essentials of marketing. 3rd edition. Cape Town: Juta.
Cant, MC. 2013. Marketing: An introduction. 2nd edition. Cape Town: Juta.
Cant, MC, Van Heerden, CH & Ngambi, HC. 2010. Marketing management. Cape town: Juta.
De Queiroz, JP & Oliveira, B. 2014. Benefits of the marketing information system in the
clothing retail business. Journal of Information Systems and Technology Management
11(1):153–168.
Dzhingarow, B. 2017. Social media marketing: What can we expect for 2017. http://www.
bizcommunity.com/196/97.html (accessed 17 March 2017).
Independent Agency Search and Selection Company (IAS). 2016. Creating a Database of
Black-owned Agencies. http://www.themarketingsite.com/news/45928/creating-a-
database-of-black-owned-agencies (accessed 10 March 2017).
Koekemoer, L (ed). 2014. Marketing communication: An integrated approach. Cape Town: Juta.
Kotler, P. & Armstrong, G, 2010. Principles of marketing (13th global edition) Prentice Hall,
2010 Pennsylvania State University.
Kotler, PT & Armstrong, G. 2012. Principles of marketing. 14th edition. Pearson Education
Inc. Upper Saddle River, New Jersey.
Prana Business Consulting. 2016. The state of social media in South Africa. https://www.
youtube.com/watch?v=x1gf78i8ajw (accessed 13 March 2017).
Wiid, J. & Diggines, C. 2015, Marketing research, 3rd edition. Cape Town. Juta & Co.

3.9 SELF-ASSESSMENT QUESTIONS

Question 1
Which one of the following statements correctly describes marketing information?
(1) It refers to all the available statistics, opinions, facts and predictions.
(2) It is the systematic design, collection, analysis and reporting of data relevant to a
specific marketing situation.

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(3) It is anything factual in a format that is suitable for decision making or in a context
that defines the relationship between two or more pieces of data.
(4) It is a structural process used to gather and analyse data on a particular opportunity
or threat.

Question 2
What is the objective of a marketing information system?
(1) The objective is to make statistics, opinions, facts and predictions available to
marketing management.
(2) The objective is to make relevant, useful and timeous information available to
marketing management on a continuous basis and in so doing reduce the risk of
making the wrong decisions.
(3) The objective is to make data available to marketing management on a continuous
basis.
(4) The objective is to make computerised information available to marketing
management in order to reduce the risk of making wrong decisions.

Question 3
In which component of a typical marketing information system will you find the market-
ing decision support system?
(1) inputs
(2) transformation
(3) modelling
(4) outputs

Question 4
The components and activities of the marketing information system include … .
(a) the users of the information
(b) an assessment of the information needs
(c) the development of information
(d) the analysis of the information
(1) abc
(2) abd
(3) acd
(4) abcd

Question 5
Which one of the following questions cannot be answered by information stored in the
marketing intelligence subsystem?
(1) Who are our customers?
(2) What are our competitors’ strengths, weaknesses and strategies?
(3) What is our competitive advantage?
(4) Who are the marketing intermediaries and suppliers?

Question 6
How will a marketing manager appraise the value of information?
(a) A marketing manager will identify the benefits of the information and decide if the
information has value.

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(b) A marketing manager will use the formula V – B - C.
(c) A marketing manager will do a value appraisal that involves an assessment of the
information in terms of its contribution to marketing decision making.
(d) A marketing manager will identify the direct cost and the cost of losing an opportunity.
(1) abc
(2) abd
(3) bc
(4) abcd

Question 7
Which of the following information are not available in the routine data of a simple
marketing information system?

(1) information about the customers of a business

(2) information about the reasons why customers are not buying as they used to
(3) information about customers who pay their accounts on a regular basis
(4) information about competitors’ activities

Question 8
When marketing managers want to develop a profile of current customers’ demographic
information, in which subsystem of the marketing information system will they find
information?

(1) internal reporting subsystem

(2) marketing intelligence subsystem
(3) statistical subsystem
(4) marketing research subsystem

Question 9
Which one of the following is not a source of information that is stored in the marketing
intelligence subsystem?

(1) competitors’ websites and annual reports

(2) information from the accountancy and operations departments in an organisation
(3) a research company that sells information about consumer trends
(4) online databases

Question 10
Which subsystem does a company use after they identified a new opportunity and need
more information before they decide to capitalise on the opportunity?

(1) internal reporting subsystem

(2) marketing intelligence subsystem
(3) statistical subsystem
(4) marketing research subsystem

Question 11
Which of the following statements about a marketing decision support system are correct?

(a) Data systems capture and store data that originate from internal and external
sources.
(b) In-house systems store information from different departments of the company.

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(c) A dialogue system, which is part of the decision support system, permits users to
explore the database by using the system models to produce reports that satisfy
particular information needs.
(d) The model system is able to manipulate data and conduct analyses according to
the requirements of a specific user.
(1) abc
(2) acd
(3) bcd
(4) abcd

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Study unit 4
Marketing research

Contents

Overview
Learning outcomes
Key concepts
4.1 Introduction
4.2 Nature and meaning of marketing research
4.2.1 Definitions and the nature of marketing research
4.2.2 Researchers: The people who do marketing research
4.2.3 Marketing research ethics
4.3 Marketing research process
4.3.1 Identify the research problem or objectives
4.3.2 Select the research design
4.3.3 Identify the data sources
4.3.4 Determine the primary data collection method
4.3.5 Develop the research measurement instrument
4.3.6 Design a sample plan
4.3.7 Fieldwork: Collect the data
4.3.8 Analyse the data
4.3.9 Write the research report
4.4 Online marketing research
4.5 Summary
4.6 Case study with questions
4.7 Reflection
4.8 References
4.9 Self-assessment questions

OVERVIEW
In this study unit, we explain how marketing information (discussed in the previous study
unit) is collected. You will first learn the definition and nature of marketing research and
then about the marketing research process and how new technology is used in marketing
research. In the first section, we explain what marketing research is and who the people
are who collect marketing research. In this section, you will also learn about the ethics
that affect everybody who is involved in marketing research.

In the second part of this study unit, we discuss the different steps of the marketing
research process. A research can select different techniques and methods in each step.
Each step has practical examples that explain how the information is used. In the last
section of the study unit, we discuss how new technology (such as the internet) is used
to interact with respondents/participants in the research.

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This study unit will unfold as follows:

LEARNING OUTCOMES
After completing this study unit, you should be able to
• define and discuss the meaning of marketing research
• explain internal and external research, and the considerations involved in deciding
whether to do research internally or externally
• discuss the ethics that influence the different parties involved in marketing research
• discuss the steps of the marketing research process
• explain the different marketing research designs, namely exploratory, descriptive
and causal
• explain the difference between secondary and primary data sources
• discuss the difference between qualitative and quantitative research
• explain the different data collection methods
• explain how a marketing research questionnaire is developed
• discuss the different sampling design methods
• discuss the interviewer’s role and administration during fieldwork
• discuss data preparation and analysis
• discuss how a marketing research report is written and presented
• discuss the advantages and disadvantages of using the internet for marketing
research
• explain the different uses of technology and the internet in collecting marketing
research information

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 KEY CONCEPTS
• marketing research
• internal and external research
• ethics
• marketing research process
• secondary and primary research
• qualitative and quantitative research
• questionnaire
• sampling
• fieldwork
• analysis
• internet and research

4.1 INTRODUCTION
Every decision that an individual, government or a business makes depends on information
that has been collected somewhere. Governments and large businesses make decisions that
affect many people’s lives and in some cases involve millions. When they use information,
they want to know that they can trust it is the right information and was collected using
the right research procedures.

Most of the money spent on research is by companies that operate in the healthcare,
software and internet industries. Microsoft, for example, spent about US$10.4 billion in
research and development in 2014. They ranked fourth in the world, with only Volkswagen,
Samsung and Intel spending more that year (Microsoft News 2014). Every industry and
business does research to develop the best products to satisfy consumers’ ever-changing
and growing needs. Even in South Africa, research is big business. The race to get the
best and the newest information never ends.

Large businesses collect their own information and buy information from external research
organisations. Some of these organisations collect information on industries and consumer
trends all over the world. Euromonitor International is the world’s leading independent
provider of market research. They create data and analyses thousands of products and
services all around the world. If marketers need information on future marketing trends,
they will find it from Euromonitor – at a price. A researcher in South Africa can visit their
website (at http://www.euromonitor.com/south-africa) to get statistics and information
on South African industries, consumer lifestyles and future demographics (Euromonitor
2017). If you visit their website, you will notice there are information from the alcoholic
drinks industry right through to transport and travel for each country in the world. All of
this information was collected through marketing research.

If companies buy market information from a company such as Euromonitor or Nielsen

in South Africa, they want to be sure that the information is valid, reliable and objective.
A company can accomplish that by carefully following the marketing research process.

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The marketing research process is a systematic process that involves different techniques,
methods and decisions in each step. In this study unit, we guide you through the process
and explain all the decisions in each step. You need to realise that every sentence is
about a key fact that is built into the sentence. Try to identify these facts when you work
through the study guide.

4.2 NATURE AND MEANING OF MARKETING RESEARCH

Marketing research is important for all businesses. A business cannot market anything if
they do not have knowledge about the market. They have to know who the customers
are, whom they are competing against and how to develop an offering that satisfies the
customer better than that of the competitors. To get all this information, they have to
do marketing research.

Marketing research is not only about information and how it is collected, but is also a social
action. It involves people, societies and moral standards. Research starts with knowing
the actions, the people and the ethical standards involved in marketing research. This
section contains this information.

4.2.1 Definitions and the nature of marketing research

There are many different definitions for marketing research. Kotler and Armstrong (2015)
define marketing research as the systematic design, collection, analysis and reporting of
data relevant to a specific marketing situation an organisation faces. This definition looks
at marketing research from a process perspective that includes the different stages of
the process.

According to Cant (2013), the AMA defines marketing research as the function that links
the consumers, customers and public to the marketer through information. This definition
focuses on the interaction between the business and society, which are in essence the
reason why businesses exist. A business cannot function if it does not have information
about the market. In other words, a business cannot exist if it does not do marketing
research.

Marketing research provides all the information businesses need to make decisions about
their consumers and the marketing mix they offer. Research costs money, but businesses
know that they will not make money if they do not spend money. Nobody wants to
waste money and it is important that when the information is collected, it is the right
information and is valid and reliable.

4.2.1.1 Validity of the research

When organisations use information, they want to know that the information is valid for
the decision they are making. Validity determines whether the research measures what it
is required to measure and performs as it is required to perform (Wiid 2014). Researcher
should have a clear idea about the problem or opportunity they face, and should select

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or design a tool that is suitable to get information relevant to the specific issue. The
measurement, for example a questionnaire, should also be valid to ask questions about
the topic it is supposed to get answers for.

A developed questionnaire should provide information about the characteristics (for

example demographics and behaviour) of the target market and not about their opinions
of other brands, competitors or anything that is irrelevant to the study. Every question
in the questionnaire should be valid for the topic that is tested. If a company wants to
know what consumers think about the features of a new product, they should only ask
questions about the new product. They should not ask questions about old products,
advertising or after-sales service.

Practical example: To test if a person can drive a car, a researcher will not give him a
pen to write how a car is driven but ask him to physically get into the car and drive it.
Another example: If Unisa wants to test if you know the principles of marketing, they
will not give you an examination paper for mathematics because it is not valid for
testing marketing knowledge.

4.2.1.2 Reliability of the research

Reliability deals with the consistency of the measure. A study is considered reliable if
the same results can repeatedly be reproduced with a similar methodology or the same
instrument of measurement (Wiid 2015). For example: The reliability of the research is
important when a company wants to track how their customers perceive their customer
service. The research instrument will be a questionnaire. The questions in the questionnaire
should be designed so that the researcher will know that he or she can compare the
different times when the survey is done. If the questionnaire is reliable, the researcher
will be able to see how and if the customers’ opinions about the service change.

Practical example:
If you decided to go on a diet to lose weight, you will use a scale to measure your
performance. To track the changes in your weight, you need a reliable scale. A reliable
scale is one that gives the same result if you repeatedly get onto the scale in one session.
If there are changes in the measurement, you will know the scale is not reliable. Changes
on different days will enable you to measure the changes in your weight. A reliable
questionnaire works on the same principle. With a reliable questionnaire, a researcher
can see how customers’ opinions about customer service change.

Activity 4.1

Imagine that you are working as a marketer for a large company. The company wants
to develop new products to satisfy their customers’ growing needs. They decided

86
 to do research to understand them better. Your manager asks you to develop a
questionnaire and do research to get more insight into the company’s target market.

What kind of questions would you include in a questionnaire that is valid for this
specific research problem?

14 Feedback

You probably thought about questions about their age, gender, income and what they think
about the company. The study unit that covers segmentation, targeting and positioning
will give you more insight into questions about the target market. After you have studied
that study unit, you will know which questions to include in your questionnaire.

Questions in questionnaires about target markets should include the demographics,

psychographics and behaviour of the customers. Demographic questions concerns
customers’ age, gender, family size and income. Physiographic questions provide
information about their perceptions and attitudes, while behaviour questions are about
how they use the products and what they do when they buy it.

4.2.2 Researchers: The people who do marketing research

Researchers conduct marketing research. It is a specialised field and not everybody has
the knowledge to do it. It is important for a company to decide who will do the research. If
the people who conduct the research do not know how to do it, it can cost the company
a lot of money for useless information.

The research can be done either internally by a department inside the organisation or
externally by a company that specialises in research. Large organisations usually have
their own research department but if they have large research projects, they may still
use an external research company such as Ask Africa, Markinor or Nielson South Africa.

There are many marketing research companies in South Africa. Some collect information on
consumer behaviour and others on products or advertising and marketing communication.
When a company decides to use an external marketing research company, they will
evaluate their credibility, their competence to do research, their capacity to do the research
and the cost of using them.

Research is expensive and organisations will first consider the advantages and disadvantages
before they decide to use an external research company. The advantages and disadvantages
are (Wiid 2014):

• External organisations are independent and impartial. A company can use their research
results in a court of law to support a claim the company makes about a product.
• External research is the only solution if an organisation does not have somebody
internally with the expertise to do it.

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• It can take an external company longer to do the research because they are not familiar
with the organisation.
• External research is more expensive than internal research.
When a company uses the services of an external research company, it is important that
the two companies build a strong relationship and that both parties behave ethically.

4.2.3 Marketing research ethics

Research demands ethical behaviour from all the people involved to ensure that nobody
suffers unpleasant consequences due to marketing research activities.

Research ethics is the application of moral rules and professional codes of conduct
in the collection, analysis, reporting and publication of information about research
subjects, particularly active acceptance of subjects’ right to privacy, confidentiality and
informed consent (Encyclopedia.com).

The people involved in marketing research include the sponsor or client who pays for
the research, the researcher and the respondents from whom the data is collected. All
of them must adhere to high ethical standards to ensure that both the function and the
information are not brought into disrepute (Aaker, Kumar & Day 2007:18).

4.2.3.1 Ethics and the client who sponsors the project

Sponsors are the companies who request the research and who usually pay for the research.
They often do not want to reveal their plans to their competitors and have the right to
confidentiality. They also have a right to non-disclosure, which means the purpose of the
research and the research results should stay confidential.

On the sponsor’s part, they have an obligation to adhere to ethical business dealings such
as making payments regardless of the outcome of the research. They should provide
the researcher with people and information needed from inside the organisation. They
should be honest and not change the conclusions of the research if they are not satisfied
with the results.

4.2.3.2 Ethical behaviour of the researcher

The researcher has the right to reimbursement, irrespective of whether the research
results are favourable to the client (Wiid 2015).

The researcher has to adhere to the following rules when interacting with participants:
He or she must not misrepresent the true purpose of the research, must make sure the
research is objective and correct, must protect the clients and participants’ right to
confidentiality, and be careful not to distribute incorrect conclusions from the research.

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4.2.3.3 Ethical treatment of the respondents
The respondents are the people who participate in the research and researchers collect
the information from them. Researchers should explain the purpose of the research,
the collection process and their rights to them. Some of the ethical issues that involve
participants are that they have the right to information about the research; they should
not be deceived; and they have the right to privacy, confidentiality and to refuse to
participate in the research.

The Southern African Marketing Research Association (SAMRA) has a Code of Conduct
aimed at eliminating unethical research practices in South Africa. SAMRA’s website is at
www.samra.co.za

Activity 4.2

Visit SAMRA’s website and identify their objectives for marketing research practice
in South Africa.

15 Feedback

SAMRA’s objectives are to ensure and maintain professional research practice in South
Africa. The objectives include:

• Raise awareness of professional research codes and practices, and the users of
the research.
• Provide guidelines that relate to ethics and professional research practices.
• Encourage education and training in research.
• Recognise levels of practice through accreditation.
• Encourage a professional ethos among SAMRA members.

4.3 MARKETING RESEARCH PROCESS

Every marketing research project is different, because the problem or opportunity and
the situation in which the research takes place are different. However, the process to
collect the information always follows a general pattern, which can be broken down into
sequential stages. The first steps of all marketing research projects are always to identify
the problem or opportunity and to set objectives for the research. Then the research plan
is developed. The plan is implemented and, lastly, the data is interpreted and a report
on the findings is written.

The four main stages of the research plan consist of the nine steps of the marketing
research process.

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Figure 4.1: The marketing research process

See the explanation of each step of the marketing research process with reference to the
following example.

Peter is an entrepreneur who identified an opportunity at a railway station to open a

take-away business. He studied marketing and business management and knows that
he needs a marketing plan and information before he can capitalise on the opportunity.
Peter knows he cannot satisfy all people’s needs. He decides to do marketing research
to guide him in his decisions to satisfy most of the commuters’ needs in the best way
he can.
For his research project, Peter first has to identify the opportunity clearly. The definition
will guide him in the rest of his research. Thereafter, he has to plan his research and
decide on the research design, what kind of data sources he will use, and how and from
whom he will collect the information. Once he has a plan, he will have to implement it
and do fieldwork to collect the data physically. The data have to be analysed to provide
him with the information he will used to make decisions. Lastly, Peter will have to write
a report on the research results that he can use for his marketing plan.
The South African government provides a lot of information to help entrepreneurs such
as Peter with the marketing of their products. You can access SMEToolkit South Africa,
one of the websites that is available, at http://southafrica.smetoolkit.org/sa/en/content/
en/783/Low-Cost-Market-Research. Read the article “Low-cost market research” to see
how the government helps small businesses with marketing research.

Depending on the nature of the problem or opportunity, the path to the final step can be
different. To use a metaphor to explain this: If you want to travel from Johannesburg to
Cape Town, you can take many roads. One route can go through Durban and down the
coast of the Eastern Cape; another can go through the Northern Cape and the Karoo; or
you can drive straight on the N1. You need to be careful that you do not get lost in the
marketing research process.

4.3.1 Identify the research problem or objectives

The most important step of the marketing research process is to define a problem or
opportunity. Most marketing research problems stem from information that the marketing
department needs to enable them to make a decision. Even an opportunity can be seen
as a research problem, because the management needs information to make decisions

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about the opportunity. The marketing department and the researchers have to work
closely together and agree on the right identification of the problem.

Do a situation analysis to get background information on and insight into a problem. In a

situation analysis, the managers analyse the different environments (micro-environment,
market environment and macro-environment) to get a better understanding of the
situation, the decisions they need to make and the information they need.

To get the information and before any problem can be solved, the right questions have
to be asked to provide the right answers. The marketing research problem is associated
with a series of questions that help to define the problem more precisely. The questions
can be a hierarchy or spectrum that covers from specific to general questions.

The above example of Peter can help to explain these questions. Peter’s specific problem
is that he wants to start a business at the railway station and needs more information
to decide which takeaways to offer. To define the problem, he will cover the following
questions:

• What is the management problem? This question involves the decision that the
management has to take: What kind of takeaway business will he start?
• What is the research problem? The management question is then refined into a marketing
research question: What are the consumers’ needs for takeaways?
• What do we have to investigate? The investigative question should provide answers to
the questions above: What kind of products (food), price, distribution and promotions
do the consumers want?
• What kind of questions must be in the questionnaire to obtain data to solve the problem?
This will be the specific questions of the questionnaire. Peter will ask questions such
as: How often will they buy takeaways? Do they prefer chicken, fish, chips or pap?
How large should the portions be? How much are they prepared to pay for a meal?
After identifying the research problem, the researcher has to decide on the objectives
that will guide the whole process. The marketing research objective refers to the specific
information needed to solve the marketing problem (Cant, Van Heerden & Ngambi 2010).
The researcher has to consider three aspects when formulating research objectives:

1. The research question. This is a statement that specifies the information the decision-
maker needs. In Peter’s case, the research question will be: What kind of takeaways
do commuters want at the railway station?
2. The hypothesis. The hypothesis offers a basic alternative answer to the research
question. It often takes the form of “If this, and then that”. Peter can hypothesise
that if commuters do not want fish, they want chicken.
3. The scope of the research. This refers to the parameters or boundaries of the study.
The scope of Peter’s research will be the commuters at the railway station, which
will be included in his sample plan.
The identified research problem and objective guide the entire research process. If anything
goes in a different way, the research process will follow a different path.

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 Activity 4.3

Imagine that you are the marketing director of a retailer, such as Checkers or Spar,
and you need to make a decision on whether the store’s layout has to be upgraded.
Which questions, in the hierarchy of questions, will you ask to identify the problem
that will guide the research?

16 Feedback

The hierarchy of questions guides you to think about the decision that the management
has to take, through to the specific questions that will be included in the questionnaire.
Ultimately, the retailer wants to satisfy the customers’ needs and their opinions are
important in the decision-making process. Examples of hierarchy questions that you
could have thought about are:

• Management problem. Do consumers want a change in the layout of the store?

• Research problem. What are consumers’ expectations when they visit the store?
• Investigative questions. What would enhance consumers’ shopping experience?
• Measurement questionnaire. Do consumers want a wide range of products? Do
they want more space to move in and around the passages? Are the different
areas well defined?

4.3.2 Select the research design

A research design describes the plan that the researcher follows to fulfil the marketing
research objectives and it provides the framework to solve a specific problem (Cant 2013).
The research design can be explorative to get more insight into the problem, descriptive
to describe a phenomenon, or causal to test the cause and effect of variables.

Peter, the entrepreneur, first needs insight into the commuters’ needs for takeaways.
To get insight and a better understanding of the problem, he has to do exploratory
research. He can do this by asking a few of the commuters to get together and discuss
the situation. This will be a focus group interview. When he has a better understanding
of what the potential customers need, he can develop a questionnaire and do a survey.
Many commuters will complete the survey questionnaire. It will provide a description
of their specific needs. This will be the descriptive research. If the descriptive research
reveals that they want chicken, he can prepare the chicken, using different recipes, and
ask people to taste a sample. With this experiment, he will identify the preferred recipe
that will be the most likely one that he will use on his menu. This type of research is
causal research.

From the example above, you will see that the different research designs follow a sequence
to provide insight into a problem. The design depends on the problem or objectives

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determined in the first step. In the following discussions, we explain what each design
entails and which techniques should be used to get the best results.

4.3.2.1 Exploratory research design

An exploratory design is necessary when more insight and information are required about
a problem or an opportunity. The objective of an exploratory design is to understand a
phenomenon, to explain central concepts and to develop hypotheses for further research.

Methods and techniques to use for exploratory research are:

• Literature reviews include reading and analysing relevant information previously written
about the problem. Literature reviews analyse secondary data. A discussion about this
follows in Section 4.3.3.
• In-depth interviews involve conversations with people who are experts in a field. They
provide a better understanding of the problem, based on their knowledge about the
specific field.
• Focus group interviews involve a small group of people who openly speak about a
problem. In Section 4.3.4, we discuss this in more detail.
• Case studies analyse similar and relevant cases to learn more from other people and
other company’s experiences about a problem that were investigated.
• Pilot studies are surveys done with a small group of people to get more insight into a
problem. Pilot studies can often be used as a guide for later research when the larger
population is tested.
Exploratory research is often seen as qualitative research (which uses words). Descriptive
design (discussed next) is quantitative research, which uses numbers.

4.3.2.2 Descriptive research design

When a descriptive design is used, marketers usually want to describe a group such as
a target market. Before the descriptive design can begin, questions about who, what,
when, where, why and how have to be answered. The answers guide the methods and
techniques that will use in further steps.

• Who. Who should be measured? Example: Who is a customer? Anyone who enters a
store or just the ones who purchase something?
• What. What characteristics of the customers should be measured? Example: Are we
interested in demographics, psychographics or behaviour?
• When. When will they be measured? Example: Will the survey happen while they are
in the store or later? Should the study take place during the week or on weekends?
Over what period will the measurement take place?
• Where. Where will the study take place? Example: Will it be in the store or outside the
store? Will the customer be contacted in an office or at home?
• How. How will they be measured? Example: If it is with a survey, what will the format
of the questionnaire be and how will the interviews be used?
Descriptive research has two distinctive forms: cross-sectional and longitudinal studies.

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• Cross-sectional studies are usually performed by doing a sample survey and involve
collecting information from a given sample of the population (just one). Every time you
do the study, conditions from the environment could have changed and the results
of the study will be different. Most marketing research is cross-sectional because
marketers want to know what the current situation in the market is. An example of
cross-sectional research is given in Section 4.3.8.
• Longitudinal studies involve repeating the same research over a specific period. This kind
of study provides information about how people’s attitudes, opinions and behaviour
change over time. Marketers can, for example, do a research study on customer
perceptions of their service, every year for many years, and compare the different
study results to see if there are changes in how customers view their services.

4.3.2.3 Causal research design

Marketing managers often need to change the elements of the marketing mix (such as
price) and before they can do it, they have to know how consumers will respond to the
change. In this case, they will use a causal research design that involves experiments.

The purpose of causal research is to show the cause and effect of relationships between
a dependent variable and an independent variable.

• The independent variable is the variable that is manipulated in an experiment. A change

in price, more advertising or a change in a product (independent variables) can be the
cause of something else happening, such as an increase in sales (dependent variable).
• The dependent variable results from a change. In the above example, the sales increase
is the effect that depends on a change in the marketing mix variables of product,
price, place and promotion.
One can do causal research, or experiments, in a laboratory or in the field.

• Laboratory experiments. One does these in a controlled environment, for example to

test the effectiveness of a product in a laboratory.
• Field experiments. One does these in a real-life situation where the product is used.
Researchers do most marketing experiments in the field where marketers can see
how consumers and competitors react to the changes of the marketing mix elements.

Activity 4.4

One of your friends has a business and she realised that her customers are not buying
as often as they used to. As her friend, you decide to help her and explain to her
that she has to do research. How will you explain the research designs that she can
follow to her?

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17 Feedback

You will explain to your friend that she first has to explore the problem to get insight into the
reasons for the problem. She can use a focus group interview to get the information. When
she realises which customers are not buying, she will be interested in the characteristics
of the customers who do buy.

To get information about the consumers’ characteristics, she should do descriptive

research. In descriptive research, surveys are used to obtain information about customer
demographics, psychographics and behaviour. If the right questions are asked, it can
describe which consumers buy and do not buy.

After the descriptive information is collected, she can decide to change the marketing mix
to see if customers will buy more. She must do causal research to see if more advertising
or a change in a product or price will result in more favourable reactions.

4.3.3 Identify the data sources

The researcher has to decide where the data will come from. There are two main data
sources, namely secondary and primary data.

4.3.3.1 Secondary data sources

Secondary data is data that already exist. It is secondary because somebody else collected
it for another purpose. A researcher uses secondary data to get more insight into a current
problem. Secondary data is available in books, articles or reports. This kind of data is less
expensive to collect and may sometimes even provide the answers that the researcher
is looking for.

One can find secondary data internally or externally of a business.

• Internal secondary data are information collected inside an organisation, but for another
purpose than the current study. Examples are invoices, bills, sales records, sales reports
and production schedules of different departments.
• External secondary data are information from sources outside the organisation. This
information include material published in books, articles or newspapers; information
in computer databases and information bought from companies that do general
research on market trends. One find published material in libraries and from industry
associations and government bodies such as Stats SA.

When secondary data is used, it is important that the researcher evaluates the quality of
the data. The researcher should know what the original purpose of the data collection
was, the date of collection, and if it is accurate and consistent with other similar findings.
The credibility of the original researcher as well as the research methodology used should
be assessed.

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4.3.3.2 Primary data sources
Primary data is data that someone collects for the purpose of the study at hand (Kotler
2014). It is new data that no one has collected before. The advantage of primary data is
that it relates to the specific problem being investigated. One can then use the data to
make the needed decisions. Disadvantages include that it is expensive and takes a lot
of time to collect.

Primary data can be collected through internal or external sources. Internal sources are
employees inside the organisation. External sources are outside an organisation and
include customers, clients, retailers, wholesalers and competitors.

If secondary data provides the information that solves the problem, it is not necessary
to do primary data collection. If it does not, the researcher has to follow the rest of the
steps of the research process.

Activity 4.5

A secondary data source exercise: Visit Stats SA’s website at http://www.statssa.gov.za/

and browse through it to identify aspects that are important for marketers to know.

18 Feedback

Did you notice that Stats SA provides information on the demographics of the people in
the country, statistics by place (such as municipalities) and statistics by theme (such as
people, the economy, living conditions and the natural environment)? All these statistics
are important for marketing managers and researchers who need to have insight into a
marketing problem or situation.

4.3.4 Determine the primary data collection method

If secondary data sources cannot provide information for a specific problem, a researcher
has to do primary research. The collection of primary data can be by means of qualitative
or quantitative research methods. If researchers want to have more insight by exploring
a situation and need words to describe it, they will use qualitative research. If researchers
need numbers and percentages to describe and test something, they will use quantitative
research. Each has its own methods and techniques to collect information.

The following figure shows the methods and techniques researchers use to collect
primary data.

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Figure 4.2: Primary data collection methods

4.3.4.1 Qualitative research methods and techniques

In qualitative research, words and detailed descriptions are used to provide insight into
a problem. Small groups of individuals are interviewed to understand their motivations,
opinions and behaviour.

Researchers do not consider qualitative research as representative of a larger population,

but it helps them to develop hypotheses that they can test in quantitative research with
numbers and statistics.

The most common qualitative research methods are in-depth interviews, focus group
interviews and projective techniques.

• Focus group interviews. These involve a small number of people (usually six to 10),
who interact under the direction of a moderator to talk about a product or service of
an organisation. The goal of the focus group is to generate data on the participants’
experiences, feelings and ideas about a particular topic or issue.
• In-depth interviews. In-depth interviews are “relatively” unstructured extensive interviews
during which the interviewer asks many questions and probes for in-depth answers
(Wiid 2015). Researchers can obtain rich and detailed information. Carefully screened
respondents participate and the interview last from 30 minutes to two hours. The
discussion develops spontaneously as part of the natural interaction between the
interviewer and the respondent. The interviewer probes to get answers to questions
such as the why, how and when. In-depth interviews provide information about the
motivations and reasons for consumer behaviour.
• Projective techniques. Projective techniques are designed to uncover hidden opinions or
beliefs (Wiid 2015). The most frequently used projective technique is word associations.
Here, the researcher gives the respondent a word and then the respondent has to
say the first word they think about that is associated with the original word. For
example, hunger = chicken and chicken = KFC. This will provide the researcher with
the knowledge that the respondent associates hunger with KFC. Sentence completion

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 and describing a picture or a cartoon are also projective techniques used to uncover
what people are really thinking.

4.3.4.2 Quantitative research methods and techniques

Qualitative research is used when marketing management wants to know more about the
characteristics of a target market. This research technique provides them with statistics,
such as totals, averages and percentages. Topics researched with quantitative methods are
demographic factors such as the average age, gender and income of a target market and
the percentage of people who have a specific attitude or behaviour towards a product.

Qualitative research relies on numbers, measurement and calculation (Wiid 2014).

It is prepared in the sense that all the respondents to a survey have to answer the
same questions. The sample size is large and the information from the sample is more
representative of the population than in qualitative research. Quantitative research is
descriptive and causal, and includes surveys, observations and experiments.

Surveys

Survey research is defined as gathering primary data by asking people questions about
their knowledge, attitudes, preferences and buying behaviour (Kotler et al 2014). This is the
most widely methods used for primary data collection. The major advantage of surveys
is that it is flexible. Researchers use it in many different situations and they can obtain
different kinds of information, such as demographic, psychographic and behavioural
information.

Most surveys use questionnaires with structured questions and small boxes after the
questions the respondent must answer. The boxes are provided so that the respondent can
tick a choice as the answer. This allows for the results to be easily analysed into numbers
and statistics such as averages and percentages.

Survey information collection methods include personal, telephonic, self-administered

and internet (online) methods.

• Personal interviews. Personal interviews are conducted face to face by a trained

interviewer at any venue (Cant 2013). This method is time consuming and expensive, and
the interviewer has to be well trained. Advantages are that the interviewer can probe
for more information and can use visual aids to explain something to a respondent.
• Telephone interviews. Telephone interviews are cost effective, a larger geographical
area can be reached and technology such as computer-assisted telephone interviews
(CATI) that allows for instant data analysis can be used.
• Self-administered surveys. With self-administered surveys, the respondents answer
the questions in their own time. A disadvantage of this method is that an interviewer
is absent and someone cannot explain the questions. Advantages include that the
respondents have more time to think about the answers and the cost is relatively
low. Examples of self-administered surveys are questionnaires at a till point or a hotel
reception desk, with questions about the customer’s experience of the company’s
service.

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• Internet surveys. Internet surveys include using emails to send a survey questionnaire
and online surveys where the respondent answers questions on a website. Web surveys
are faster, simpler and cheaper. Disadvantages are that the response rate is low and
not everybody has access to the internet. There is also no database available for email
addresses. This means that the survey results are not representative of the population.

Observations

Observation is the process of recognising and noting what is going on, rather than
asking for information (Cant 2013).

This involves gathering data by observing what people do and how they do it. Observation
research is used for exploratory and descriptive studies. It can be done by people or
by mechanical devices such as video cameras, sound recorders or traffic counters.
Observations provide information in situations where people cannot or do not want to
provide information.

A marketing manager who wants to change the layout of a store would, for example,
observe how people move around in the store and how they select the products they buy.
Even un-interviewable things, like babies and animals, are often subjects of observation.
In these cases, researchers can use recordings on video cameras which they analyse at
a later stage.

Experiments

Experimental research is defined as gathering primary data by selecting matched groups

of subjects, giving them different treatments, controlling related factors and checking for
differences in group responses (Kotler et al 2014). Experiments are best suited for causal
research and are aimed at explaining cause and effect relationships between dependent
and independent variables.

Test marketing is an example of a marketing research experiment. When a chain of

restaurants (such as Spur) needs to decide on the best marketing mix (product, price
and promotion) for a new item on their menu, they will do test marketing. To test the
market, they will select a few similar outlets and change the marketing mix elements
(independent variable) in each. If all the other factors are the same, and they sell more in
one restaurant (dependent variable) than in the others, they will conclude it is because
of the different mix that was used. All the marketing mix elements of new products are
usually tested in this way before the final product enters the market.

Activity 4.6

Test your knowledge of primary data collection methods by matching Column A

with Column B.

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 A Method B Description
1 Qualitative A Use human beings and mechanical devices to
methods collect information.
2 Quantitative B The interviewer can use visual aids to explain things
research to respondents.
3 In-depth C Include email and online surveys.
interviews
4 Focus groups D Use words and provide detailed descriptions.
5 Projective E Reach a wide geographical area.
techniques
6 Personal F Provides rich and detailed information.
interviews
7 Internet surveys G A small number of people interact with a moderator.
8 Telephone H Provides statistics such as averages and percentages.
interviews
9 Observations I Uncover hidden opinions and believes.
10 Experiments J Explain cause and effect relationships.

19 Feedback

Answers: 1/D, 2/H, 3/F, 4/G, 5/I, 6/B, 7/C, 8/E, 9/A, 10/J

4.3.5 Develop the research measurement instrument

To collect primary data, researchers use survey questionnaires and mechanical devices
for observation or experiments.

4.3.5.1 Questionnaires
A questionnaire is a set of questions designed to generate the data that are necessary to
accomplish the objectives of a research project (Wiid 2015). Researchers must consider the
design carefully, as it will influence whether or not the research problem will be solved.
The questionnaire should be designed for the specific data collection method that is
used, whether it is a personal/telephone interview or a self-administered/online survey.

Aspects that are important in developing questionnaires are the content, format, wording,
sequence and layout of the questions.

• Content. A researcher has to decide on the type of information that is needed to solve
the problem. Consider the content of each question. Sometimes several questions are

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 necessary to get the right information. However, if a question will not provide valuable
information, do not use it.
• Format. The researcher has to decide how to ask the questions. The format of a question
refers to its structure. A question can be open or closed. With an open, non-structured
question, the respondent can write sentences to explain the answer. When a question
is structured or closed, the respondent has a variety or list of specific choices from
which to pick the answer. Multiple-choice questions are examples of structured, closed
questions. An example of an open question is: What do you think about the idea to
be able to buy food at the railway station? A closed question provides alternatives,
for example: Do you want to be able to buy food at the railway station? “Yes” or “No”.
• Wording. It is important that the respondents understand the questions. Use simple
words that are familiar to everybody. Do not use words and questions that have double
meanings.
• Sequence. The sequence of the questions should be logical and in chronological order.
Questions about demographics such as age and gender should be together and
questions about what people think of how they behave should be together.
• Layout. The questionnaire should look professional and attractive. It should enable the
respondents to easily identify the places where they have to answer the questions.
Researchers can also use mechanical instruments to measure consumers’ behaviour and
physical responses. Eye cameras can, for example, be used to see how long a person focuses
on a point in an advertisement and a pupil meter can measure emotional responses.
Traffic counters, galvanometers, video cameras and people meters also measure people’s
responses, behaviour and opinions.

Activity 4.7

Peter, the entrepreneur, heard that you are studying marketing and he asked you to
help him with research. He told you that he has already done exploratory research
and established that the commuters would like to have food available at the station.
Now he has to decide what he will offer and the quantities he has to offer. To be able
to do this, he needs more information about the commuters’ specific needs.

The two of you sit down together and decide to do a survey. You realise that the
commuters would probably be in a hurry and would not like to participate in the
survey. How would you design a questionnaire that looks professional and only has
the most important questions to enable Peter to make his decisions?

20 Feedback

It is important that you think about the situation and the characteristics of the people who
have to respond. You have to think wisely about the content, format, wording, sequence
and layout of the questionnaire. You need to be professional and tell them what the survey
is about and thank them at the end.

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 If you follow the guidelines above, your questionnaire might as follows:

Visit the following websites to get more information about questionnaire design and to
look at examples of marketing research questionnaires:

• https://www.surveymonkey.com/mp/market-research-survey-templates/ – Survey-
Monkey offers market research survey templates and information for free.
• https://www.smartsurvey.co.uk/market-research-questionnaire – SmartSurvey offers
information and templates for free.
• http://www.websurveymaster.com/1-Market_Research-Questionnaire-examples –
Web Survey Master offers advanced survey tools for professionals.

4.3.6 Design a sample plan

A researcher has to decide from whom they will collect the data. It would be ideal to
collect data from everybody who is relevant to the research, but this is not always possible.
To select participants, the researcher has to do sampling. The following concepts are
important in sampling:

• Population. A population is all the people with the characteristic(s) of interest to the
study. If a researcher can collect data from everybody in the population, it is called a
census. Governments usually do a census of a country’s population to establish how
many people live in the country and what their characteristics are.
• Sample. A sample is a segment of the population that is selected to represent the
population as a whole (Kotler et al 2014). If a company, for example, wants to know
what customers think about their customer service, it is not possible to ask every single
customer. If they ask a sizeable group, they will get a fair idea of what the customers
are thinking.
• Sample plan. To select a sample, the researcher needs a sample plan to decide who
will be selected, how many people will be selected and how they will be selected.
A sample plan is a process that involves identifying the population, getting a list of their
names, selecting the sampling method, deciding how big the sample should be, selecting
the elements and gathering the data.

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Figure 4.3: The steps of the sampling process

There are six steps in the sampling process.

1. Identify the population

The researcher must decide what information is needed and who is most likely to have
it. The population can be people who live in a certain area, people who buy a certain
product/service or people who have specific characteristics (such as being male or female,
or belonging to a specific age group). Families with a baby would, for example, be the
population of interest for a company who sells baby nappies.

2. Identify the sampling frame

A sample frame is a list of names of all the people in a population. It is not always possible
to get a list of names of all the people in a certain interest group. The availability of a list
will influence the sampling method which will be chosen.

3. Select the sampling method

The researcher can decide between probability and non-probability sampling. If a list of
names is available, the researcher will use probability sampling. In this sampling, every
person has an equal chance to be selected and to participate in the research study. With
probability sampling, the researcher can statically calculate the probability that something
will happen and that the sample will represent the population. When a list of names is not
available, the researcher uses non-probability sampling – with which representativeness
cannot be calculated.

Probability and non-probability sampling each has its own data collection methods.

Probability sampling methods include:

• Simple random sampling. When this method is used, every name on a list, or person
in a population, gets a number that is written on a card. The cards are placed in a
hat, box or computer and scrabbled. Thereafter, the researcher selects the required
sample size from all the cards. The people whose names are drawn are selected for
the sample. The six balls, chosen out of 49, in a lottery is an example of this method.
• Stratified sampling. The researcher uses this method when it is possible to divide a
population into distinctive groups such as male or female. This enables the researcher
to ensure that each group is clearly represented in the study.
• Cluster sampling. Examples of clusters are people who live in provinces, towns or hostels.
Instead of selecting sample units in all the different provinces or towns, a researcher
randomly selects two or three provinces and then selects samples in the cluster.

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• Systematic sampling. When researchers use a systematic sampling method, they
randomly select the first person and then select the sample units according to a set
interval. The interval is a skip pattern. To calculate the interval, the researcher will
take the size of the population, divide it with the size of the sample and the answer
provides the skip pattern. If the population’s total size is 50 and the sample size is 10,
interval is five (50 ÷ 10 = 5). Every fifth sample unit forms part of the total sample.
Researchers can apply this method to a list of names, people walking through a door
or items on a shelf.
Non-probability sampling methods include:

• Convenience sampling. With a convenience sample, the researcher uses whoever is

readily available. The sample is not representative of the larger population. A researcher
can, for example, use people who are shopping in a store to give their opinion about
the customer service. The problem is that people who are unhappy with the service
might not be in the store that day.
• Judgement sampling. Researchers use their judgement and select people with a specific
characteristic. If a young person, for example, wants to do research on life or love, she
would use her judgement and ask other young people – and not old people – or she
can decide to only ask old people.
• Snowball sampling. It is often difficult to find people with a specific characteristic, such
as mothers with triplets. The researcher will find the first mother and then asks her to
provide the names of other mothers who can be asked to participate in the research.
In this way, the research sample starts with one respondent and snowballs to many
respondents.
• Quota sampling. This sampling method is used when the researcher needs information
from a certain amount of people with a certain characteristic. For example, the researcher
decides to ask 50 women younger than 30 years to provide information, 100 women
between 30 and 40 years and 50 women who are older than forty years. In this case,
the researcher bases his selection on the premise that certain characteristics (30 to 40
year old women) better represent the topic that is researched.
4. Determine the sampling size
The researcher has to decide how many respondents should be included in the study. It
is an important decision for calculating percentages and establishing what the average
person, in a population, thinks. If there are not enough respondents in a sample, it will
be skew and not representative of the population. If the sample size is too big, it will be
expensive to collect the information. The sample size can be statistically calculated.

5. Select the sample elements

The sampling method is implemented in this step and the individual respondents are
selected.

6. Gather the designated data

The researcher is now ready to do the fieldwork and collect the data.

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 Activity 4.8

Match the sampling method in Column A with the situation in Column B

A Sampling method B Situation

1 Simple random A People are selected according to the province
where they live.
2 Stratified B They are selected because they are available.
3 Cluster C A mother of triplets gives the researcher the
name of another mother.
4 Systematic D Each person has the same chance to be
selected.
5 Convenience E A number of people have a certain
characteristic.
6 Judgement F The population is divided into males and
females.
7 Quota G Every fifth person who walk through the door is
selected.
8 Snowball H The researcher decides who will be selected.

21 Feedback

Answers: 1/D, 2/F, 3/A, 4/G, 5/B, 6/H, 7/E, 8/C

4.3.7 Fieldwork: Collect the data

After the researcher has done all the planning and preparation, the data has to be
collected. Fieldwork involves data collection and the researcher has to decide who will
collect the data, how the collection process will be administrated, and how the process
will be evaluated and controlled.

• Interviewers. Interviewers collect the data in a survey. The interviewers have to be

appointed and trained. They should have good communication skills, get on well
with people, be sensitive and have emotional control. The training covers the purpose
and procedures of the research, such as the sampling, asking questions and probing.
• Administration. Administration involves preparing the questionnaire and having enough
copies of the questionnaire, stationery and authorisation forms for each interviewer.
There also has to be a file for each interviewer, to facilitate questionnaire administration
and remuneration.

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• Evaluation and control of interviewers. The purpose of control is to determine if the
fieldworkers are carrying out their tasks correctly to meet the objective(s) of the
research. Regular meetings should be held with the interviewers to ensure that the
correct procedures are followed. The interviewers must check the questionnaires to
see if they were fully completed and that no mistakes were made.

4.3.8 Analyse the data

After the data has been collected, it has to be prepared for analysis and be analysed.

4.3.8.1 Data preparation

The raw data from each questionnaire have to be edited, verified and coded before it can
be analysed. The process of editing the collected data ensures that the data is accurate,
consistent, uniform, complete and arranged to simplify the coding and tabulation process
(Cant 2013). It is now time to discard incorrect questionnaires and enter the information
onto an Excel spreadsheet or similar statistical software.

4.3.8.2 Data analysis

Data analysis provides the researcher with percentages, averages, tables and graphs. These
help the researcher to interpret the data and to provide information for decision making.
Data analysis is a specialised field and it is better that a professional data analyst does it.

The following table is an example of cross tabulation (discussed in the section on descriptive
design).

Table 4.1: Cross tabulation

Discussion
Yes No Total
The total sample size is 200 (100 males and 100
Male 40 60 100
females). They were asked to answer yes/no to a
Female 70 30 100 question in the questionnaire. The information in
Total 110 90 200 the centre and the totals at the bottom provide the
information for data analysis and conclusions.
% 55% 45%

Let us say the above research example refers to a study that was done on customer
service satisfaction. The researcher can conclude that the men are not satisfied with the
customer service, but the women are. Overall, only 55% of the respondents are satisfied
with the customer service. The researcher can conclude that the company has a serious
problem and has to work on their customer service.

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4.3.9 Write the research report
The final step of the marketing research process is to communicate the information to the
marketing decision-makers. The written report is the document that the management
uses as their information source for decision making. They are usually not concerned
with the details of the research project, but are only interested in the project’s results
and how well the information can be used to solve the marketing problem (Wiid 2015).

An oral presentation usually complements the written report. The presentation facilitates
the interpretation of the results. During the presentation, the decision-makers and the
audience can ask the researcher questions to clarify any obscurities in the report (Wiid
2015).

Criteria that are used to evaluate the quality of the research report are its intelligibility,
relevance, clarity, conciseness, organisation, accuracy and comprehensiveness (Cant 2013).

Activity 4.9

After you have studied the marketing research process, compile a mind map or a
table to summarise the steps, indicating the techniques and different methods used
in each step.

22 Feedback

There are many kinds of mind maps, but your mind map might look like the table below.
You can use this one, or your own, and extend it further to revise and study the process.

Step Key words Techniques Example

1 Identification of Problem Decision making
the problem
Objectives Question, hypothesis and scope
2 Research design Exploratory In-depth interviews, focus group
interviews and case studies
Descriptive Cross-sectional and longitudinal
Causal Cause and effect, and experiments
3 Data sources Secondary Available, internal and external
Primary Survey, observation and
experiments
4 Collection Qualitative Use words and descriptions
method
Quantitative Use numbers and statistics

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 5 Collection Mechanical Video cameras and traffic counters
instrument
Question- Content, structure, words and layout
naire
6 Sample design Probability SRS, stratified, cluster and systematic
Non-proba- Convenience, judgement, snowball
bility and quota
7 Fieldwork Interviewers Appointed and trained
Administra- Preparation, implementation and
tive control
8 Data analysis Preparation Editing, verification and coding
Analysis Statistics, tables and graphs
9 Report writing Communi- Written and oral presentation
cation

4.4 ONLINE MARKETING RESEARCH

The growth of the internet has presented researchers with a wealth of new methods to
collect marketing information. Secondary data can be collected through search engines,
databases and information sites. Primary online data collection methods include methods
such as email-based questionnaires and online surveys and focus groups. Many people
believe that in the future, internet surveys will essentially eliminate telephone interviewing
(Wiid 2015).

• Email-based questionnaires. Respondents receive and return questionnaires by email.

• Online surveys. The survey is done on a website.
• Online focus groups. An online focus group can be conducted in one of two ways: chat
based or web-conferencing based.
Over time, as online marketing research developed, advantages and disadvantages of
using it emerged.

The advantages of online marketing research include (Cant 2013):

• Cost effectiveness: Travelling and printing questionnaires are eliminated.

• A large number of participants can be reached at the same time. Geographic restrictions
are eliminated and respondents all over the globe can be reached.
• Data capturing and analysis are automatic and results are available quicker.
• Attractive graphics, audio and videos can be used to increase the response rate and
the general enjoyment of respondents to web surveys.
The disadvantages of online market research include:

• People perceive the research email as junk mail and simply ignore and delete it.

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• The representativeness of the population is a problem. Access to the internet is still
growing in South Africa and the targeted population cannot always be reached. It is
also difficult to check the respondent’s identity.
• Data privacy: It is difficult to guarantee the anonymity of the respondents.
According to Wiid (2015), most computer-based data collection methods are still in their
infancy and will change rapidly as technology develops and becomes more sophisticated.

Activity 4.10

To get more insight into and examples of web surveys, visit the following websites:

• https://www.surveymonkey.com/mp/website-feedback-survey-template/
• https://survicate.com/website-survey/questions/
• https://www.questionpro.com/survey-templates/website-surveys/

23 Feedback

Did you notice that the websites provide information on developing online questionnaires
and templates of questionnaires that can be used for online web research?

4.5 SUMMARY
In this study unit, we discussed the marketing research process and the
people and ethics involved in collecting marketing information. You learned
about all the steps of the process and were given examples to show you
how each step applies to a practical situation. In the study units that follow,
we provide more information about the specific factors of products, prices
and marketing communication. All these factors have to be researched to
develop a marketing plan for a specific offering.

4.6 CASE STUDY WITH QUESTIONS

The search for all kinds of information starts with a question. When an entrepreneur
has an idea, his idea is built on the question “What if?” This one question leads to more
questions that lead to a hypothesis that is based on “If this, then that”. If you think about
it, the existence of a business depends on questions and hypotheses. To get answers to
the questions, research has to be conducted.

Marketing managers ask many questions. They have to decide on the target market,
how they will compete in the market, a product’s features, the price of the product, and
how the product will be delivered and promoted. To get answers to all these questions,
marketing research has to be done.

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Look at the video “Why market research is important” at https://www.youtube.com/
watch?v=1Fja06iCIE0 (SquareOne, Saskatchewan’s Business Resource Centre) and identify
all the questions that are mentioned to explain the importance of marketing research
and the information necessary to develop a marketing plan.
Answer
You would have realised that a business cannot develop a marketing plan without doing
marketing research. Some of the questions that should be asked to develop a marketing
plan are:
• The target market: Who is the target market? How often will they buy? How big is the
market? What is their buying behaviour? What products/services do they want? What
prices are they willing to pay? How will the product get to the target market? How do
customers perceive a product?
• Competitors: Who are the competitors? What are they offering? What is their share of
the market? What are their strategies and how do they react to other competitors?
Marketing research is used to identify markets and trends.

4.7 REFLECTION
Before you continue with the next study unit, reflect on the following questions:
1. Do you have a clear understanding of the difference between external and internal
research? Do you understand the ethics that influence the different stakeholders
in research?
2. Do you have a practical understanding of the different steps of the marketing
research process? Would you be able to explain the different research designs and
give an example of each? Do you understand the difference between secondary
and primary data sources, and can you provide examples of each?
3. Would you be able to explain the difference between qualitative and quantitative
research? Can you explain the different primary data collection methods? Do you
have a practical understanding of the different survey methods? Would you be
able to explain how a questionnaire is developed? Do you understand the different
sampling methods?
4. Do you understand how data is collected and the fieldwork step of marketing
research? Would you be able to discuss data preparation, data analysis and the
important aspects of a research report? Can you explain how the internet is used
to collect marketing research information?
5. What did you find interesting in this study unit? Why?
6. How long did it take you to work through this study unit? Are you still on schedule
or do you need to adjust your study programme?

4.8 REFERENCES
Aaker, DA, Kumar, V & Day, GS. 2007. Marketing research. 9th edition, Haboken, NJ: John
Wiley & Sons.
Armstrong, G & Kotler, P. 2015. Marketing: An introduction. 12th edition. Pearson Education
Inc. Essex England.

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Cant, MC. 2013. Marketing: An introduction. 2nd edition. Cape Town: Juta.
Cant, MC, Van Heerden, CH & Ngambi, HC. 2010. Marketing management. Cape Town: Juta.
Encyclopedia.com. Research ethics. http://www.encyclopedia.com/social-sciences/diction-
aries-thesauruses-pictures-and-press-releases/research-ethics (accessed 4 March 2017).
Euromonitor. 2017. South Africa. [http://www.euromonitor.com/south-africa (accessed 3
March 2017). Kotler, PT & Armstrong, G. 2015. Principles of marketing. 16th edition. Up-
per Saddle River, NJ: Pearson Education. Microsoft News. 2014. Microsoft spent $10.4
billion in R&D in 2014, ranked 4th in the world. https://mspoweruser.com/microsoft-
spent-10-4-billion-in-rd-in-2014-ranked-4th-in-the-world/ (accessed 3 March 2017).
Kotler, PT. & Armstrong, G. 2012. Principles of marketing 14th edition. Pearson Education
Inc. Upper Saddle River, New Jersey.
Kotler, PT & Armstrong, G. 2014. Principles of marketing. 16th edition. Pearson Education
Inc. Upper Saddle River, New Jersey.
SMEToolkit South Africa. Low-cost market research. http://southafrica.smetoolkit.org/sa/
en/content/en/783/Low-Cost-Market-Research (accessed 3 March 2017).
SquareOne, Saskatchewan’s Business Resource Center. “Why market research is important”
https://www.youtube.com/watch?v=1Fja06iCIE0 (accessed 8 March 2017).
Statistics South Africa (Stats SA). http://www.statssa.gov.za/ (accessed 5 March 2017).
Wiid, J. & Diggines, C. 2015, Marketing research, 3rd edition. Cape Town. Juta & Co.

4.9 SELF-ASSESSMENT QUESTIONS

Question 1
Which one of the following statements correctly explains the validity of research?
(1) Validity refers to the consistency of a measure.
(2) The validity of research is used when a company wants to track how customers
perceive their customer service.
(3) Validity determines whether the research measures what it is required to measure.
(4) When a questionnaire is valid, the researcher knows that he can compare the different
times when the survey is done.

Question 2
There are three aspects that have to be considered when developing a research objective.
Which one of the following is not one of the three aspects?
(1) research question
(2) hypothesis
(3) scope of the research
(4) cost of the research

Question 3
Which research design should be used when a company wants to understand more about
the reasons why customers are not buying as often as they used to?
(1) exploratory
(2) descriptive
(3) causal
(4) quantitative

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Question 4
Where would a researcher find new data that are collected for the study at hand?
(1) internally in the records of the organisation
(2) by doing surveys and experiments
(3) in libraries and publications
(4) from external research companies that do general research on market trends

Question 5
Which survey technique would you use when you want a method that is cost effective,
that reaches a large geographic area and where you can use technology such as CATI?
(1) personal interviews
(2) telephone interview
(3) self-administered questionnaire
(4) internet survey

Question 6
Which of the following are criteria for developing a questionnaire?
(a) The researcher has to decide on the questions that will be asked.
(b) the researcher has to decide whether the questions will be open, closed or both.
(c) All the respondents should understand the question.
(d) The questionnaire should look attractive and professional.
(1) a b c
(2) a b d
(3) a c d
(4) a b c d

Question 7
In which step of the sampling process will a researcher get a list of names of all the people
in a population?
(1) Identify the problem of the opportunity.
(2) Identify the sample frame.
(3) Select the sample method.
(4) Decide on the sample size.

Question 8
Which of the following sampling methods are used when a researcher can calculate the
sample’s representativeness of a population?
(1) simple random sampling
(2) convenience sampling
(3) judgement sampling
(4) snowball sampling

Question 9
In which step of the research process will a researcher do editing, validation and coding?
(1) research design
(2) sampling design
(3) questionnaire development
(4) data analysis

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Question 10
Which of the following are criteria that are used to evaluate a research report?
(a) intelligibility
(b) relevance
(c) conciseness
(d) comprehensiveness
(1) a b c
(2) a b d
(3) a c d
(4) a b c d

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Topic 4
Consumer behaviour and market
segmentation

AIM
Our aim in this topic is to enable you to understand the main factors of marketing
segmentation as well as consumer behaviour.

LEARNING OUTCOMES

On completion of this topic, you should be able to interpret consumer behaviour in

order to divide the consumer market into various groups with similar wants and needs.
More specifically, you should be able to
• identify six individual factors that influence consumer behaviour
• identify group factors that influence consumer behaviour
• distinguish between the different types of decision making
• identify the different phases of the consumer decision-making process

Study unit 5: Consumer behaviour

TOPIC 4
Study unit 6: Segmenting the consumer market

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Study unit 5
Consumer behaviour

Contents

Introduction
Overview
Learning outcomes
Key concepts
5.1 Definitions
5.1.1 What is a consumer?
5.1.2 What is consumer behaviour?
5.2 Individual factors influencing consumer behaviour
5.2.1 Motivation
5.2.2 Perception
5.2.3 Learning ability
5.2.4 Attitude
5.2.5 Personality
5.2.6 Lifestyle
5.3 Group factors influencing consumer behaviour
5.3.1 Family
5.3.2 Cultural groups
5.3.3 Social groups
5.3.4 Reference groups
5.4 Consumer decision-making process
5.4.1 Types of decision making
5.4.2 Phases of consumer decision making
5.5 Adoption of new products
5.5.1 Consumer states
5.5.2 Five stages of the consumer adoption process
5.5.3 Factors influencing the consumer adoption process
5.6 Case study with questions
5.7 Reflection
5.8 References
5.9 Self-assessment questions

INTRODUCTION
The key to the success of any business entity lies in understanding consumers and their
buying behaviour. During trying times of economic instability and uncertainty which
lead to reduced customer expenditure, all businesses – big or small – have to ensure
that consumers’ wants and needs are met. In this manner, consumers exert pressure –
or rather influence – on businesses, forcing them to act in a particular way. Therefore,
business organisations that want to remain viable and profitable should realise that

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understanding consumer behaviour is imperative as it provides them with information
to plan their marketing initiatives.

OVERVIEW
There are various reasons why people purchase products. Consumer behaviour is influenced
by several factors, including psychological, cultural, social and economic factors. During
the festive season, the buying tendencies of consumers increase compared to other
months. In the same way, during celebrations honouring family members (for example
Mother’s Day), people purchase gifts. However, fluctuations in the financial markets and
economic recessions decrease consumers’ buying power.

In this study unit, we discuss the individual factors and group factors that influence
consumer behaviour. We also look at the consumer decision-making process and the
adoption of new products.

This study unit will unfold as follows:

LEARNING OUTCOMES

When you have completed this study unit, you should be able to
• define consumer behaviour
• describe and apply insights on consumers by using the theoretical principles of
human behaviour
• understand the individual factors and group factors that influence consumer
behaviour
• distinguish between various reference groups and their degrees of influence
• classify and evaluate all the stages of the consumer decision-making process
• build skills in understanding human behaviour and in the end develop innovative
solutions to business problems in creative, interesting ways

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 KEY CONCEPTS
• consumer behaviour
• motivation
• perception
• selective exposure
• selective attention
• selective retention
• selective distortion
• learning ability
• attitude
• personality
• lifestyle
• cultural group
• social class
• reference group

5.1 DEFINITIONS

5.1.1 What is a consumer?

It is important to first define what a consumer is before we define the concept of consumer
behaviour. A consumer is simply an individual who purchases products and services for
personal use. The following are synonyms of the word “consumer”: “purchaser”, “buyer”,
“customer” and “shopper”.

5.1.2 What is consumer behaviour?

Consumer behaviour is the key to understanding the product preferences, buying
tendencies and spending patterns of consumers. Each individual customer prefers to
buy different products, compared to other individual customers. It is therefore important
to note that there are personal factors that influence the individual consumer’s choice.
The study of consumer behaviour attempts to answer the following question: Why do
individual customers purchase/not purchase particular products and services?

Consumer behaviour is the study of how individual customers, groups or organisations

select, buy, use, and dispose of ideas/products/services to satisfy their needs and wants.
It refers to consumers’ actions in the marketplace and the underlying motives for those
actions. It includes the study of what, why, when, where and how often they purchase
and how they use the purchased products. In addition, it encompasses all the behaviours
consumers display when searching for, purchasing, using, evaluating and disposing of
products and services to satisfy their needs.

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5.2 INDIVIDUAL FACTORS INFLUENCING CONSUMER
BEHAVIOUR
We will now discuss six individual factors that influence consumer behaviour.

5.2.1 Motivation
Motivation refers to the internal drive that leads consumers to develop a purchasing
behaviour. It is the expression of a need which has become pressing enough to lead
the consumer to want to satisfy it by purchasing the product. Motivation is often not
measurable and it always works at a subconscious level without the individual feeling it.
Individuals have different needs, such as physiological, biological and social needs. The
nature of needs is that some of them are most pressing and others are least pressing.
When a need is more pressing, it becomes a motive that ultimately directs the individual
to seek satisfaction.

It is the aim of any business to increase sales and encourage consumers to purchase its
products. In order to achieve their targets (monthly, quarterly or annually), brands should
try to create, make conscious or reinforce a need in the consumer’s mind so that a purchase
motivation is created. Well-designed advertisements appeal to the tastes of customers
and often create the desire in customers to buy the advertised products. Advertisements
must also indicate the type of product they sell and the consumers they target, select
the motivation and highlight the need to which their product respond in order to make
it appear as the solution to the consumer’s need.

5.2.2 Perception
Perception is an internalised process whereby consumers sense the world and the
situations around them, and take decisions accordingly. Every person looks at the world
and the situation at hand differently. Individuals’ personal judging ability and capacity
are different; hence, they look at the world differently. This is the very thing that separates
decision-making abilities. Perception is how you interpret the world around you and
make sense of it in your brain. Perception also plays an important role in influencing the
buying decisions of consumers.

The buying decisions of consumers depend on the following factors: messages,

advertisements and promotional materials – which are all part of the selective exposure.
However, not all promotional materials and advertisements excite consumers. Consumers
do not pay attention to everything they see. They are interested only in what they want
to see. Such behaviour is called selective attention. Consumers would certainly buy
something they find appealing. They will remember the most relevant and meaningful
message, and will obviously not remember something that has nothing to do with their
needs. This is called selective retention.

Lastly, each individual has a different perception based on their background, experiences,
state of mind, beliefs and attitudes. Two consumers will not interpret a stimulus (for

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example an advertisement) in the same way. Selective distortion leads people to interpret
situations in order to make them consistent with their beliefs and values. For brands, this
means that the message that is communicated is never perceived exactly the same by
consumers; hence, it is important to find out what consumers’ actual brand perceptions
are. This can be done through surveys or research projects.

5.2.3 Learning ability

Before consumers take a decision to buy a product, they first go through a learning curve.
They engage in research on products and services. Learning occurs in various forms,
including through self-education. Nowadays learning can also be done online, with
consumers conducting research about products on the internet. For example, consumers
visit various websites and use application (apps) for different products. Some apps are
for old equipment while some are for groceries. Consumers also learn in groups. Group
learning normally happens at home, at school and in the workplace. To live, learn and
work together effectively, people have to listen to one another, work together to identify
and solve problems, and acknowledge and respect diverse points of view. Learning helps
the consumer to make an informed choice about which products to buy.

Consumers learn through action. It is when we act that we learn. Learning leads to changes
in behaviour as people obtain information and experience different things. For example:
If you used lavender-scented Doom and found the smell unappealing, you will associate
this product with discomfort. You have learned that you should not spray scented Doom
and will opt for the odourless option. Obviously, if you had a great experience with the
product, you will buy it again next time.

5.2.4 Attitude
To understand consumer behaviour, you also need to understand the concept of attitude.
Attitudes are based on people’s values and beliefs, and are hard to change. They are mental
positions or emotions/feelings. Attitudes are favourable or unfavourable evaluations, and
action tendencies that people have about products, services, companies, ideas, issues
or institutions. It is also important to understand that attitudes tend to be reactions to
actions and behaviours. Hence, attitude is important and has to be taken into consideration
when studying consumer behaviour. Companies want consumers to have positive feelings
about their offerings and, at times, they bombard customers with advertisements to
create a good attitude towards their products. For example: A few years ago, KFC ran
advertisements that fried chicken was healthy – until the US Federal Trade Commission
told them to stop.

5.2.5 Personality
Personality also affects the buying behaviour of individuals. Every individual has his/her
own unique personality traits which are reflected in his/her buying behaviour. Personality
makes people stand out due to the dominant quality/qualities they possess. It is the set

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of attractive qualities (such as energy, friendliness and humour), emotional qualities, ways
of behaving and so on that makes a person different from other people. A music lover
will always look for new CDs, concerts and music festivals; whereas an IT specialist will
happily spend money on gadgets and so on.

"Personality is the set of traits and specific characteristics of each individual. It is the
product of the interaction of psychological and physiological characteristics of the
individual and results in constant behaviors. It materializes into some traits such as
confidence, sociability, autonomy, charisma, ambition, openness to others, shyness,
curiosity, adaptability, etc". (Rani 2014:57).

For example, Apple has been able to cultivate an image of innovation, creativity, boldness
and singularity, which continuously attracts consumers who identify with these values
and who feel valued in their self-concept by buying an Apple product.

5.2.6 Lifestyle
Lifestyle refers to the way someone conducts his/her life in society. It includes all the
habits, attitudes, tastes, moral standards and economic level of the individual or group
of people. Some individuals prefer to wear only branded clothes, while others are not
brand conscious at all. An individual who stays in a wealthy high-class estate might need
to maintain his status and image, and this might be visible in the clothes he or she wears.
People’s lifestyle reflects their styles, attitudes, perceptions, social relations and immediate
surroundings. For example, when consumers possess luxury items and can buy whatever
they want, this is a reflection of their lifestyle.

5.3 GROUP FACTORS INFLUENCING CONSUMER BEHAVIOUR

Consumers are social beings, therefore they influence one another. They live in diverse
social groups. Average individual consumers use a relevant group as a standard of reference
with whom they compare themselves.

We discuss the following four social groups in this study unit: the family, (cultural groups,
social groups and reference groups.

5.3.1 Family
The family institution is perhaps the most important influencing factor for the individual
consumer. It provides an environment in which the individual develops and it shapes his/
her personality. In the family unit, the individual acquires values. It builds family members’
attitudes and opinions on various subjects, such as politics, society and social relations.
Consumer behaviour is strongly influenced by the members of a family unit. Marketers
have to understand the roles and influence of husbands, wives, siblings and children
on consumer behaviour. For example, if the buying decision for a particular product is

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influenced by a wife, the marketers have to target women in their advertisement. It is
worth noting that buying roles change with changes in consumer lifestyles. For example,
if you never drunk a particular energy drink in your childhood and your parents described
it as an unhealthy product full of drugs, there is a greater possibility that you will not buy
it when you grow up, yet someone else has drunk the same energy drink since childhood.

5.3.2 Cultural groups

Cultural groups also play an important role in purchasing decisions. If one could for
instance the black South Africans, one notices the diverse cultural groups and each group
has its own set of values, traditions and beliefs.  Each cultural group has particular cultural
demands that are determinant in terms of what should happen during different stages
of their lives e.g. Rites of Passage. When a Rites of passage ceremony is due, there are
specific items that should be purchased to facilitate the event. In some cultural groups
or subcultures, the burial of a head of a household or breadwinner requires the skin of
an animal to be used for wrapping the body. Farmers whose farms are located next to
these cultural groups always ensure that they keep good stock and also the right colours.  

5.3.3 Social groups

Social groups are based on social class and comprise of people who have more or less
similar values, lifestyles, interests and behaviours irrespective of how small or big these
groups are. Every nation or society has some form of social class, which is important to
marketers because the buying behaviour of consumers in a social class is similar. In this
way, marketing activities can be designed according to different social classes. The social
perception of a brand or a retailer plays a role in the behaviour and purchasing decisions
of consumers. In addition, consumers’ buying behaviour may also change according to
social class. Lower-class consumers are more likely to focus on price; whereas a shopper
from the upper class will be more attracted to elements such as quality, innovation,
features or even the social benefit that can be obtained from the product.

5.3.4 Reference groups

There are four types of reference groups, which we discuss below.

5.3.4.1 Associative reference groups

This group includes people who more realistically represent the individual’s peers, current
equals or near-equals (such as co-workers, neighbours or members of churches, clubs and
organisations). For example, teenagers usually prefer branded sneakers just like their peers.

5.3.4.2 Aspirational reference groups

This group refers to other people with whom one likes to compare oneself. For example,
many companies use opinion leaders such as sports stars as spokespeople because

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these individuals represent what many people aspire to become. Itumeleng Khune,
goalkeeper for Bafana Bafana (the South African national soccer team), was once the
African ambassador for shoe polish brand Kiwi. Kiwi’s campaign also features 800 metre
runner and world record holder, David Rudisha, as their East African ambassador.

5.3.4.3 Dissociative reference groups

This is where an individual deliberately disassociates from a particular group. This reference
group includes people whom the individual does not like to be like. In other words, it is a
group with whom an individual does not wish to be associated. The use of a product by
this group deters other buyers from buying it. For example, some retail clothing stores
literally came about because many young people wanted to actively dissociate themselves
from their parents and other older people.

5.3.4.4 Reference groups’ degrees of influence

Reference groups have various degrees of influence. Every individual is influenced by
people in one way or another. Reference groups comprise people with whom individuals
compare themselves. Every individual knows some people in the society who become
their idols in due course of time. Family members, relatives, neighbours, friends, co-workers
seniors in the workplace often form reference groups.

(1) Primary reference groups

Primary reference groups consist of individuals with whom we interact on a regular
basis. These include friends, family members, relatives and co-workers. These individuals
influence consumers’ buying decisions because they used the product or brand earlier
and know its features and specifications. For example, if one family member bought a
Samsung laptop, there is a high possibility that all the members of the family will buy a
Samsung laptop when they need/have to buy a laptop. The reason why all the members
would purchase a Samsung laptop is because a family member is using the same model
and is quite satisfied with the product. We tend to buy products that our relatives or
friends recommend.

Primary reference groups have a great deal of influence, for example members of social
organisations at colleges and universities such as the Student Christian Organisation.
Religion has a direct influence on people’s attire or dress code, among other things.

(2) Secondary reference groups

Secondary reference groups tend to have a limited influence on people, for example
members of a cycling club who only meet on weekends are likely to have limited influence
on consumption activities during that period only.

(3) Normative reference groups

In a normative reference group, the individual complies largely for utilitarian reasons. For
example, a person dresses according to the norms and standards of the company as such
compliance is likely to help their career. Staff members working for the Mango airline
wear orange and black branded uniforms but outside the job, there is no real motivation

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to dress that way. In contrast, individuals comply with identification groups’ standards
and norms just for the sake of belonging. For example, a member of a religious group
may wear a symbol even outside the church building because the religion is a part of
his/her identity.

5.4 CONSUMER DECISION-MAKING PROCESS

A decision is a choice made between two or more options. Decision making is the process
of selecting the best option to reach an objective. It is a daily activity for all human beings,
with no exception. The same applies to business entities. Businesses take decisions every
day and to them, decision making is a habit and a process. When a business takes the
right decisions, it realises a higher turnover and good profits; whereas bad decisions
result in losses. In the decision-making process, one course of action is chosen from a
few alternatives.

5.4.1 Types of decision-making processes

5.4.1.1 Extensive decision-making process

This decision-making process involves high-involvement and/or high-investment products,
for example buying a new manufacturing plant in the case of industries or a consumer
buying a house. Many people are involved in the process and the decision making is
extensive, as the customer wants to get maximum benefits. There are also risks in such
endeavours and therefore extensive decision making is necessary.

5.4.1.2 Limited decision-making process

This type of decision-making process takes place when a consumer buys products like
an LG television, where the investment is nominal and not very high. It is facilitated by
the fact that the customer has some experience with the product because they regularly
watch television. Thus, they do not spend as much time on buying these products. The
presence of online media in the world today is another factor that encourages limited
decision-making processes. Through online media, people know a lot about the products
while sitting at home. The following factors influence the speed of the limited decision-
making process:

• the customer’s experience of the product

• the customer’s knowledge about the product, and
• the amount of time the customer has to make the decision

5.4.1.3 Routine decision-making process  

This decision-making process happens in daily life activities. In this case, customers are
more likely to stick to a one brand for a long time. It is unlikely that they will switch to
different brands because they want to invest minimum time in routine decision making.

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The routine decision-making process is influenced largely by regular advertising of
fast-moving consumer goods (FMCGs). This is because consumer products are bought
regularly. Once the company has obtained a customer, they are likely to reap long-term
profits from the same customer.

5.4.2 Main categories of decision making

There are many types of decision making, which can be categorised into the following
four groups:

1. Rational decision making. This is the most common type of decision making. It is
logical and sequential, and the emphasis is on listing many possible options and
then working out the best option. The advantages and disadvantages of each option
are listed and scored in order of importance.
2. Intuitive models. Decisions are taken based on inner knowing, or intuition. They are
based on some kind of sense of what is the right thing to do. Consumers can feel
it in their hearts, in their bones, in their gut and so on. For example, we often hear
people making statements such as: “I can feel it in my heart” or “I smell a rat”. The
intuitive category includes tossing a coin and throwing dice.
3. Combinations. This category is a result of combinations of both rational and intuitive
processes. It can be done deliberately or by coincidence. For example: Where the
rational approach was employed with positive and negative consequences of options
listed and numerical values are then assigned and added up but it still yielded an
unsatisfactory result, parameters can be changed and the numbers add up differently.
If this new result is more satisfactory, it will be implemented.
4. Satisficing. This is a decision-making strategy aimed at achieving a result that is
good enough, satisfactory or adequate. The end result is not necessarily the best
or the optimal solution. Satisficers sacrifice other potentially better options. There
are individual customers who tend to make choices based on their most important
current needs instead of following a rational process. For example, when people are
stressed, they will choose the first thing that will reduce their stress, even though
it may cause problems afterwards. In choosing a university, a statisficer will ask
whether her university choice is excellent and meets her needs, not whether it is
really the best.

5.4.3 Types/Classifications of decisions

5.4.3.1 Programmed/Routine/Operational decisions

These decisions are routine and repetitive in nature. They relate to the general functioning
of the organisation, do not require much evaluation and analysis, and can be taken
quickly. Companies develop specific ways to handle them, such as determining the in-
store décor and how products will be arranged on the shelves of a supermarket. For this
kind of routine, repetitive problem, standard arrangement decisions are typically made
according to established management guidelines. Ample powers are delegated to lower

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ranks to take these decisions, hence middle and lower-level managers take these decisions.
For example, if a bonus is to be given to the employees, calculating the bonus for each
employee is an operating decision.

5.4.3.2 Non-programmed/Strategic/Tactical (policy) decisions

These are decisions about different policy matters of the organisation and are applied
to difficult situations for which there is no easy solution. They are usually less structured
than programmed decisions. Strategic decisions are important and affect organisational
goals and objectives as well as other important policy matters. These decisions usually
involve huge investments or funds. Unlike programmed decisions, these decisions are
non-repetitive in nature and are taken after careful analysis and evaluation of many
alternatives. They are are taken at the higher level of management. For example, paying
employees a bonus is a policy decision.

5.4.3.3 Organisational and personal decisions

When an individual takes a decision in his/her official capacity as an executive of a company,
it is known as an organisational decision. However, if an executive takes a decision in his/
her personal capacity, thereby affecting his/her personal life, it is known as a personal
decision. Sometimes personal decisions affect the functioning of the organisation, for
example if an executive leaves the organisation, it may affect the organisation. You should
note that the authority to take organisational decisions may be delegated, whereas the
authority to take personal decisions cannot be delegated.

5.4.3.4 Major and minor decisions

Major decisions are taken by top management, for example the decision to purchase new
factory premises is a major decision. However, purchasing office stationery is a minor
decision that can be taken by the office superintendent/manager.

5.4.3.5 Individual and group decisions

When a decision is taken by a single individual, it is known as an individual decision.
Usually routine decisions are taken by individuals within the broad policy framework of
the organisation. For example, group decisions can be taken by a group of individuals
constituted as a standing committee and usually very important and pertinent matters
for the organisation are referred to this committee. The advantage of taking group
decisions is that it ensures the involvement of a maximum number of individuals in the
decision-making process.

5.4.4 Stages of decision making

Every individual consumer goes through a process as and when they purchase a product/
service. As depicted in Figure 5.1 below, this process consists of up to six stages, namely:

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1. Consumers identify their needs.
2. They collect information.
3. They evaluate alternatives.
4. They make the purchase decision.
5. They purchase the product.
6. They do post-purchase evaluation.
These stages are influenced by psychological, economic, environmental and other factors
such as cultural, group and social values.

Figure 5.1: The consumer decision-making process

Let us first look at the example in the box below so that you can understand the consumer
decision-making process clearly.

Activity 5.1

Mdu goes to a shopping centre to buy a new Suzuki motorbike for himself. The
executive sales consultant shows him the types and brands of motorbikes, both old
models and new/the latest models. After a short session of negotiations, Mdu finally
chooses a Yamaha motorbike.

Now try to answer the following questions based on the scenario above:

(1) Who is the consumer?

(2) Why do you think the consumer went to the shopping centre?
(3) What could be the reasons why the consumer wants to purchase a motorbike?

24 Feedback

(1) Mdu is the consumer.

(2) He wants to buy a motorbike.

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 (3) There are countless reasons why he wants to buy a motorbike, including but not
limited to the following:
• Mdu just joined a bikers’ club.
• He wants to present it to his wife as a Valentine’s Day gift.
• His old bike is written off.

Below is a detailed discussion of the consumer decision-making process.

Stage 1: Need/Problem recognition

Before customers can purchase a product, they must have reason to believe that they
want or need the product. Where they want to be or how they perceive themselves or a
situation is different from where they actually are. In other words, desire is different from
reality. This presents a need or a problem for the customer, but creates an opportunity for
the marketer. When marketers take time to “create a problem” for the customer, they are
initiating or triggering the buying process whether or not they recognise that it already
exists. Marketers do this through content marketing.

We live in a world where the markets are buyer driven. Many consumers do not rely on
contacting a brand or salesperson but rather research online before they set foot in a
store. Hence, stores use content marketing as an answer to the buyer-driven environment.
Stores create high-quality and valuable content to attract, inform and engage an audience
while also promoting the brand in the process. Stores that use content marketing do it
for three reasons, namely: increased sales, cost savings and better customers who have
more loyalty. Marketers share facts and testimonials of what their product/service can
provide, and they ask questions to pull the potential customer into the buying process.
Doing this helps the potential customers to realise that they have a need that should be
solved. For example, many advertisements begin with questions such as “Do you suffer
from a continuous headache?”

Stage 2: Information search/collection

Once a problem is recognised, the customer begins to search for information. In this
stage, they know that there is an issue and they are looking for a solution. If it is a new
non-alcoholic deodorant, they look for perfumes; if it is a new set of sunglasses with all
the newest technology thrown in, they start to look at sunglasses – it is fairly simple and
straightforward. The best way for marketers to address this need is to establish their
brand as an industry leader or expert in a specific field. There are many methods to
consider, including advertising partnerships and sponsors that are prominent on all web
materials. For example, becoming a Google Trusted Store enables you to increase search
rankings and provide a sense of customer security by displaying the company’s status
on the website. This also increases the company’s credibility markets to the information
search process by keeping them in front of the customer and ahead of the competition.

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Stage 3: Evaluation of alternatives
When a business stands out among the competition, this does not always mean that the
customer will obviously purchase the company’s product/service. Customers want to
make sure they have done enough research before they can purchase a product. Some
do it by window shopping. Even though they may be sure of what they want, they still
want to compare other options to ensure their decision is the right one and this is what
makes marketing very challenging.

Stage 4: Purchase decision

This is the most important stage of the consumer buying process because it is where
profits are either made or lost. At this point, the customer has compared various options
and explored multiple options. The customer now understands pricing and payment
options, and he or she is deciding whether to move forward with the purchase. It is
important to note that, at this point, the customer can still change his/her mind and can
decide to walk away without buying. It is now the right time for the marketer to step up
the game by providing a sense of security in the marketing process.

It is also time to remind customers why they wanted to make the purchase in the first
place. In this stage, it is essential that the marketer provides information relating to the
need created at Stage 1, along with why the company’s brand is the best option to fulfil the
need. If customer decided to walk away from the purchase, now is the time to bring them
back. The following strategies can be used to enforce the purchase decision: Retargeting
or sending simple email reminders that speak to the need for the product in question
can enforce the purchase decision even if the opportunity seems lost.

Stage 5: Purchase
At this point, we know of course that a need has been created, research has been completed
and the customer has decided to make the purchase. All the stages to bring about a
conversion have been exhausted. However, this does not bring any certainty since the
customer could still be lost. Marketing is just as important during this stage as during the
previous stage. In this stage, marketers should ensure that the marketing is kept simple
and straightforward. This is where the marketer should test the company brand’s purchase
process online to check whether or not it is user-friendly and not too complicated. Ensure
that there are not too many steps and that the load time is not too slow. It should also
be verified whether or not the purchase should be completed on both a mobile device
and a desktop computer. If any deviations are noticed, adjustments should be made.
The purchase process should not be too difficult, as this will lead to losing customers
and reduced revenues.

Stage 6: Post-purchase evaluation

The process does not come to an end simply because the consumer has bought the
product. Customer loyalty is very important. After customers have bought a product, it
is important that they decide whether they are satisfied with the decision they made. In

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this stage, customers evaluate their purchase decision. If, for a particular reason, they feel
that they took an incorrect decision to purchase the product, they can return it to the
store. Many retail stores, such as Makro and Edgars, require customers to return goods
with the original till slip and have a customer services unit that handles all returns. Instead
of cash refunds, some customers opt for an exchange. It is of critical importance to send
out follow-up survey questionnaires, for example to customers who bought household
appliances such as microwaves, and emails to thank customers for making a purchase.
These should be sent even to dissatisfied customers. The following are reasons why stores
send post-purchase email messages to customers and do follow-up surveys:

• It is done for customer engagement.

• It provides valuable feedback about ways to improve customer service even further.
• It can be used to generate more interest and leads.
• If the customer provides a review, the store can email him or her that the review has
been posted and a link can be provided, which may be helpful to enable social sharing
so that they can spread the word if they choose to do so.
• It shows customers that the store appreciates their purchase and is looking out for
other ways to help them.
• If the product should be replenished on a regular basis or the store offers a service
routinely, customers are helped by sending them reminders.
• A special offer or incentive is sent to customers who recently purchased goods from
the store so that they will come back soon.
• A purchase anniversary email acknowledges customers in a personalised way.
The length of the decision process varies. A consumer may not act in isolation in the
purchase, but may be influenced by any of several people in various roles. The number
of people involved in the buying decision increases with the level of involvement and
complexity of the buying decision behaviour.

5.5 ADOPTION OF NEW PRODUCTS

In the previous section, we discussed the six stages of the consumer decision-making
process. We will now focus our attention on the five-stage mental process that all
prospective customers go through, from learning of a new product to becoming loyal
customers or rejecting it. The consumer adoption process is a constant marketing tool
which has the following five stages:

1. Product awareness
2. Product interest
3. Product evaluation
4. Product trial
5. Product adoption/rejection

5.5.1 Consumer states

All customers/consumers go through this five-stage mental process of adopting a product,
from learning about a new product to becoming a happy and loyal user of the product

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or to decline/reject the product completely. The consumer adoption process can also be
explained by using three consumer states of being:

1. Cognitive state. It can be defined as the time during which the customer is informed
and aware of the product’s existence.
2. Emotional state. This state can be defined as that which the customer likes/dislikes
and prefers.
3. Behavioural or conative state. This is the stage when the customer makes the decision
to buy.
We now discuss in more detail the five stages of the consumer adoption process.

5.5.2 Five stages of the consumer adoption process

5.5.2.1 Product awareness

During the first stage of the consumer adoption process, the product is introduced in
the market and awareness of the product is created. Prospective customers then come
to know about the product, but they lack sufficient information about it. Companies
invest a lot in creating avenues for informing consumers and customers. The creation of
product or brand awareness is very important for the success of the entire business. In
other words, making customers aware of the existence of the product ensures the entire
existence of the company. Companies use many advertising techniques and marketing
materials like teasers, videos, banners and images. They use many different, interesting
ways to engage the consumers in this stage of product marketing. If a strong, attractive
presence for the newly-launched product is created, the business can attract more
customers. We live in an era of internet marketing, online shopping and social media
advertising. Marketers have many advertising tools at their disposal to create awareness
about the product. Companies use smart mediums, methods and strategies to launch a
product in the market to avoid advertisement clutter.

5.5.2.2 Product interest

During this second stage of the consumer adoption process, the consumers or customers
try to get more information about the product. They become more aware and informed
about the product itself, the value the product can deliver, its unique features and also
the manufacturer of the product. Because it is of vital importance that companies realise
the need to create and maintain the interest of the customer, marketers should use
promotional channels that are easily accessible for the targeted market.

5.5.2.3 Product evaluation

During this stage of the consumer adoption process, consumers consider whether the
product is beneficial. Is the product able to deliver according to the brand promise? They
even judge its performance against the brands that they used before. This is the stage
where the consumer examines, compares and evaluates the product before making a

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purchase decision. Consumer behaviour varies in intensity according to the need, the
price of the product, the features of the product and the value that the product delivers.
Customers search for information about the product options and the brands available in
the market. They surf the internet to learn about the new brands on the market and use
social media channels, online shopping sites and other media channels to learn about
and explore products. Customers use advices, tips, recommendations, online reviews
and suggestions from online groups before making purchase decisions. In a nutshell,
the following are of key importance at this stage:

• The consumer verifies the advantages and disadvantages of the product.

• They verify substitutes available in the market and check the value for money.
• They outline the unique selling proposition and identify what the product
offers compared to competing products.
• Employing the marketing strategies gives companies an opportunity to communicate
with existing and potential customers and advertise the unique features of the product.

5.5.2.4 Product trial

In this stage of the consumer adoption process, the consumer makes the first purchase
to determine the worth or use of the product. In other words, the product is used on a
trial basis to determine its usefulness. After trying out the product, the consumer gets
to know the product and its benefits. This is the most important stage of the process as
the acceptance or rejection of the product depends on this stage. Usually, companies
provide free samples and trial products as part of their marketing campaign. Providing
free samples is very important to meet consumer expectations about the product.

5.5.2.5 Product adoption/rejection

During this last stage of the consumer adoption process, consumers decide to adopt the
new product, look for something else or revert to the old product they have been using.
The customer moves from a cognitive state (being aware and informed) to the emotional
state (liking and preference) and finally to the behavioural or conative state (deciding and
purchasing). When the consumer is ready to adopt the product, it means that he or she
is ready to actually spend money on the product. The adoption phase is the most critical
stage of the process, as the companies need the consumers to accept the product and
completely adopt it. To guarantee permanent adoption of the product, companies have
to make sure that the product is available in the correct quantity and quality and that it
is easily accessible to the consumer.

We will now discuss some important factors influencing the consumer adoption process.

5.5.3 Factors influencing the consumer adoption process

Consumer adoption processes vary according to behavioural factors. The following are
some important factors that influence the consumer adoption process:

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• Readiness of the consumer. Some customers have the tendency of trying new products
and ultimately switch to the new brands.
• New product or innovation. Some customers are fussy and are attracted more to
innovation. If newly-launched products do not have the new features they expect
the products to have, they simply do not adopt the products.
• Personal choices and influences about the purchase decisions. Personal influences refer to
the effect of other people on the consumer’s attitude and purchase decision. Personal
Influences can greatly impact the consumer adoption process and the customer’s
acceptance or rejection of the purchase decision.
• Varying rates of product adoption. The rate of adopting a product depends on competitive
advantage, complexity, compatibility and communicability.
• Readiness. The readiness of the organisation to launch new products plays an important
role in influencing the consumer’s adoption of a product.
It is very important that companies build strong marketing strategies and invest in the
necessary tools to influence the targeted consumers so that they are able to move through
the five stages of the consumer adoption process. If the consumer adoption process
is managed successfully, it will lead to loyal customers for the product and long-term
profits for the business. Just like manufacturing a product of good quality is important,
the marketing of the product is also important.

5.6 CASE STUDY WITH QUESTIONS

Read the case study below and answer the questions that follow.

PART A: Tim was the chief executive officer (CEO) of ABC Ltd and Jack, Tim’s friend,
was the CEO of XYZ Ltd. Tim always looked for premium brands which would go with
his designation, whereas Jack preferred brands which were not very expensive. Tim
was really conscious about the clothes he wore, the perfume he used and the watch
he wore; whereas Jack never really bothered about all this. The two were in the same
salary range and received the same benefits.
PART B: To some individuals, attire is of importance and it is connected to one’s
designation or status. As the CEO of an organisation, Tim always felt it was essential for
him to wear elegant and unique clothes and accessories so that others could look up
to him. He was convinced that a CEO, as a senior professional, could never wear cheap
labels and local brands to work.
PART C: On the contrary, Jack’s designation and the nature of his work could never
influence his buying decisions. He preferred to go out with his family every weekend.
He always wore casual clothes and only kept one formal suit for meetings.

Questions
1. To which individual factor does this case study relate?
2. Give reasons why you think this case study relates to the individual factor you
identified in Question 1.

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5.7 REFLECTION
Before you continue with the next study unit, reflect on the following questions:
1. Define consumer behaviour.
2. Discuss the individual factors that influence consumer behaviour.
3. Identify the group factors that influence consumer behaviour and then explain each
one in detail.
4. What are the stages of the consumer decision-making process?
5. Explain your understanding of each of the following perception concepts:
a. selective exposure
b. selective attention
c. selective retention
d. selective distortion
6. Use a pyramid to illustrate all the stages of the consumer decision-making process.
7. Identify and then explain the main types and categories of decisions.
8. Distinguish between programmed and non-programmed decisions.
9. Give a detailed explanation of the whole consumer adoption process.
10. Distinguish between an associative reference group and a dissociative reference
group.

5.8 REFERENCES
Rani, P. 2014. Factors influencing consumer behavior. International Journal of Current Re-
search Academic Review 2(9): 52–61.

5.9 SELF-ASSESSMENT QUESTIONS

Question 1
… is defined as the process of choosing the best alternative to reach objectives.
(1) Creative thinking
(2) Mobilising
(3) Strategising
(4) Decision making

Question 2
… decisions affect organisational objectives and goals, and other important policy
matters, and usually involve huge investments or funds.
(1) Routine
(2) Individual
(3) Strategic
(4) Individual

Question 3
During the product … stage of the consumer adoption process, consumers try to get
more information about the product.
(1) evaluation

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(2) interest
(3) trial
(4) awareness

Question 4
The … state can be defined as the time/stage during which the customer is informed
and aware of the product’s existence.
(1) cognitive
(2) emotional
(3) behavioural
(4) conative

Question 5
Which of the following statements is true about post-purchase evaluation?
(1) The process comes to an end simply because the consumer has bought the product.
(2) Customer loyalty is not important.
(3) After a customer has bought a product, it’s important that he or she decides whether
he or she is satisfied with the decision.
(4) In this stage, customers evaluate their purchase decision. If (for a particular reason)
they feel that they took an incorrect decision to purchase the product, they cannot
return the product.

Question 6
Which of the following strategies can be used to enforce the purchase decision?
(1) Retargeting or sending simple email reminders that speak to the need for the product
in question can reinforce the purchase decision even if the opportunity seems lost.
(2) Not communicating with the customers in the meantime.
(3) Returning to Step 1 of the process.
(4) Changing the advertisement’s message and the targeted consumers would be
appropriate.

Question 7
The first four stages of the consumer decision-making process, in the correct order, are:
(1) consumers identify their needs, evaluate alternatives, purchase the product and
make the purchase decision
(2) collect information, evaluate alternatives, make the purchase decision and purchase
the product
(3) evaluate alternatives, make the purchase decision, purchase the product and do
post-purchase evaluation
(4) consumers identify their needs, collect information, evaluate alternatives and make
the purchase decision

Question 8
… decisions are always taken by the top management, for example the decision to
purchase new factory premises.
(1) Major and routine
(2) Minor and routine
(3) Major and non-programmed
(4) Minor, tactical and operational

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Question 9
The … decision-making strategy is aimed at a result that is good enough, satisfactory
or adequate but not necessarily the best or optimal solution.
(1) rational
(2) intuitive
(3) satisfying
(4) combination

Question 10
The … decision-making process is influenced largely by regular advertising of FMCGs.
(1) limited
(2) intensive
(3) routine
(4) extensive

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Study unit 6
Market segmentation, market targeting and product
positioning

Contents

Introduction
Overview
Learning outcomes
Key concepts
6.1 Market segmentation
6.2 Segmenting the market
6.2.1 Advantages and Disadvantages of market segmentation
6.2.2 Criteria for successful market segmentation
6.2.3 Bases for segmenting consumer markets
6.2.4 Bases for segmenting industrial markets
6.3 Market targeting
6.3.1 Evaluating a market segment for targeting
6.3.2 Criteria for selecting potential target markets
6.3.3 Strategies for selecting target markets
6.4 Product positioning
6.4.1 Product positioning maps to aid decision making
6.4.2 Positioning process
6.4.3 Positioning methods
6.5 Summary
6.6 Case studies with questions
6.7 Reflection
6.8 References
6.9 Self-assessment questions

INTRODUCTION
Organisations manufacture and supply one or more standardised products to the mass
market, hoping that the products will appeal to as many customers as possible. Meeting
all customers’ needs is physically impossible for any company. Even the well-known
worldwide brand Coca-Cola cannot satisfy the needs of all consumers. People’s needs and
wants are just too different to be satisfied universally with one product. For example, it is
extremely difficult for one company to meet all the clothing needs of the market. Because
of this, marketing strategists have to categorise buyers based on their characteristics and
specific product needs.

It is important that companies regularly evaluate their own position and decide on their
market strategy. In other words, they have to reflect on the markets in which they are

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currently or intend servicing, and segment them accordingly. To be successful, marketers
have to satisfy the needs of the customers – and the more specifically they do so, the
greater their chances of success. To meet their primary objective, however, companies
must make a profit. This is why segmentation is needed – to identify those segments of
the market that are economically viable and will result in profit for the company.

Marketers are quick to realise that to satisfy an individual customer’s needs is not
economically feasible; it is far too costly. Instead, marketers have to generalise about
the needs, demands and preferences of the heterogeneous market, realising at the
same time that they cannot be all things to all people. They must focus on satisfying a
specific market’s needs, concentrating on what they do best to remain competitive in
an increasingly cut-throat marketplace. How this can be achieved is the central theme
of this study unit.

OVERVIEW
This study unit deals with the nature of market segmentation, target marketing and
product positioning. We start by defining the three terms “segmentation”, “targeting”
and “positioning”. This is followed by a discussion on the advantages and disadvantages
of market segmentation. We then explain the bases for segmenting consumer markets
and for segmenting industrial markets. We also discuss the criteria for selecting potential
target markets as well as the steps of evaluating a potential market. Finally, we explain
product positioning maps, processes and methods.

LEARNING OUTCOMES

After completing this study unit, you should be able to

• explain and illustrate how a market can be segmented with the aid of the bases
of segmentation
• indicate how marketers can segment the market
• highlight the prerequisites for effective market segmentation
• compare business-to-business (B2B) market segmentation with consumer market
segmentation
• define market targeting and explain the criteria that should be met to choose a
target market
• explain which target strategies can be used when selecting a target market
• explain the concept of product positioning
• discuss the positioning process and describe the positioning methods marketers
can use in practice

KEY CONCEPTS
• market segmentation
• segmenting consumer markets

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 • segmenting industrial markets
• target marketing
• targeting strategies
• product positioning
• positioning methods

6.1 MARKET SEGMENTATION

For a company to be successful and meet its long-term goals, it has to meet the needs of
the target market that it has selected to serve. A company cannot keep on doing the same
actions over and over because the needs initially met by these actions change over time.
As customer needs change, so should the company’s offering. It is the task of marketers to
constantly monitor the segments they serve for any changes or new demands that may
rise. If they do not do this, their competitors will take over the segments. Although the
satisfaction of customer needs is not a goal in itself, it enables the company to achieve
its own goals; therefore, the greater the need satisfaction customers can derive from a
company’s products, the easier it is for the company to achieve its own goals. To ensure
continuity and growth, a business is dependent on consumers and the satisfaction of
their needs, among other things.

There are various definitions of market segmentation.

• Cant (2013:92) defines market segmentation as the process of dividing the market
(which is very diverse) into subgroups of consumers with similar needs, wants and/or
demands in order to achieve maximum customer satisfaction by successfully addressing
the specific needs, wants and/or demands of the target group.
• Cant and Van Heerden (2017:77) define market segmentation as the process of dividing
a broad target group into clearly identifiable subsets of consumers who have common
needs, wants and/or demands and who will respond in virtually the same way based
on a particular marketing mix.
• Masterson and Pickton (2004:95) say that market segmentation is splitting a market
into smaller groups (segments) so that marketers can better direct or focus their
efforts. They further define segmentation as “[t]he process of dividing a total market
into subgroups segments, such that each segment consists of buyers and users who
share similar characteristics but are different from those in the other segments”.
• Parumasur and Roberts-Lombard (2012:221) define market segmentation as a process of
dividing a market into subsets or segments of customers, where the members of each
segment share characteristics and are distinct from the members of other segments.
Each market segment represents a group of customers who share one or more similar
characteristics that cause them to have relatively similar product needs. The market
for hotels can, for example, be subdivided into the following segments: business
travellers, sports participants, conference delegates, holiday tourists, local travellers,
overseas travellers and so on. Each of these segments exhibits different characteristics
and needs with regard to accommodation facilities and the services required.

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6.2 SEGMENTING THE MARKET
Segmenting the market is a crucial task as the future of the company depends on
correctly identifying the market to serve and the correct basis on which to segment the
market. This refers, among others, to the following issues of market segmentation: (1)
the advantages and disadvantages of market segmentation; (2) the criteria for effective
market segmentation; and (3) the common bases used to segment consumer and industrial
markets. Let us look at these issues in more detail.

6.2.1 Advantages and disadvantages of market segmentation

Market segmentation offers the following advantages to marketers:

• It forces marketers to focus more on customer needs. In a segmented market,

the marketer can fully appreciate the differences in customer needs and respond
accordingly. A greater degree of customer satisfaction can be achieved if the market
offering is developed around customer needs, demands and preferences.
• Segmentation leads to the identification of excellent new marketing opportunities if
research reveals an unexplored segment. Without proper segmentation, such a market
may remain untapped for years.
• Market segmentation provides guidelines for the development of separate market
offerings and strategies for the various market segments.
• Segmentation can help to guide the proper allocation of marketing resources.
A large growing market segment may be allocated a greater proportion of the market’s
budget, while a shrinking one may be scaled down or eventually abandoned if it becomes
unattractive.

Market segmentation, however, has the following disadvantages which must be considered
by the marketer:

• The development and marketing of separate models and market offerings are very
expensive. It is much cheaper, for example, to develop only one product for one
segment than to develop multiple products for multiple segments and multiple
strategies.
• Only limited market coverage is achieved, since marketing strategies would be directed
at specific market segments only.
• Excessive differentiation of the basic product may eventually lead to a proliferation of
models and variations, and finally cannibalism. Cannibalism occurs when one product
takes away market share from another developed by the same company.

6.2.2 Criteria for successful market segmentation

Marketers segment markets for three important reasons:

1. Segmentation enables marketers to identify groups of customers with similar needs

and to analyse the characteristics and buying behaviour of three groups.

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2. Segmentation provides markets with information to help them design marketing
mixes specifically matched with the characteristics and desires of one or more
segments
3. Segmentation is consistent with the marketing concept: satisfying customer wants
and needs while meeting the company’s objectives.
To be useful, market segmentation must produce segments that meet the following criteria:

• Measurable. The segments must be identifiable and their size measurable. Without being
measurable, a segment cannot be assessed for its size and profit potential. Marketers
have to know the characteristics of who is in each segment, how many potential
customers are in each segment, and what their buying and usage behaviours are like.
• Substantial. A segment must be large enough to warrant developing and maintaining
a special marketing mix. It must be profitable or otherwise be capable of meeting the
objectives of the organisation. A segment must be the largest homogeneous group
of people worth exploiting with a tailored market offering and marketing strategy.
Although South Africa boasts a large variety of cultures, some of them may be so small
that they do not warrant special attention by marketers.
• Accessible. The company must be able to reach the market segment with their market
offering and strategy. Some market segments are difficult to reach, for example senior
citizens who do not speak English or illiterate people. An organisation that is trying to
reach the San in the Kalahari Desert may have an accessibility problem!
• Actionable. It must be possible to develop separate offerings for different market
segments. Smaller companies are often unable to develop different market offerings
or market strategies even if they realise there are distinct differences between various
segments.
• Differentiable. Different market segments must exhibit heterogeneous needs. In other
words, people in different segments must have different needs, demand and desires.
People in the same segment, however, must exhibit similar characteristics and needs.
The marketers should also be able to distinguish the segments from others without
too much difficulty.
Once the marketing management is satisfied that a specific segment conforms to these
conditions, it can be considered a possible target market.

Activity 6.1
Discuss the different criteria that a market segment must meet before being
segmented.

25 Feedback
The prerequisites for market segmentation are:

• It must be measurable. Without being measurable, a segment cannot be assessed

for its size and profit potential. Marketers should know the characteristics of who

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 is in each segment how many potential customers are in each segment, and what
their buying and usage behaviour is like.
• It must be large enough. Pursuing a market segment that is too small is not
profitable. A segment must be the largest homogeneous group of people worth
exploiting with a tailored market offering and marketing strategy.
• It must be accessible. Segments should be reached and served effectively, not only
in terms of the delivery of product but also in terms of being able to communicate
with the members of the segment.
• It must be actionable. It must be possible to develop separate market offerings
for different market segments.
• It must be differentiable. The customers in different segments should be as differ-
ent as possible with respect to their likely responses to marketing mix variables.
The less the segments overlap one another, the better.

6.2.3 Bases for segmenting consumer markets

Marketers use segmentation bases (characteristics of individual groups or organisations)
to divide the total market into segments. The choice of segmentation bases is crucial
because an inappropriate segmentation strategy may lead to lost sales and missed
profit opportunities. The key is to identify bases that produce substantial, measurable
and accessible segments. These variables can generally be classified according to
psychographic, geographic, demographic and behavioural bases.

Table 6.1 below provides a detailed analysis of the classification bases. It lists the various
bases for segmenting consumer markets and examples of the possible variables to be
taken into consideration. In the sections that follow, we briefly explain each approach.

Table 6.1: Bases for segmenting consumer markets

PSYCHOGRAPHIC SEGMENTATION
Lifestyle People are classified according to their values, beliefs,
opinions and interests (for example conservative, liberal
or active).
Personality Personality is the amalgamation of physical, emotional,
social and behavioural characteristics that a person may
have (for example outgoing/extrovert versus introvert).
Social class The population is divided according to socioeconomic
groupings. People are grouped into various classes, for
example lower, middle or upper class.
GEOGRAPHIC SEGMENTATION
Geographic region Segmenting the market geographically may be divided into
world, regions, countries, cities and suburbs. A marketer for
a high-end fashion boutique may target the richer suburbs
in South Africa, for example Clifton in Cape Town, Sandhurst
in Johannesburg and Woodhill in Pretoria.

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Size of city or town This could influence the location of a company targeting
major city centres such as Johannesburg and Cape Town.
Population density This refers to population numbers within a region, which
may be classified as urban, suburban or rural.
Climate This refers to the climate in a region, such as summer, rainfall,
hot and humid, or cold and windy. For example, a restaurant
owner who wants to open a beach restaurant in Cape Town
will have to consider the prevailing wind when designing it.
BEHAVIOURAL SEGMENTATION
Attitude to product A customer may have certain regard for a product, which
may be positive, neutral or negative.
Purchase occasion The frequency at which the consumer uses the product may
vary, for example regularly or only on special occasions.
Benefits sought The benefits that customers need from a product vary,
for example in a car these may be economy, convenience
prestige or speed.
User status This relates to the frequency at which the customer uses
a product, for example the customer may be a non-user, a
potential user, a regular user or an ex-user.
Usage rate This may be heavy, medium, regular or occasional.
Loyalty status This may range from no loyalty to medium or strong.
Readiness stage The customer may be unaware or aware of, informed about,
interested in or intending to buy the product.
DEMOGRAPHIC SEGMENTATION
Race Customers may be segmented according to their race, such
as Caucasian, African, Coloured, Asian or Indian.
Education This refers to consumers’ qualifications, such as matric
certificate, diploma, degree or postgraduate degree
Age Customers fall in one of the following age groups: 0–4
year old (babies); 5–12 year old (children); 13–18 year old
(teenagers); 19–24 years old (youth); 25–34 year old (young
adults); 35–64 years old (adults); and 64+ years (old seniors).
Gender Gender segmentation is necessary, as females may have
different needs and wants of a product than males.
Family size Segmentation is done according to family dynamics, such
as the number of people in the household.
Family life cycle These are, for example, young married couples without
children, married couples with children or single parents.

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 Annual income This influences, for example loans or credit approval
customers need.
Occupation This influences consumers’ buying decisions. Occupation
categorisations include student, housewife, retired, manager
or owner.
Religion This may be Catholic, Jewish, Muslim, Hindu, Protestant,
Buddhist and so on.

Regarding the bases identified, the following should be noted:

• A mutual relationship may exist between some of these bases. It is possible, for example,
that there is a strong relationship between income, occupation and education on the
one hand and between family, size and geographic region on the other hand. In the
online industry, there is a relationship between gender, age, salary and job description,
and the likelihood of shopping online. Needs seldom relate to one segment base only.
A specific marketing strategy is unlikely to be directed only at people with an income of
R130 000 per year. A better description of a particular market segment often uses more
than one segment base, for example young females between the ages of 18 and 24,
who like sports and are socially active, earn R15 000+ per month and live in Gauteng.
• The market segmentation bases described in the diagram are not exhaustive and many
others may be identified by marketers. In the online industry, for example, marketers
also use types of products/services offered, consumer needs and the benefits sought
as segmentation bases. The number of possible segmentation bases is, to a great
extent, determined by the creativity of the marketing manager.

6.2.3.1 Geographic segmentation

Geographic segmentation refers to segmenting markets according to the regions of the
country or world market size, market density or climate. Variations such as the size of the
city or town may also be appropriate bases. The company can then decide to target only
one or a limited number of areas. Geographic segmentation is most often performed in
conjunction with other types of measurement, and is mostly useful when differences in
product consumption correspond closely with demographic or lifestyle types who live
in different areas and suburbs. If customers in different areas exhibit different needs,
these differences can be addressed at the local level. The assumption is that people with
similar characteristics tend to live in the same area and therefore have similar buying
patterns. Climate is commonly used for geographic segmentation because of its dramatic
impact on residents’ needs and purchasing behaviour. Ice cream, water, snow skis, air
conditioning and heating systems are products with varying appeal, depending on the
prevailing climate.

Today one element of geographic segmentation is the use of local advertising media and
the allocation of sales representatives to different areas. Rural and urban markets can also
be distinguished, and other territorial subdivisions within larger geographic areas are also
possible. For example, in a geographic area such as Johannesburg, marketers realise that

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there are diverse markets (such as the central southern, northern, western and eastern
areas of the city) which can be treated as separate market segments with different needs.
Many smaller entrepreneurs sell to only one or two of these segments, for example Spar
retail shops that concentrate on the northern areas of the city.

6.2.3.2 Demographic segmentation

Demographic segmentation is the most common base for segmenting consumer markets
because it is clearly identifiable. It is widely available and often related to consumer’s
buying and consuming behaviour.

Demographic segmentation is based on aspects such as age, gender, marital status,

family life cycle, income, occupation and education. Marketers rely on these demographic
characteristics, both because they are often closely linked to customer product needs and
buying behaviour and because they can be easily measured. Potential users of a product,
service or brand can be divided into categories consisting of different age groups, gender
(male and female) and income (high, medium and low). Gender is perhaps the demographic
characteristic most used to segment household markets: clothing, cosmetics, haircare
products and toiletries are all marketed differently to men and women.

Traditionally, companies in South Africa (with its diverse population groups and cultures)
use race heavily as a basis for market segmentation. However, increasingly and specifically
more so since 1994, companies are moving away from this approach and making more
use of other segmentation variables such as income, education, lifestyle, living standard
and so on. In 1993, the South African Advertising Research Foundation (SAARF) published
its first Living Standards Measure (LSM) report, explaining how it arrived at eight LSM
categories by using 13 variables such as degree of urbanisation and ownership of cars
and major appliances instead of the outmoded category of race. Since then, the SAARF
LSM has become the most widely used marketing research tool in South Africa. The most
recent LSM classification divides the population into 10 LSM groups, from 10 (highest) to
1 (lowest). In Table 6.2 we give a brief description of each of these categories.

Table 6.2: Description of selected LSM groups

Brief description of LSM 1 to 10
LSM 1: 1,9% of adult population LSM 2: 5,1% of adult population
Demographics Demographics
• Males and females • Female
• 50+ years • 15–24 and 50+ years
• Primary school completed • Some high school completed
• Small urban/rural • Small urban/rural
• Traditional hut • Squatter shack, matchbox and traditional hut
• R1369 average household income per month • R1952 average household income per month
Media Media
• Radio: A major channel of media commu- • Radio: Commercial, mainly ALS Ukhozi FM
nication, mainly African language services and Umhlobo Wenene FM
(ALS) Umhlobo Wenene FM, Ukhozi FM
and community radio

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General General
• Minimal access to services • Communal access to water
• Minimal ownership of durables, except radio • Minimal ownership of durables, except radio
sets sets and stoves
• Mzansi bank account • Mzansi bank account
• Minimal participation in activities: Singing • Minimal participations in activities: Singing,
attending burial society meetings and tradi-
tional gatherings
LSM 3: 6,1% of adult population LSM 4: 12,2% of adult population
Demographics Demographics
• Female • Male
• 15–34 years • 15–34 and 50+ years
• Some high school completed • Some high school completed
• Small urban/rural area • Small urban/rural area
• Squatter shack, matchbox and traditional hut • Squatter shack, matchbox and traditional hut
• R2545 average household income per month • R3141 average household income per month
Media Media
• Radio: Mainly ALS stations UKhozi FM and • Radio: Commercial, mainly ALS, Gagasi,
Umhlobo Wenene FM Motsweding, UKhozi, Umhlobo Wenene FM
General and community radio
• TV: SABC 1
• Water on plot or communal
• Minimal ownership of durables, except radio General
sets and stoves • Electricity, water on plot or communal, non-
• Mzansi bank account flushing toilet
• Activities: singing • TV sets and electric hotplates
• Mzansi bank account
• Activities: Attending gatherings and going
to nightclubs
LSM 5: 17,4% of adult population LSM 6: 22,4 % of adult population
Demographics Demographics
• Male and Female • Males
• 25–34 years • 25–49 years
• Some high school completed • Matric completed
• Small urban/rural area • Large urban area
• House, matchbox/matchbox improved • House/Townhouse, cluster house
• R4200 average household income per month • R6454 average household income per month
Media General
• Radio: Commercial, mainly ALS stations Lese- • Electricity, water and flush toilet in home
di FM, Motsweding FM, Ukhozi FM and com- • TV set, stove, fridge/freeze and, microwave
munity radio oven
• TV: SABC 1, 2, 3; etv; Top TV • Savings and Mzansi bank accounts
General • Activities: Hiring DVDs, going to nightclubs,
buying takeaways (in past four weeks), at-
• Electricity, water on plot, flush toilet outside tending gatherings, buying lottery tickets
• TV sets, hi-fi/radio set, stove and fridge and going to gym
• Mzansi bank account
• Activities: Singing; baking for pleasure, go-
ing to nightclubs, attending gatherings and
buying lottery tickets

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LSM 7 LOW: 4,9% of adult population LSM 8 HIGH: 5,8% of adult population
Demographics Demographics
• Female • Male
• 35+ years • 35+ years
• Matric and higher completed • Matric and higher completed
• Urban • Urban
• R9768 average household income per month • R12 311 average household income per
Media month

• Wide range of commercial and community Media

radio • Wide range of commercial and community
• TV: SABC 1, 2, 3; etv; DSTV; Top TV; commu- radio
nity TV • TV: SABC 1, 2, 3; etv; M-Net; DSTV; Top
• All print TV; community TV
• Accessed internet in past seven days • All print
• Outdoor • Accessed internet in past seven days
General • Cinema and outdoor

• Full access to services General

• Savings account • Full access to services, including cheque and
• Increased ownership of durables plus DVD savings accounts
player and motor vehicle • Increased ownership of durables plus DVD
• Participation in all activities player and motor vehicle
• Participation in all activities
LSM 8 LOW: 4,2% of adult population LSM 8 HIGH: 4,1 of adult population
Demographics Demographics
• Male • Male
• 35+ years • 35+ years
• Matric and higher completed • Matric and higher completed
• Urban • Urban
• R14 275 average household income per • R15 499 average household income per
month month
Media Media
• Wide range of commercial and community • Wide range of commercial and community
radio radio
• TV: SABC 1, 2, 3; etv; M-Net; DSTV; Top • TV: SABC 1, 2, 3; etv; M-Net; DSTV; Top
TV; community TV TV; community TV
• All print • All print
• Accessed internet in past seven days • Accessed internet in past seven days
• Cinema and outdoor • Cinema and outdoor
General General
• Full access to services and bank accounts • Full access to services and bank accounts
• Full ownership of durables, including PC • Full ownership of durables, including PC
• Increased participation in activities • Increased participation in activities
LSM 9 LOW: 4,6% of adult population LSM 9 HIGH: 4,6% of adult population
Demographics Demographics
• Male • Male
• 50+ years • 35+ years

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 • Matric and higher completed • Matric and higher completed
• Urban • Urban
• R18 444 average household income per • R22 887 average household income per
month month
Media Media
• Wide range of commercial and community • Wide range of commercial radio
radio • TV: SABC 2, 3; etv; DSTV; M-Net; Top TV; com-
• TV: SABC 2, 3; etv; M-Net; DSTV; Top TV; com- munity TV
munity TV • Accessed internet in past seven days
• Accessed internet in past seven days • All print
• All print • Cinema and outdoor
• Cinema and outdoor General
General • Full access to services and bank accounts
• Full access to services and bank accounts • Full ownership of durables
• Full ownership of durables • Increased participation in activities, exclud-
• Increased participation in activities, exclud- ing stokvel meetings
ing stokvel meetings
LSM 10 LOW: 3,3% of adult population LSM 10 HIGH: 3,0% of adult population
Demographics Demographics
• Male • Male
• 35+ years • 35+ years
• Matric and higher completed • Matric and higher completed
• Urban • Urban
• R27 807 average household income per • R33 590 average household income per
month month
Media Media
• Wide range of commercial radio • Wide range of commercial radio
• TV: SABC 3; M-Net; DSTV; Top TV; commu- • TV: M-Net; DSTV; Top TV; Community TV,
nity TV • All print
• All print • Accessed internet in past seven days
• Accessed internet in past seven days • Cinema and outdoor
• Cinema and outdoor General
General • Full access to services and bank accounts
• Full access to services and bank accounts • Full ownership of durables
• Full ownership of durables • Increased participation in activities exclud-
• Increased participation in activities, exclud- ing stokvel meetings.
ing stokvel meetings
Source: Cant (2013)

For more information on the LSM groups, go to http:/www.saarf.co.za.

6.2.3.3 Psychographic segmentation

Psychographic research is the psychology behind why customers make purchase
decisions. It assesses customers on a psychological dimension, instead of only focusing
on demographics. Motives determine people’s behaviour and lifestyle. Psychographics is

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the study of individuals based on characteristics that describe them. It involves breaking
up the market in terms of attributes such as social class, lifestyle and personality. It refers
to the analysis of customers based of their activities, interests and opinions. To establish
the different lifestyle categories, information on customers’ activities, interests, opinions
and lifestyles is collected and then subjected to factor analysis to identify separate groups.
The terms ”psychographics” and “lifestyle” are often used interchangeably to denote the
separation of customers into categories based on differences in their consumption activities
and product usage. Many psychographic variables may be used to segment customers,
but they all share the underlying principle of going beyond surface characteristics to
understand customers’ motivations for buying and using products. Demographics enable
us to describe who buys, while psychographics enable us to understand why they buy.
This is largely based on the values of the customer concerned.

(1) Values determine lifestyle

Lifestyle refers to how a society and consumers live, their attitudes, behaviours, values and
norms. Values are goals we live for. They are the core beliefs that motivate us. Customers
are motivated to purchase products to satisfy their needs and wants, which are based on
their values; therefore, their personal values determine product choice. Customers buy
products which they perceive will achieve a value-related goal.

(2) Psychographic profiles

In South Africa, the Nielsan Sociomonitor Value Groups Survey is one of the best
psychographic profiles. Respondents are asked to answer an extensive array of
psychographic questions so that value groups can be created. The respondents’ answers
are grouped and scored. Depending on their answers, each respondent is given a different
score and position on the “social map”. The value groups are the result of grouping
together customers with similar values, attitudes and motivations.

(3) Uses of psychographics

Psychographics can be used extensively in market segmentation. It enables marketers
to go beyond simple demographic or product usage descriptions. Sometimes marketers
create their strategies with a typical customer in mind. This stereotype may not be correct,
because the actual customer may not match the assumptions. For example, the marketers
of a body lotion for women were surprised to find that their key market consisted of
older, widowed women rather than the younger, more sociable women to whom they
pitched their appeals.

Psychographic information can enable marketers to emphasise features of the product

that fit a person’s lifestyle. Products targeted at people whose lifestyle profiles show a
high need to be around other people might focus on the product’s ability to help meet
this social need.

Psychographic information can offer very useful input in advertising, communicating

something about the product. The advertiser gets a much richer mental image of the target
customer than through dry statistics, and this insight improves the advertiser’s ability to
talk to the customer. For example: It was found that heavy drinkers of brandy tended to

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feel that life’s pleasures were few and far between. Commercials were developed using a
theme that told these drinkers: You only go round once, so reach for all the gusto you can.

Understanding how a product fits or does not fit into customers’ lifestyle enables marketers
to identify new product opportunities, design media strategies, and create environments
most consistent and harmonious with these consumption patterns.

6.2.3.4 Behavioural segmentation

Behavioural segmentation is described by Dibb (2009) as grouping customers and
consumers according to how they buy, use or feel about products and, as such, it can
be very effective in identifying segments. Behavioural segmentation involves many
different variables. These can include product or brand loyalty, frequency of purchase or
rate of consumption, attitudes towards the product, whether the product is perceived
as a high involvement product where great care will be taken over the purchase, or a
low involvement product that may be bought more out of habit and what the product is
bought for (general use or special occasions such as a party). If behavioural segmentation
is used, the market is segmented based on the customer’s buying behaviour. This may
take the form of the following.

(1) Purchase occasion

Some buyers may use a product regularly, while others may use it only on special occasions.
Bread and cake are two examples of products that fall into this category. Bread is a staple
food item which is generally consumed on a daily basis, especially as lunch; whereas
cake is usually consumed on special occasions such as birthdays, weddings and other
celebrations.

(2) Benefits sought

Some market segments may be specific in terms of the benefits they seek when buying
a product. For example, some may seek economy in a car while others may prefer speed
or a good maintenance plan. When consumers are very specific about the benefits they
seek, marketers can respond with products that address and satisfy these needs.

(3) User status

Consumers can be segmented into groups of non-users, ex-users, potential users and
regular users. A balanced approach requires that the company focuses on both regular
and potential users. While the regular users guarantee the company’s survival in the
short to medium term, potential users who can be enticed to become users represent
future growth.

(4) Usage rate

This divides a market by the amount of products bought or consumed. Categories
vary with the product, but are likely to include a combination of the following: former
users, light and irregular users, medium users and heavy users. Segmenting by usage
rate enables the marketers to focus their efforts on heavy users or to develop multiple
marketing mixes aimed at different segments. Because heavy users often account for a
sizable portion of all product sales, some marketers focus on the heavy-user segment. It

150
is therefore common to see hotels, casinos and airlines develop special clubs or frequent
flyer programmes to appeal to this important segment of the market.

(5) Loyalty status

Consumers vary in terms of the degree of loyalty they have towards the organisation or
its brand names. At one extreme are the switchers or consumers who show no loyalty
towards a brand. They can be attracted through frequent sales and promotions, but
attracting them may sometimes not be worthwhile. At the other extreme are very loyal
consumers. Hard-core loyalists insist on a particular brand and go to great lengths to
acquire it. Ideally they should be retained and, where possible, encouraged to become
spokespeople for the organisation’s products and services, as suggested by the relationship
marketing philosophy. Loyalty is the reason why companies follow the 80/20 principle
(that is, that 80% of the profit is made from 20% of the loyal customers).

(6) Buyer readiness stage

Different marketing approaches have to be followed, depending on the consumer’s
readiness to buy. Potential customers who are unaware of the product must first be made
aware of it, while those who may buy the product must be persuaded to do so. When
tablets were introduced to the South African market, most people were either unaware
or or uninformed about the product. Initially, awareness had to be established and as it
increased, more aggressive strategies were followed in marketing tablets.

(7) Attitude towards the product

By segmenting consumers according to their attitude towards the product, the company
can increase its marketing productivity. Market segments that are negative or hostile
to a product can be avoided, saving valuable time and money. Attempts can be made
to persuade those who are indifferent, while those who are enthusiastic or positive can
merely be encouraged to support the product in future. For example, the well-publicised
battle between smartphone users depicts iPhone advocates as being “snobby” and “cult-
like” and mocked by Samsung, which is run on the Android operating system. It would
be easier for either brand to focus their marketing campaigns on those customers who
are indifferent rather than those who are loyal to competing brands.

(8) Developing segment profiles

In developing segment profiles, marketers have to consider every segment the organisation
has identified and then describe each segment fully in terms of size, demographics,
psychographics and lifestyle as well as behaviour patterns and product usage. Once they
have developed a complete profile of the various segments in the market, the marketers
should then select one or more segments (the target market) on which to focus their
market offering (the product they are going to sell in the market). Such a profile enables
marketers to develop products that will provide the need satisfaction customers want
and to design marketing communication messages that will appeal to members of
specific segments. By segmenting the market, marketers will be in a better position to
communicate with the intended target market based on the profile information (consisting
of age, gender, income, benefits sought, geographical location, family size, lifestyle,
attitudes and opinions).

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 Activity 6.2

Choose magazine advertisements for five different products. For each advertisement,
write a description of the demographic and psychographic characteristics of the
targeted market.

26 Feedback

Demographic Psychographic
Product
characteristics characteristics
Audi A1 Any race, mostly post-matric, Middle to upper-class, out-
working youth and young going, active and liberal
adults, single
Nando’s chicken All races, all ages (both young Conservative or liberal, ac-
and old), both genders, edu- tive, outgoing and introverts,
cated mostly with a degree especially middle and upper
diploma or postgraduate class
qualification
iPhone 7 Matric, diploma degree and Middle to upper class, active,
postgraduate degree; work- liberal, both extroverts and
ing youth and young adults introverts, optimistic and
up to seniors; both males and impulsive
females; managers and busi-
ness owners
Bread All races; all ages; both female People of all lifestyles, per-
and male; married couples sonalities and social classes
with children, singles and
married without children;
housewives, retired manag-
ers, owners, etc; almost all
religions
City of Cape Town All races; all ages; post-matric Extroverts, optimistic, con-
diploma, degree and post- servative and liberal, active,
graduate degree; both male mostly middle and upper
and female; all family sizes; class
retired managers and owners

Note: You should be able to identify each of the different bases and give the
characteristics used in market segmentation.

In the following section, we look at the bases for segmenting industrial or business markets.

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6.2.4 Bases for segmenting industrial markets
Traditionally, industrial companies were reluctant to accept marketing segmentation as a
marketing tool. This can be attributed to the fact that these companies tend to be more
engineering oriented, often focusing on product specifications rather than customer
requirements. On the other extreme, one may find many industrial companies producing
products/services customised to their customers’ needs. Consequently, they have no
reason to segment the market as they are producing for individual customers. However,
the importance of market segmentation is increasingly being realised by B2B marketers.

Table 6.3 shows the most popular bases for segmenting industrial markets. It is clear
from this that the marketer will consider totally different variables when segmenting the
industrial market. Highlighted below are the key questions that need to be asked.

Table 6.3: Bases for segmenting industrial markets

Demographic dimensions
• On which industry should we focus?
• How many employees are in the company?
• Which geographical areas must we target?
• How long has the company been in business?
• Does the company have one/multiple establishments?
• Is it a local/national/international company?
Operating variables
• On what technologies should we focus?
• On what user types should we focus (heavy, medium, light or non-users)?
• On what product type must we focus?
• How frequently does the customer require delivery?
• Should we focus on customers requiring many/few services?
Purchasing approaches
• How centralised/decentralised is the purchasing function?
• Should we focus on companies that seek quality/service/lower price?
• Should we focus on companies that demand quick delivery/convenience/reputation/economy?
• Should we focus on the companies with which we have strong links or should we go after the
most desirable ones?
• Should we concentrate on organisations that prefer leasing/service contracts/systems pur-
chases/sealed bidding?
• Should we focus on businesses that are financial/marketing/production/engineering dominated?
Situational factors
• Should we focus on customers requiring periodic quick delivery or those requiring regular
steady delivery?
• Should we focus on a special application of our product or on all applications?
• Should we focus on small/medium/large orders?
Personal characteristics
• Should we focus on companies with values similar to ours?
• Should we concentrate on organisations that are risk takers or risk avoiders?
• Should we focus on companies that show high loyalty towards their suppliers?

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6.2.4.1 Demographic dimensions
These are used to give a broad description of the business segments based on variables
such as location, size of business, type of business and business sector, number of
employees, geographic area, number of outlets or scope of operation (local national/
international). These dimensions may be used to classify companies into market segments.

6.2.4.2 Operational variables

Companies can also be classified according to their operational characteristics. These
enable a more precise identification of existing and potential customers within the
demographic categories. The variables include user status, technologies applied, product
type and frequency of delivery.

6.2.4.3 Purchasing approaches

Marketers of industrial products have to negotiate with the purchasing department of
their businesses. It therefore makes sense to segment the market along these dimensions.
Among the most important variables are the degree of centralisation or decentralisation
of the purchasing function, the power structure of the company, the nature of the existing
relationship with the customer, the purchasing criteria employed by the company and
so on. In a centralised purchasing department, for example, the buyer is more likely to
consider all transactions with suppliers on a global basis to emphasise cost savings and
minimise risks. A decentralised purchasing department will, however, be more concerned
with the user’s needs, tend to emphasise product quality and prompt delivery, and is
likely to be less cost conscious.

6.2.4.4 Situational factors

Criteria such as the delivery requirements of customers, the product application or the
order size are regarded as situational factors. Often the marketer will find that about 80%
of sales will be to customers who order in large quantities, while only about 20% will be
to those who buy in smaller quantities. The needs and demands of these segments often
vary greatly, justifying segmentation along these lines.

6.2.4.5 Personal characteristics

Marketers may also choose to segment the industrial market on the basis of the
organisational value, risk profile or loyalty towards suppliers. Customers who are loyal to
their suppliers can, for example, be treated with less aggression by salespeople while the
salesperson will have to be more aggressive in an attempt to retain the less loyal market
segments. It is also advisable to spread one’s risk between risk takers and risk avoiders,
which decreases the likelihood of a disaster.

As in the case of the consumer market, the industrial marketer must compile a comprehensive
description of the characteristics, needs and demands of the various market segments
based on the criteria provided in this section. Table 6.4 provides guidelines in this regard.

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First, it is necessary to identify the various segments in the particular market. Second, the
manager must outline the characteristics of each of these segments. Lastly, the marketer
must derive the needs and preferences of each segment by studying their characteristics.
Once this process is done, the product/service can be developed around the needs of
the identified market segments.

This process enables the marketing manager to adapt his/her marketing strategy to the
unique requirements of the targeted market segments. In an increasingly competitive
environment, this can only enhance the competitiveness of the company.

Table 6.4: Steps of compiling a profile of the industrial market

Step 1 • Identify major industrial market segments.

Step 2 • Profile each segment based on its characteristics.
Step 3 • Identify the major needs of each segment.
Step 4 • Design products and service specification according to specific needs.

Activity 6.3

You have learned that different bases are used to segment consumer and industrial
markets. Based on your understanding of the bases discussed above, discuss the
differences between consumer and industrial bases.

27 Feedback

Industrial markets tend to be more engineering oriented, often focusing on product

specifications rather than customer requirements. Industrial companies produce products/
services customised to their customer’s needs; therefore, they have no need to segment
the market as they are producing for individual customers. Both industrial and consumer
markets have demographic dimensions, but they differ. For industrial markets, they include
the size of the company; sales volume; number of employees; industries on which to focus;
the geographical areas to target; and if the company is local, national or international.
For consumer markets, the demographic dimensions include the age, gender, race,
education, family size, occupation and the religion of the targeted consumers. Apart
from the demographic dimensions, industrial markets have operational, purchasing,
situational and personal characteristics that differ from consumer markets which have
psychographic, behavioural and geographic dimensions.

Note: You should be able to discuss and show an understanding of the different bases
for segmenting industrial markets, and give the steps of compiling a profile of
the industrial market.

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In the section that follows, we look at market targeting.

6.3 MARKET TARGETING

Market targeting involves making decisions about which part of the market the organisation
should focus on. It follows from market segmentation, where the total potential market is
subdivided according to its characteristics. Market targeting is the choice of which single
segment or group of segments the organisation should focus on. A target market can
therefore actually be better described as a target submarket or target segment.

6.3.1 Evaluating a market segment for targeting

There are five principal characteristics that make a market segment particularly attractive
for targeting. The organisation has to consider its own company resources and capabilities,
strength and weaknesses, the competition and the company’s objectives when evaluating
a segment for targeting. The characteristics of an attractive segment are:

• It has sufficient current and potential sales and profits.

• It has the potential for future growth.
• It is not over-competitive.
• It does not have excessive barriers or costs to entry or exit.
• It has some relatively unsatisfied needs that the company can serve particularly well.

6.3.2 Criteria for selecting potential target markets

Before a specific market segment can be selected as a target market, it must first be
evaluated according to five evaluation criteria.

(1) Segment size and growth possibilities

A worthwhile target must contain enough consumers to justify the development of the
offering and the promotional campaigns customised to its characteristics. The size of a
target market is not relative to its profitability. A small segment may be more profitable
than one in which a large sales volume can be realised. Marketing management should be
convinced that there are further growth possibilities, thus making the segment sustainable.
The markets for Rolex watches or Ferrari cars are small, but the profit potential is huge.
This makes them very attractive segments.

(2) Attractiveness and potential profitability

The attractiveness of a target market depends not only on its size and growth potential,
but also on its promise of long-term profitability. Attractive segments can draw intense
competition which may have a negative effect on future profits. Aggressive competitors
who can launch price wars, intensive advertising campaigns or develop new substitute
products are serious threats that need to be considered. The growing power of buyers
and suppliers also threatens attractive target markets. If the threat is serious, the company

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that does have the necessary resources and skills can decide not to take the opportunity
to select the segment as a target market.

A target market is generally attractive to the marketer if it has some degree of interrelationship
with other segments. Instead of serving a number of small segments, it would be much
better to combine interrelated segments. Interrelationships exist among segments that
use the same raw materials, similar production methods or joint distribution channels.

(3) Resources and skills of the company

Even if a segment has great potential, it cannot be used if it does not fit management’s
long-term objectives. For example: A make-up company could see great potential in the
10 to 15 year age group as these are young girls who love wearing make-up. However, this
would go against the company’s ethical behaviour and therefore it cannot be pursued.
The same applies if the resources and skills are not available to take full advantage of the
opportunity. A segment can only be chosen as a target market if marketing management
is fully committed to serving it better than any other competitor does. This implies that
the market offering must have an undoubted differential advantage to target market
members. If not, it is advisable to commit the cost and energy to an alternative option.

(4) Compatibility with the company’s objectives

Besides the company’s resources and skills, the target market’s compatibility with the
company’s objectives must be considered. If the company’s objectives cannot be enhanced,
the market segment in question should be disregarded. For example, a company that
sells weight-loss products would not target senior citizens because the its objectives will
not be enhanced.

(5) Costs of reaching the target market

When a potential target market cannot be reached by the company’s marketing strategies,
or the cost to reach it is too high, it should not be considered. Companies tend to market
only to the suburban parts of the country. For example, people who live in rural areas
may be a potential target market for a toy company but it would be too costly to reach
them and therefore that market will not be considered.

(6) Identification
Marketers have to identify customers with homogeneous characteristics and allocate
them according to these characteristics. Make-up companies (for examples Avon, Justine
and Avroy Shlain) market almost exclusively to women; companies that sell construction
tools or car parts market nearly exclusively to men.

(7) Stability
Marketers should look for markets that are stable in terms of needs, demographics
and psychological factors. Families, different age groups and educational levels are
characteristic to some of the most stable markets that can be targeted. For example, Spur
Steak Ranches are well known for being an excellent family restaurant chain.

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(8) Accessibility
Marketers must be able to reach the market segments that have been chosen as targets
cost effectively. The alcohol and soft drinks company SA Breweries is a good example
of a company that has been able to reach its target markets far and near with relative
ease, and cost effectively. They also appeal to a wide variety of target markets and it is
not surprising to find the company’s products in the most remote parts of South Africa.

(9) Responsiveness
The development of unique marketing programmes for target segments cannot be
justified if the segments fail to respond to these efforts. Apple offers a variety of products,
all of which have specific target markets. A series of advertisements are aimed at a very
specific target market. The Macs are aimed at the young, smart, sharp-looking tech-savvy
man, while PCs have been represented by an older portly and relatively technology naïve
man. Apple is advertising to a target market of young tech-savvy people who are eager
to embrace the future of technology.

After target market selection, the marketers have to position the product, service or
brand in the minds of the customers so that they feel that it satisfies their needs better
than competing products.

Table 6.5: Steps of evaluating a potential market

Step 1 Identify the criteria that will be used to measure the attractiveness and
competitive position.
Step 2 Determine the importance of the target market based on the attractiveness
and competitive position.
Step 3 Assess where each potential target market currently stands.
Step 4 Make calculated predictions of where each target market is likely to go..
Step 5 Evaluate the possible outcomes likely to impact the business strategy and
resource requirements.

To assess the potential of each of the market segments identified during the segmentation
process, Walker, Boyd and Larreche (2010) propose the five steps shown in Table 6.5 above.

The evaluation of potential market segments starts with the selection of a set of criteria
that can be used to assess (1) the attractiveness of the particular target market and (2) the
competitive position of the company with regard to the specific market segment. Because
not all evaluation criteria are of equal importance, these factors are then weighed to reflect
the relative importance of each. The company then rates every market segment that it
is considering. Scores that reflect the market attractiveness and competitive position of
the company are posted on a market attractiveness/competitive position graph. Such
a graph is shown in Figure 6.1 below. Once this has been done, the marketing manager
considers likely future changes that might manifest themselves. The segment near the
area illustrated with a star in Figure 6.1 shows that this segment is expected to become
less attractive in the future, while the company also believes that the competitive position

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will deteriorate. It is critically important to consider likely future changes since the choice
of a particular target market commits the company to it. If changes occur in the future,
the company’s competitive position may be adversely affected. A therefore represents
the most attractive and competitive position. Target markets that lie on the equilibrium
(line) indicate those of only moderate attractiveness, while B (bottom right) indicates
unattractive target markets.

Figure 6.1 Market attractiveness/competitive position graph

Source: Cant (2013:109)

The marketing manager will, lastly, evaluate the implications of possible future changes
with regard to their impact on the company’s strategies and resource requirements.
Only once this has been completed will the marketing manager finally choose a market
or market segment to target.

6.3.3 Strategies for selecting target markets

Having analysed the chosen market and determined the attractiveness of the various
market segments, a decision has to be made about which segments to target.

6.3.3.1 Undifferentiated marketing

This is also known as the aggregation strategy. It is where the market is believed to be
composed of customers/consumers whose needs are fundamentally the same in the
context of the product being offered; there is no basic difference between them, in other
words they are undifferentiated. This is the area of mass marketing. In undifferentiated
or mass marketing, a single marketing programme is used for all. Although this may
result in lower costs and prices, and higher profit margins, it is very difficult to satisfy
all the customers with one marketing mix. An organisation that uses undifferentiated
marketing may also provide an excellent opportunity for its competition to capture a

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portion of its sales by appealing to the desires of specific segments. Few, if any, products
are marketed totally in this way. Usually some form of differentiation takes place, even if
only on a small scale. Products such as Coca-Cola and Pepsi are reasonable examples of
undifferentiated marketing, where the business chooses to ignore the differences in the
market and pursues the total market with one basic market offering.

Undifferentiated marketing may be a strategy that marketers use even when some
differences between customer/consumer groups are recognised. The segments are
aggregated in the belief that the differences are not significant or can be ignored.
Combining segments to enlarge the target, and adopting mass marketing approaches,
means that the target becomes less and less homogeneous – the differences between
each segment begin to outweigh their similarities. Thus, the mass marketer has to be
convinced that the nature of the product offering can meet the requirements of a large
market, as it appears to be the case with organisations like McDonald’s, Burger King and
KFC. This strategy has, however, lost ground in recent years as consumers have become
more discriminating.

6.3.3.2 Differentiated marketing

Differentiated marketing occurs when differences between market segments are
recognised and two or more target markets are selected, each receiving a different
marketing programme. The Ford Motor Company is a good example of an organisation
that uses a differentiated target marketing strategy effectively. By developing a range of
models, it is able to meet the needs of a wide range of targeted segments. Most large
organisations have adopted the principles of differentiated marketing even if the specific
approaches they have adopted vary. This strategy allows the organisation to cater for the
diverse needs of the different segments. It is, however, a costly strategy. To cater for the
diverse needs, the organisation incurs extra production costs as production runs become
smaller, advertising costs rise because communication strategies must be adapted for
the different market segments, administrative costs increase as separate marketing plans
have to be developed, and inventory costs go up as a greater variety of products must
be maintained.

6.3.3.3 Concentrated marketing

With this strategy, only one market segment is chosen for targeting – hence there is a
concentration of marketing effort. If the market is relatively small, well defined and much
focused, the term “niche marketing” is used. In the car market, this may apply to Aston
Martin and Morgan cars. At an even greater level of focusing where individual customer
preferences are important to the organisation, marketing efforts may be defined entirely
by the need to satisfy a single customer. The term “customised marketing” may be used.
In consumer markets, this can occur for once-off products such as items hand-built to a
customer’s specifications. Tailors custom-make suits and architects design and build new
houses for clients. More frequently, we tend to associate this degree of targeting with
B2B markets and especially large-value orders. This may apply to a custom-made factory,
engineering project or organising a special event on behalf of a company.

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 Activity 6.4

Visit the Spur website at www.spur.co.za/. Describe the different market segments
targeted by Spur restaurants. How would you describe Spur’s targeting strategy?

28 Feedback

The different market segments targeted by Spur include children (who have a menu
specially made for them), families, business partners and friends. The children have a
variety of games and activities; they can host their birthdays at Spur and get very special
treatment when they choose to celebrate their birthdays at a Spur restaurant. Spur also
targets the older population, particularly families. When they want to treat themselves
to a lovely meal, they can visit Spur knowing that they will relax in an environment that
caters for their children. Young couples without children are also catered for, as well as
smokers. Spur has successfully managed to embrace the whole family and has created
a product offering to suit every customer who walks through their doors; no one is ever
turned away. They specialise in families with children, and have made it their mission to
understand the needs of parents when they eat out and that children have to be treated
as special customers too.

Note: You are encouraged to work through the assessment questions and come up with
your own answers to show an understanding of the concepts being assessed.

Let us now look at product positioning.

6.4 PRODUCT POSITIONING

“Positioning is the place a brand is perceived to occupy in the minds of the target market
relative to other competing brands. It has been referred to as a battle for the hearts and
minds of customers.” Masterson, R & Pickton, D. (2004:115).

The term “positioning” refers to the consumer’s perception of a product, service or brand,
or the company in relation to its competitors. A product’s positioning is the place the
product occupies in the customer’s minds. Positioning is therefore all about perception.
As perception differs from person to person, so do the results of the positioning map.
For example, what you perceive as quality or value for money is different to what your
friend perceives them to be (Parumasur & Roberts-Lombard 2012: 238). Cant (2013:110)
defines positioning as the way customers perceive a product in terms of its characteristics
and advantages, and its competitive positioning relative to products of competing
organisations. Masterson and Pickton (2004:115) define positioning as the place a brand is
perceived to occupy in the minds of the target market relative to other competing brands.
It has also been referred to as a battle for the hearts and minds of customers/consumers.

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Through product positioning, marketers influence how customers perceive a brand’s
characteristics to be relative to those of competing products. The goal of product positioning
is therefore to influence demand by creating a product with specific characteristics and a
clear image that differentiates it from competitors. Positioning assumes that customers
compare the important features of products. If a product/service is perceived to be exactly
like another product/service on the market, customers have no reason to buy it instead
of the other product. Furthermore, positioning enables marketers to differentiate their
products, services or brands from competitors’ products, services or brands and to create
a sustainable competitive advantage. According to Lamb, Hair, McDaniel, Boshoff and
Terblanche (2012), this competitive advantage forms the basis of a positioning strategy.

There are no fixed rules and few guidelines for the positioning of a product, service or
brand. Questions such as “How do customers perceive my product/service?”, “Which
attributes are important for differentiation purposes?” and “How are competitive products/
services being perceived?” are very important.

A company with several brands in a category will benefit from positioning each brand
within the product/service portfolio against a distinct set of consumer needs – ideally
each brand should be sufficiently distinct so that there is little cannibalism (where one
company’s brand takes customers away from another brand of the same company).

6.4.1 Product positioning maps to aid decision making

Marketers often use positioning or perceptual maps to portray market positions visually.
A perceptual map is a multidimensional graphic image depicting consumer perceptions.
These maps assist marketers in developing focused marketing mixes or strategies (Cant
2013:115). They also help the manager to assess the advantages of an organisation’s
marketing programme.

Many variables or determinants can be used to compile similar positioning maps. However,
marketing information and sophisticated and statistical testing are necessary for the
development of positioning maps.

6.4.2 Positioning process

A seven-step approach can be adopted when positioning brands. (The term “brands” is
preferred here, since it is an individual producer’s brands and not products that compete
against each other in a market. Positioning maps can, however, also be developed for
product categories.). These steps are shown in the following table.

Table 6.6: Steps of the brand positioning process

Step 1 (1) Identify all the major competing brands.

Step 2 (2) Identify which variables are most relevant to consumer needs and wants.
Step 3 (3) Determine the consumer’s perceptions of your brand and competing
brands.

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 Step 4 (4) Analyse the strength of major brands.
Step 5 (5) Analyse the brand’s current position.
Step 6 (6) Determine which variables consumers prefer.
Step 7 (7) Develop a positioning strategy that best satisfies consumer preferences.

6.4.2.1 Identify all the major competing brands

The positioning process starts with the identification of a relevant set of competitive
brands to which a particular producer’s brand will be compared. It is essential that all
the relevant competing brands be identified to make the positioning effort worthwhile.
This enables marketers to identify the strengths and weaknesses of their own brand
against a competing one. It also helps them to decide whether to reposition the brand
to strengthen its position in the market.

Repositioning refers to changing a brand’s (mostly undesirable) position in the market

in the hope that the new position will improve the brand’s appeal among consumers.

6.4.2.2 Identify which variables are most relevant to consumer needs and wants
In essence, product positioning has to do with competitive differentiation and effectively
communicating this to customers. Kotler and Keller (2015) suggest that an enterprise or
market offering can be differentiated along four different dimensions: product, service,
personnel and image. Table 6.7 summarises the main differentiation variables suggested
by Kotler and Keller. These are not the only variables that can be used; the most obvious
ones are discussed. The marketer must decide which of the differentiation variables
shown in the table (or other variables) should be used in developing a positioning map.

Table 6.7: Differentiation variables

Differentiation item Differentiation variable

Product Features
Quality
Durability
Reliability
Style
Design
Service Delivery
Installation
Repair
Training
After-sales service

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 Personnel Competence
Knowledge
Credibility
Reliability
Responsiveness
Image Symbol
Media
Events
Atmosphere (the feel of the place)

6.4.2.3 Determine the consumer’s perception of your brand and of competing brands
The marketer must establish how consumers perceive the various brands in terms of the
determinant variables selected in the previous step. This step involves collecting primary
data from a sample of consumers. Using a structured questionnaire, these consumers
are questioned about their perceptions of the various brands. The collected data is then
analysed, using several statistical techniques. These include factor analysis, discriminant
analysis and multidimensional scaling.

6.4.2.4 Analyse the strength of major brands

When a consumer is unaware of a brand, the brand clearly cannot occupy a position in
the mind of the consumer. In such instances, brand awareness must first be established.
However, when a consumer is aware of a brand, the intensity of awareness may vary. In
many markets, the awareness set for a particular product class may be as little as three or
fewer brands when there are more than 20 brands in the product class. In such markets,
the marketer of the less-known brand must attempt to increase the intensity of awareness
by developing a strong relationship between the brand and a limited number of variables.

Competing directly with dominant brands is not advised. Instead, the marketer must
identify as a target a position within a market segment that is not dominated by a leading
brand. Alternatively, the marketer must concentrate on a variable that is highly prized by
a particular market segment.

6.4.2.5 Analyse the brand’s current position

From the data collected from consumers about their perceptions of the various brands
in the market, the marketer can establish how strongly a particular brand is associated
with a variety of determinant variables. To do this, a positioning map (similar to the one
in Figure 6.2 below) is developed. Brands that are close to each other on the map can be
expected to be close rivals and those that are far apart are considered very different from
each other, thus competitive rivalry between them is expected to be limited.

164
6.4.2.6 Develop a positioning strategy that best satisfies consumer preferences
Our discussion thus far has focused on consumers’ perceptions of existing brands and
has given no insight into the positions that would appeal most to consumers. This can
be achieved by asking the survey respondents to think of the ideal product or brand in a
particular product category. The respondents would be asked to rate their ideal product
and existing products on a number of determinant variables. The result of such an analysis
of electronic gadgets is shown in Figure 6.2: the determinant variables that are closest
to the ideal point are more important to consumers, while those that are further apart
from each other are considered less important.

Figure 6.2: Perceptual map of electronic gadgets based on ideal points

Source: Cant (2013:115)

6.4.2.7 Select positioning strategies

Deciding where to position a new brand or where to reposition an existing one depends
on the market targeting analysis discussed earlier as well as the market positioning analysis.
The position chosen must reflect customer preferences and the positions of competitive
brands. The decision must also reflect the expected future attractiveness of the target
market, the relative strengths and weaknesses of competitors, and the organisation’s own
capabilities. Specific positioning methods are discussed in the next section.

6.4.3 Positioning methods

In general, seven positioning methods can be distinguished.

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1. Attribute positioning. The company positions itself in terms of one or more outstanding
attributes. Castle Lite positions its beers as the leading premium light beer and “cold”.
2. Benefit positioning. This positioning method emphasises the unique benefits that
the company or product offering offers its customers. For example, Vanish promises
effective stain removal.
3. User application positioning. A company can position itself or its products in terms
of the product use or application possibility. Graca, for example, is positioned as a
wine to be enjoyed at all kinds of fun occasions.
4. User positioning. The company may position its products with its users in mind.
Marketers of skydiving can position their market offering to appeal to thrill-seekers.
5. Competitor positioning. Some products can best be positioned against competitive
offerings. BMW finds it useful to position its cars directly against those of Mercedes-
Benz, its closest rival in South Africa.
6. Product category positioning. A company can position itself in a product category
not traditionally associated with it, thereby expanding business opportunities. A
museum or planetarium traditionally regarded as an educational institution (such
as the Apartheid Museum) may elect to position itself as a tourist attraction.
7. Quality/Price positioning. The company may claim its product is of exceptional quality
or has the lowest price. While Woolworths is known for high-quality garments, Mr
Price is known for unbeatable prices.

Activity 6.5

A friend of yours has opened a small grocery store in a wealthy suburb. Advise her
on the dangers of poor positioning.
Draw a positioning map of the four dominant cell phone service providers in South
Africa: Vodacom, MTN, Cell C and Virgin Mobile. Based on your analysis, advise Cell
C on a repositioning strategy.

29 Feedback

Positioning usually follows naturally from the targeting decision and forms a link between
the target marketing strategy and marketing programmes. By carrying out a detailed
analysis of the target market, an appreciation of competing offerings and where one’s
brand might fit into the market can be developed, especially in the context of how
consumers think and feel about the brands. It has to do with their perceptions and
preferences. This will be a consequence of their previous knowledge and experience of
the brands themselves and the companies associated with those brands, thus a brand is
frequently a function of perceptions held about both the company and its products. Poor
positioning will affect the product sales and therefore lead to profit loss. Word of mouth
(by consumers) is the most effective marketing tool. When consumers’ perceptions of the
product are poor, word will spread in that regard and this will negatively affect the sale
of the product. Positioning is very much about understanding customer and consumer
perceptions of the brands on offer.

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Note: You are encouraged to work through the assessment questions and come up with
your own answers to show an understanding of the concepts being assessed.

6.5 SUMMARY
Market selection is one of the most fundamental aspects of marketing.
The choice is affected by what market opportunities seem to be available
and match the company’s objectives and resources, and an assessment
of the general business environment. Markets consist of customers and
consumers, whether they are B2B or business to consumer (B2C) markets.
Because no single company can fulfil the needs of all, careful attention
should be given to defining customer and consumer requirements as this
is vital. While individuals are different, people do share similarities in their
habits, lifestyles, preferences and where they are located (and, in the case
of B2B, what type of business they are in).
An understanding of these similarities can be used to divide the total market
into subgroups that each consists of buyers and users who share similar
characteristics which are different from those of the other subgroups. This
is called market segmentation. In this study unit, we defined the main
theoretical concepts associated with market segmentation, market targeting
and product positioning, and explained how marketers can apply them.
Although there are many ways to segment markets, we discussed the use
of demographic, geographic, psychographic and behavioural segmentation
in the case of consumer segmentation and demographic, operational,
situational and personal approaches in the case of B2B markets.
It is up to marketers to decide which of the segments are attractive enough
to target for special attention. This is the process of target marketing.
Positioning is about understanding customer and consumer perceptions
of the brands on offer. It is achieved by carrying out a detailed analysis
of the target markets so that an appreciation of competing offerings and
where one’s own brand fit into the market can be developed. Ultimately,
the success of marketing management depends on the ability to select
profitable target markets in an ever-changing marketing environment and
the ability to satisfy the needs of the chosen segments.

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6.6 CASE STUDIES WITH QUESTIONS

Teba Bank opens to look after SA’s rural poor

Teba Bank is the first bank aimed exclusively at servicing the rural poor. The bank
provides micro-financial services to about 4 million low-income earners living in and
around mining towns and in rural areas who have been denied access to formal banking
services. Only about 20 per cent of rural people have savings accounts, while research
shows more than 40 per cent would like to have access to banking facilities. The bank,
which will be savings-led, will differ from other financial institutions – such as micro-
lenders – operating in rural areas, which are limited to providing credit.
The bank will appeal to the need for affordable financial services which give clients a
safe place to keep their savings. The bank will offer fixed deposits, savings accounts,
micro-loans, housing loans and financial management advice.
Source: Jacobson, C. 2006

Questions
1. Describe the target market of Teba Bank.
2. Describe how you would use the bases of segmenting consumer markets to assist
Teba Bank to select their target market.
3. Which LSM group(s) would you recommend Teba Bank works with? Give reasons
for your answer.

Spot the teen reader

Former financial journalist Sam Sneddon (33) has created a joint venture company with
media 24 to publish the biggest selling US teen magazine, Seventeen, in SA. Sneddon,
who was granted the licence for Seventeen by Hearst Magazines International, has
managerial control of the new company, 8 Ink Media. So far, the magazine has netted
big advertisers Estee Lauder, L’Oreal, Samsung and Boss Woman. Almost all special-
position slots for the following year have been filled. “SA has incredible mags,” says
Sneddon, “but no–one has done the mainstream youth market properly yet”.
AdVantage editor John Farquhar says meeting the needs of mercurial teenage readers
will be tricky. He says teen magazines have failed to build a following in SA. In the
previous year, independent publisher Paul Kerton launched Wicked (notching up sales
of 15 000 to 20 000). Now Seventeen has entered the market and next year another teen
publication, Glamour, will follow.
The important question, says Farquhar, is whether these magazines can collectively
make enough noise to create a teen magazine following. He is sceptical. Sneddon
says research shows that more than 90 per cent of the group aged 13 to 20 in market
categories LSM 7 and upwards read magazines regularly.
Source: Bisseker (2008)

Questions
1. How would you describe the market segment targeted by Seventeen in demographic
terms?

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2. Do you think there are enough teenagers in South Africa to make pursuing this
market segment profitable?
3. What are the unique needs of the consumers in the target market of teenager
magazines?

6.7 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. How do you think you will be able to use the skills you learned in this study unit in
your professional life?
2. What did you find difficult about this study unit? Why do you think you found it
difficult? Do you now understand the concept(s) you struggled with or do you need
more help? How will you get more help if you need it?
3. What did you find interesting in this study unit? Why?
4. Were you able to identify different sources of information or references to deepen
your understanding of the topic?
5. How long did it take you to work through this study unit? What do you need to do
differently to be able to keep up with your study schedule?

6.8 REFERENCES
Bisseker, C. 2008. Spot the teen reader. Financial Mail, 31 October.
Businessdictionary.com. [Sa]. Psychographics. http://www.businessdictionary.com/defini-
tion/psychographics.html (accessed 17 November 2016).
Cant, MC. 2010. Essentials of marketing. 3rd edition. Cape Town: Juta.
Cant, MC. 2013. Marketing: An introduction. 2nd edition. Cape Town: Juta.
Cant, M.C., Van Heerden, C.H. & Ngambi, H.C. 2017. Marketing Management A South African
Perspective. 2nd Ed Cape Town: Juta & Co.
Cant,M.C, et al 2010 Essentials of Marketing: CapeTown: Juta & Co., The other co-authors
are Strydom,J, Brink,A., Jooste, C,. Machado, R.,
Jacobson, C. 2006. Teba bank opens to look after SA’s rural poor. Sunday Times, 8 October.
Kotler, P & Keller KL. 2015. Marketing management. 14th edition. Boston, Mass: Pearson
Education.
Lamb, CW, Hair, JF, McDaniel, C, Boshoff, C & Terblanche, NS. 2008. Marketing. 3rd edition.
Oxford: Oxford University Press.
Masterson, R & Pickton, D. 2004. Marketing: an Introduction. McGraw-Hill Education UK.
Paramasur, SB & Roberts-Lombard, MR. 2012. Consumer behaviour. 2nd edition. Cape Town:
Juta.
South African Advertising Research Foundation (SAAF). 2012. LSM descriptions.
http://www.saarf.co.za/lsm-descriptions/2012/SAARF%20LSM%20Descriptions%20
AMPS%20Dec%202011 (accessed 26 November 2016).

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6.9 SELF-ASSESSMENT QUESTIONS
Question 1
Which ONE is NOT an advantage of market segmentation?
(1) It forces marketers to focus more on customer needs.
(2) Limited coverage is achieved since marketing strategies are directed at specific
market segments only.
(3) Segmentation leads to identification of excellent new marketing opportunities.
(4) Segmentation can help guide the proper allocation of marketing resources.

Question 2
The main aim of segmentation is to enhance customer satisfaction and the profitability
of shareholders. Which ONE of these is NOT a criterion for an effective segment?
(1) It must be measurable
(2) It must be large enough
(3) It must be actionable
(4) It must be reliable

Question 3
Lifestyle, personality, social class are bases for
(1) geographic segmentation
(2) psychographic segmentation
(3) behavioural segmentation
(4) demographic segmentation

Question 4
Attitude to product, usage rate, readiness stage and loyalty status are bases for
(1) demographic segmentation
(2) geographic segmentation
(3) behavioural segmentation
(4) psychographic segmentation

Question 5
Which ONE of these is NOT a step in the evaluation of a potential market?
(1) Design products and service specification according to specific needs
(2) Determine the importance of a target market based on the attractiveness and
competitive position
(3) Make calculated predictions where each target market is likely to go.
(4) Evaluate the possible outcomes likely to impact the business strategy and resource
requirements.

Question 6
This strategy allows for the organisation to cater for the diverse needs of the different
segments. It is however a costly strategy.
(1) Undifferentiated marketing
(2) Concentrated marketing
(3) Differentiated marketing
(4) Business marketing

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Question 7
Before a specific market segment is selected as a target market it must first be evaluated
according to five important evaluation criteria. Which of the following is NOT part of the
evaluation criteria?
(1) Segment size and growth possibilities
(2) Attractiveness and potential profitability
(3) Compatibility with enterprise’s objectives.
(4) Attitude towards the product.

Question 8
…. can be defined as the way customers perceive a product in terms of its characteristics
and advantages.
(1) Segmentation
(2) Positioning
(3) Targeting
(4) Advertising

Question 9
Product positioning has to do with competitive differentiation and the effective com-
munication of this to the customers. Competence, knowledge, credibility, responsiveness,
reliability are differentiation variables for the …..item
(1) Product
(2) Service
(3) Image
(4) Personnel

Question 10
In general, there are seven positioning methods that can be distinguished. When the
enterprise positions itself by claiming that its product is of exceptional quality which
type of positioning will it be using?
(1) Quality/price positioning
(2) Product category positioning
(3) Competitor positioning
(4) User application positioning

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172
Topic 5
The marketing mix

AIM
Our aim in this topic is to enable you to understand the four elements of the marketing mix.

LEARNING OUTCOMES

On completion of this topic, you should be able to explain product, marketing com-
munication, distribution and price decisions.
More specifically, you should be able to
• explain the four levels of the product concept
• identify the sequence of the steps of the new product development process
• explain how the communication process is used to help market products and
services
• discuss the steps of developing a promotion campaign
• discuss the promotion mix elements of advertising, direct marketing, sales promo-
tion, public relations and personal selling in terms of management issues, strengths
and weaknesses, and the methods used
• indicate the influence of marketing instruments on the distribution channel
• explain the factors involved in selecting a suitable distribution channel
• explain the different pricing objectives that describe what a business hopes to
achieve through its pricing activities

Study unit 7: Product decisions

Study unit 8: Distribution decisions
TOPIC 5
Study unit 9: Pricing decisions
Study unit 10: Promotion decisions

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Study unit 7
Product decisions

Contents

Overview
Learning outcomes
Key concepts
7.1 Introduction
7.2 Definition and nature of a product
7.2.1 Definitions of a product
7.2.2 Product concept
7.3 Classification of products and services
7.3.1 Classifying products according to their durability
7.3.2 Classifying consumer and industrial products
7.4 Product mixes and product lines
7.4.1 Product mix decisions
7.4.2 Product line decisions
7.5 Product identity decisions
7.5.1 Product attributes
7.5.2 Branding decisions
7.5.3 Packaging decisions
7.5.4 Labelling decisions
7.6 New product development
7.6.1 Types of new products
7.6.2 New product development process
7.7 The product life cycle
7.7.1 Introduction stage
7.7.2 Growth stage
7.7.3 Mature stage
7.7.4 Decline stage
7.8 Summary
7.9 Case studies with questions
7.10 Reflection
7.11 References
7.12 Self-assessment questions

OVERVIEW
In this study unit, we discuss the major decisions marketing managers consider when
they develop product strategies. We first provide you with definitions of a product and
discuss the nature of the product concept. Thereafter, we explain how businesses classify
products to enable them to develop the right strategy for a specific need. We also cover
the product lines and mixes that are develop to satisfy needs. Each product in the lines

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and mixes has an identity, a name and a “face”. This is discussed in the section about
attributes, branding, packaging and labelling.

We then discuss new product development. With the continuously changing marketing
environments and the changing needs of consumers, marketers have to develop new
products to adapt to new demands. In the section on new product development, we
explain the steps that have to be followed when new products are developed. In the
last section, we explain the life of a product and the strategies used during a product’s
life cycle.

This study unit will unfold as follows:

LEARNING OUTCOMES

After completing this study unit, you should be able to

• define a product and discuss the product concept
• explain how products are classified according to their durability and tangibility

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 • explain the classification of consumer and industrial products, and provide examples
of each subclassification.
• discuss the attributes of a product, including the quality, design, style and features
of a product.
• discuss the different branding strategies and packaging and labelling decisions
• explain what is meant by a new product and how new products are developed
• explain the characteristics and strategies used in the different stages of a product’s
life cycle

KEY CONCEPTS

• product concept
• durability
• intangibility
• services
• consumer products
• attributes
• quality
• feature
• packaging
• branding
• labelling
• new products
• product life cycle

7.1 INTRODUCTION
There is a reason why every product is available on the market. Irrespective of whether it
is a loaf of bread, a cell phone, a car or a movie ticket, products are developed to satisfy
specific needs.

For example: There are many different cell phones. Each cell phone has a name, style,
design, features and services that back it up. New cell phones with new technology come
on the market almost daily. A cell phone that created excitement as little as a year ago is
now old, outdated and forgotten.

Companies know consumers’ needs change as the marketing environments change and
that competitors always try to get a bigger share of a market before another company
does. To prevent this, companies carefully develop strategies for every product. Their
product strategies are influenced by the needs of consumers, the changes in the market
and the behaviour of competitors. The objective of all management decisions is to get
consumers to purchase the company’s product before and instead of a competitor’s
product. Ultimately, it is the product that brings money into an organisation and all the
decisions about the products have to be the right ones.

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In this study unit, we explain and discuss all the different decisions companies have to
make when developing products that are unique and that will differentiate the company
from competitors while satisfying the demanding needs of the market.

7.2 DEFINITION AND NATURE OF PRODUCTS

Every person who has to describe a product will give a different description. Products can
be defined from a company’s perspective and from a consumer’s viewpoint. Consumers
describe products in terms of what they see and how it satisfies their needs. Companies’
perspective is different because they see product layers and functions that are developed
to satisfy a specific consumer need. In the following sections, we explain the definitions
and the product layers that form the product concept.

7.2.1 Definitions of a product

Armstrong and Kotler (2015) define a product as anything that can be offered to a market
for attention, acquisition, use or consumption that might satisfy a want or need. Products
are not only tangible objects; services, events and organisations are also products. Anything
that can be marketed can be seen as a product.

Tangible products are products that can be seen and touched, and include things such
as food, cell phones, soap and cars. Services cannot be touched, but only experienced.
Examples of services are the services a bank offers, a visit to the dentist, a cell phone
service or a ride in a bus. Even people can be a product when they are marketed, such
as television personalities, vocal artists, models and other famous people.

From a marketing perspective, a product is the offering that satisfies the needs of the
company and the target market. A product or service forms the basis of the relationship
that is built between a company and consumers. From a consumer’s perspective, a product
is something that provides a benefit and that satisfy a need. Consumers do not care
about the layers, the categories or the strategies behind products. As long as a product
performs the way the consumer expects it to; the consumer is satisfied.

7.2.2 Product concept

From a marketer’s viewpoint, products have many different layers that all contribute to the
satisfaction of consumer needs. The product concept represents the different layers that
expand from the most basic element, the core of a product, to the image that includes
all the other elements. Each layer is interconnected to the other and can be peeled away
in the same way as an onion. Consumers, although they are not aware of it, evaluate a
product according to the different layers that are included in the product concept.

For each one of the layers, marketing managers have to develop strategies and make
decisions to differentiate their product from those of their competitors. Figure 7.1 is a
representation of the elements or layers of the product concept, showing how the core,
tangible, augmented and product image elements are connected.

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Figure 7.1: The layers of the product concept

7.2.2.1 Core product

The core product is the basic part of a product that satisfies a consumer need. It is also
the main reason for the existence of the product and why a consumer buys the product.
This part of the product provides the benefit that the consumer receives from owning,
using and experiencing the product. Owning jewellery or a watch, such as a Rolex, gives a
person a feeling of prestige. The core benefit of cosmetics is beauty and the core benefit
of a car is transportation.

When marketers design a product, they first have to define the core of the product and
realise that the product might have many benefits. A car, for example, does not only
provide transportation but also the prestige of owning it and the excitement of driving it.

7.2.2.2 Tangible product

The tangible product is the part of the product that can be seen. It is also called the
physical, the actual or the formal product. This part of the product includes the features,
style, design, quality, labelling, brand and packaging of the product. A Mercedes-Benz car
looks different from a BMW car. They have different features, their styles and design are
unique, and they can be identified by the brand name if somebody does not recognise
the design.

Marketers use this layer to design the product so that it is different from the competitors’
products and for consumers to identify it as unique. We discuss each of the marketing
decisions that are involved in this layer in more depth later in this study unit.

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7.2.2.3 Augmented product
The augmented part of a product gives the consumer additional benefits, such as
warranties, guaranties and installation. DSTV, for example, is useless if it is not correctly
installed. DSTV also provide a warranty in the event of the equipment failing, hence the
added benefit to a consumer is peace of mind and a feeling of money well spent.

Marketers use the augmented part of products to differentiate their products further
from those of competitors. Other added benefits include credit, delivery, product repair
and customer instructions on the use of the product. If some of these benefits are not
included, some customers will not purchase the product.

7.2.2.4 Product image

The last layer of the product concept includes all the other layers. When consumers look
at a product, they do not look at the individual layers but perceive the product as a whole.
Marketers have to decide how to develop all the layers in one product to form an image
that will attract a specific target market. The image forms the basis for the development
of the other marketing mix elements. For example: Woolworths Food target young,
upwardly mobile individuals. They use the image of quality and convenience to create
a product that appeals to this market. The total product, the price, location, promotions
and advertisements communicate an integrated message of this image.

Activity 7.1

Think about your cell phone and describe the different layers of the cell phone’s
product concept.

30 Feedback

You could have described it in the following way:

• Core product. At the core of the cell phone is the need for communication and the
benefit you receive when you phone and communicate with somebody.
• Actual product. The actual product is the physical cell phone. This includes the
brand name (such as Samsung or Sony), the body, the size, the features (such as
the camera and the different apps) and the packaging (with all the labels that
are part of it).
• Augmented product. This is the service and product repairs you receive if anything
goes wrong with your phone, and the instructions for using it. Without a service
provider such as Vodacom or MTN, for example, the cell phone is useless. The
service is provided by a different company and is not part of the product concept
of the cell phone. Cell phone providers have agreements with service providers
such as Vodacom that augment their products.

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 • Image. The image includes everything that you think about when you look at your
cell phone and more. The quality, what it means to you personally, technology,
how much you paid, where you bought it, and even what the cell phone company
does for the environment and social responsibility play a part in this layer.

7.3 CLASSIFICATION OF PRODUCTS AND SERVICES

Marketers classify products to be able to develop a marketing mix strategy for every
product and to apply the correct resources so that consumers will notice the products.
The strategies include decisions about the features, the quality, the price, where the
product will be sold and how it will be communicated to the target market. Each of these
decisions depends on the specific classification of the product.

Products are classified according to their durability, tangibility, and if they are consumer
or industrial products. Each of these classifications is further divided into subgroups with
their own characteristics.

7.3.1 Classifying products according to their durability

The durability of a product refers to how well it performs, stands up to usage or maintain
its quality over time (Business Dictionary 2016a). Some products last a long time, while
others are used in a matter of minutes. A consumer will, for example, get value from a
car for years but a tea bag is consumed within minutes.

Durability also relates to the physical product that can be touched and the value of it
that can be measured. Services cannot be touched but still have value. Products that
can be touched is said to be tangible and services are intangible. Tangible products are
often easier to market. For a service that cannot be touched, a marketer has to adopt a
different approach.

To decide on marketing strategies, marketers classify a product according to how durable

and tangible it is. The following figure and discussion will give you more insight into
these characteristics.

Figure 7.2: Classification of products based on durability and tangibility

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7.3.1.1 Durable products
Durable products last for a considerable time and are the most tangible. Owning a house is
the ultimate durable product, but other durable products such as cars, kitchen appliances
and furniture are also used for years.

Consumers spend time searching for information when they buy durable products.
Characteristics of these products are that they are not often bought; they are expensive
and they have high value. Marketers have to carefully decide on strategies for price,
distribution and communication to market them. Durable products normally have high
prices, are distributed in exclusive outlets and are advertised in glossy magazines.

7.3.1.2 Non-durable products

Non-durable products are used up quickly. Teabags, for example, are used on a daily basis
and need to be purchased more frequently. Other examples of non-durable products
are food, cleaning products, magazines, fashion clothing and cigarettes that go up in
smoke in minutes.

The unit values of non-durable products are not as high as durable products. Consumers
buy them often and want them conveniently available. Marketing strategy decisions
include lower prices, intensive distribution and continuous communication about their
availability.

7.3.1.3 Services
Services represent intangible products comprising activities, benefits or satisfaction that
is not embodied in physical products (Cant & Van Heerden 2010). Intangibility means that
a consumer cannot see, touch or feel something when they purchase a service. When
consumers, for example, stay overnight in a hotel, they leave with nothing except perhaps
a good night’s sleep. Buying an airline ticket provides transport from one place to another
but when the activity is done, the consumer has nothing physical to show or take with
them. Banking, cell phone communication and repairs are also examples of services.

Services require a different marketing strategy to that of products. The strategies are
based on the characteristics of services, which are inseparability, intangibility, perishability,
variability and right of ownership.

1. Inseparability. The consumption and production of the service happen at the same
time. A patient need to be present to be operated on or the operation cannot be
performed.
2. Intangibility. A service cannot be touched and it is difficult for a client to predict the
outcome of the service before it has happened. Only later does a person know if
the service provider honours a contract or not. A person does not know what he
will get before the service is delivered.
3. Perishability. Products can be produced in advance and stored. Services cannot be
stored for future use. If a room in a hotel is not sold to a guest for an evening, it is
an opportunity lost.

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4. Variability. Every time a service is provided, it is different. Services depend on people
and their moods, personality and behaviour. Aspects such as friendliness, response
and a common interest can influence the service. A customer can go to the same
restaurant on separate occasions, but a different waiter or the same waiter in a
different frame of mind can result in a completely different experience.
5. Right of ownership. Services are invisible and people cannot take right of ownership
of it; it can only be experience. A product such as a house can be transferred to
a new owner. The service the estate agent provides is just for the duration of the
transaction and when the transfer is done, the service seizes to exist.
Marketing strategies for services use the extended service marketing mix, namely the
7Ps: product, price, place, promotion, people, processes and physical evidence. Most
marketers’ strategies are aimed at making the benefits of services more tangible. An
airline may, for example, emphasise their comfortable chairs, their excellent food and
the friendliness of their cabin crew.

Activity 7.2

Think about MTN or Vodacom as cell phone service providers. How would you explain
the service they provide according to the characteristics of a service?

31 Feedback

You could have explained it as follows:

• Inseparability. Only if the service is available and you want to make a call does
the service exist. If nobody needs to make a call, there will not be a service.
• Intangibility. After you made the call, you cannot show anything for it except a
good feeling if you spoke to a friend.
• Perishability. If nobody used their phones, Vodacom cannot make up for the
money they have lost. They cannot save the time to sell it at a later stage. This is
why they have special promotions for quiet times.
• Variability. Every time you or somebody else makes a call, the nature of the call
is different. Some calls are long and others are short. The real nature of this
characteristic of a service becomes clear when you have a problem and have to
go into a Vodacom shop. It depends on the Vodacom employee if you will walk
out satisfied or not.
• Right of ownership. You do not own anything more during or after you made a
call, except perhaps a good feeling – that is soon forgotten when you make the
next call.

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7.3.2 Classifying consumer and industrial products
Products can also be classified according to the type of buyer who buys it. There are
two main categories, namely business buyers and end-consumers. When businesses
buy products, it is a less emotional process and more disciplined because buyers follow
company rules. End-consumers are more emotional, there are less people involved and
they behave differently depending on the product they buy.

7.3.2.1 Consumer products

Consumer products are divided into convenience products, shopping products, speciality
products and unsought products. For each of the buying situations, consumers behave
differently and marketers have to use different marketing strategies to satisfy their own
and consumers’ needs.

(1) Convenience products

When choosing a convenience product, customers do not want to put a lot of effort into
decision making. The products have to be available where they need it and when they
need it. When buying a magazine, for example, consumers want to find the magazine
easily and not spend hours thinking about the product. This is why magazines are often
placed at till points where customer can pick up a magazine without giving it a second
thought.

Marketers are particularly interested in the buying behaviour for convenience products.
This gives them an indication of how much information and effort are required from a
customer to make a decision. Convenience products are divided into staple, impulse and
emergency products, and marketing strategies are adapted for each.

Figure 7.3: Convenience products

(2) Staple products

Examples of staple products are bread, milk and cleaning products. These products are
bought often, are used on a regular basis, and have to be available when and where
consumers need them. Consumers do not perceive major differences between the different
products or brands. Marketing strategies are used to try and differentiate the products
from those of competitors and get consumers to be loyal to their brands. An example of
such a strategy is Albany bread, with the slogan “best of both worlds”.

(3) Impulse products

Impulse products are products that consumers usually do not plan to buy before they
buy them. Examples are sweets and magazines that are available at the till point, where

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the customer waits to pay for something else. Marketers know that consumers do not
plan to buy these products and for this reason, they are highly visible and available where
consumers cannot ignore them.

(4) Emergency products

Examples of emergency products are umbrellas, batteries and plaster. Consumers usually
do not want to buy these products, but have to when they need them in an emergency
situation. For this reason, emergency products are highly available and displayed where
consumers can easily find them.

(5) Shopping products

Some products require more time for consumers to decide what they want to purchase.
When buying a new pair of shoes, a customer will fit a few different pairs before finding
the right pair that is both comfortable and in the right style. These items are classified
as shopping products because they require more effort on the part of the customer to
make a decision. Examples of shopping products are clothing, cosmetics, furniture and
appliances. Consumers buy these products less frequently and carefully think about the
price, quality and style.

Marketing strategies for shopping products include having a wide assortment of the
products and well-trained salespeople who provide customers with information and
advice on their purchase. Marketing mix decisions for these products include higher prices
than those of convenience products, advertising that focus on distinct differences from
competing products and selecting the right retailer for the product.

(6) Speciality products

When buying a speciality product, the customer puts more effort into the purchase.
Speciality products are expensive and have high value, and consumers might have an
emotional attachment to them. When buying jewellery, such as an engagement ring,
customers will shop around until they find exactly what they are looking for at the price
that they are prepared to pay.

Speciality products are distributed in exclusive stores and the more exclusive the product,
the more prestigious the retailer. The salespeople who sell the products are well trained.
The products usually have high status, such as a luxury car, and have reputations of good
quality and high performance. Glossy magazines are used for advertisements and the
uniqueness of the products is communicated.

(7) Unsought products

Unsought products are often seen as necessary “evils” in the sense that consumers may
not want to buy the product, but are obliged to do so for their “peace of mind”. Everything
we spend money on is in a sense a product, although we do not often perceive it as such.
When you give money to a car guard or to a person standing next to your window at a
traffic light, you are buying something. Have you ever thought about what you are buying?
You are buying the same thing that you buy when you purchase medical aid, insurance
or an alarm system – “peace of mind”. Purchasing unsought products usually has a very
emotional element attached to them. Marketers use these emotions to advertise and sell

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their products. Just think about the advertisement for funeral cover and life insurance that
ask you the question “Have you thought about your loved ones who will be left behind?”

Activity 7.3

After studying the previous section, summarise the key points of convenience,
shopping and speciality products in a table. Use consumer buying behaviour, price,
distribution and communication as guidelines for the summary and provide examples
of each. This will help you to do research to understand the topic even better.

32 Feedback

Your table might look like the following one. Use the table and expand on it to cover each
category in more depth.

Convenience Shopping Speciality

Consumer buying Spend little time; Search for infor- Spend a lot
behaviour buy out of habit mation; want a of time; need
specific style information
Price Low Average High
Distribution Intensive Speciality Exclusive
Communication Continuous Use salespeople Use glossy
magazines
Example Bread and milk Furniture and Jewellery and
clothing cars

7.3.2.2 Industrial products

Industrial products are purchased by well-trained buyers. The buying process is organised
according to company rules, there are more people involved and suppliers are carefully
selected. Industrial products are bought for further processing and for supporting the
manufacturing of other products.

Industrial products are classified into production goods, installations and accessories,
and supplies and services.

• Production goods. Production goods are used to manufacture final products and include
raw material, manufacturing materials and parts. The companies that sell production
goods are large and few. They sell many products at one time and usually sell directly
to industrial users. A mill that sells flour, as raw material, to a bakery is an example of

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 such a seller and buyer. Personal selling, price and services are the main marketing
factors that companies consider.
• Installations and accessories. These are products that are necessary to produce industrial
goods. Factories, buildings, machinery and production equipment fall into this category.
Installations are expensive and are bought to last for many years. Buyers take time
and carefully decide before they buy these products.
• Supplies and services. To produce industrial goods, manufacturers need supplies and
services. Supplies are used for operations, maintenance and repairs, and include
things such as cleaning material, pencils and brooms. Services and maintenance
include computer repairs, legal services, advertising consultants and window cleaners
that are usually supplied on a contract basis.

7.4 PRODUCT MIX AND PRODUCT LINES

Some consumers buy large quantities of a product at one time while others buy small
quantities. Someone who buys for a family wants large boxes of washing powder, while
a single person wants a small packet. One consumer might need hand washing powder
or machine washing powder, and others want both. All these products are available to
satisfy a specific type of consumer need. Even the colour of the flakes in the washing
powder – whether blue, red or white – is there to satisfy a consumer need.

These examples are true for almost any kind of product on the market. Marketers know
that consumers’ needs are different and changes continuously. If the marketers want to
stay in the market, they have to not only satisfy the needs of consumers but do it better
than their competitors.

Product mix and product line strategies are tools marketers use to differentiate themselves
from competitors and to satisfy the continuously changing market needs. Research and
product development enable them to do this. As the consumers’ preferences change,
so must the decisions for product lines and product mixes.

The following table will give you an idea of the mixes and lines Nivea has developed in
their Men’s Care range. You can visit their website and look at the complete range. There
are about 52 different products in the range and new products are added as the market
grows.

Table: 7.1: Examples of product mixes and lines in the Nivea Men’s Care range

NIVEA MEN’S CARE PRODUCTS

Product mixes Shower gels Aftershave Deodorants
Product lines • Cool kick • Anti-aging • Cool kick roll-on
• Pure impact • Replenishing • Silver protect
• Silver protect • Revitalising deodorant stick
• Stress protect roll-on

Source: http://www.nivea.co.za/products/mens-care

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7.4.1 Product mix decisions
A product mix is the set of product lines a company offers for sale. The Nivea company
in the above example has eight ranges in their product mix, including shower care, body
care, deodorants, and face care. Each one of these ranges has different lines that fall in a
specific range. All the products together form the product mix.

Most companies offer their customers a variety of products. The product mix can be related
or unrelated. Related products complement each other, such as a haircare provider that
sells shampoo, conditioner and hair gel. An example of unrelated products is the Jeep
Company that sells Jeep motor vehicles and Jeep clothing.

To develop a product mix, marketers make decisions about the consistency, width, length
and depth of the company’s range.

• Consistency. The consistency of the product mix refers to how closely the various
product lines are related in end use, production requirements, distribution channels
or other ways (Cant et al 2010). A consumer should, for example, be able to identify
a product as belonging to a specific company by seeing the packaging, style, quality
and design of the product.
• Width. The width of the product mix refers to the number of different lines a company
has. Mercedes Benz, for example, has accessories, finance and insurance, trucks,
busses, vans and cars. Each of these lines can be broken down into a mix that relates
to the specific line and the markets develop marketing strategies for each mix, line
and individual item in the line.
• Length. The length of the product mix refers to the total number of items in the
product lines. SA Breweries, for example, has a range of over 150 beers. The Coca-Cola
Company has 34 different items in their carbonated soft drink rage and eight in the
water beverage range. Visit Coca-Cola online at http://www.coca-colacompany.com/
history to see all the products in the Coca-Cola product mix.
• Depth. The depth of product mix refers to the number of different versions that are
offered of each product in a line. The Aquafresh line’s depth for children’s toothpaste
has three different units: Milk Teeth for 0 to 2 year olds, Little Teeth for 3 to 5 year olds
and Big Teeth for 6+ year olds.

7.4.2 Product line decisions

A product line is a group of products that are closely related because they function in a
similar manner, are sold to the same customer groups, are marketed through the same
types of outlet or fall within given price ranges (Kotler et al 2014).

You saw in the previous section that one company may have several product lines. Nivea,
for example, has ranges of body care for women and men. The amounts of product lines
companies have determine its product line width. Pick n Pay, for example, offer a large
range of products because it carries most brands that satisfy different consumer needs.

Coca-Cola offers a product line with several flavours , such as Coke Light, Vanilla, Cherry,
Coke Light Lemon and Coca-Cola. The basic product is the same, but different versions are

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available. Each of these lines has sublines, for example 500 ml, one litre, two litre bottles
and also tins. Each item is on the market to satisfy a specific consumer need.

When marketers decide on strategies for the product line, they can trade down, trade
up, or decide to expand the line both up and down.

• Trading down. This strategy involves extending a product line with products that are
less expensive and that satisfy the lower end of the market. Coca-Cola can decide to
put a 200 ml bottle on the market if they want to use this strategy. Companies that
produce prestige products use this strategy to capitalise on their image and to attract
a larger market with a product that have less features. KFC, which introduced chicken
nuggets in small portions that cost less, can be seen as an example of this strategy.
• Trading up. Companies who function in the lower end of the market will introduce a
more expensive product. When Toyota introduced the Lexus to compete with Mercedes
and BMW, they used this strategy.
• Trading both ways. Companies that want to stretch their line to cover a larger market
use this strategy. A company that manufactures refrigerators can extend their line to
include a prestigious large fridge at the one end of the line and a small bar fridge at
the other end.

7.5 PRODUCT IDENTITY DECISIONS

People are identified by their names, faces, personalities and the clothing they wear.
Products {the same as people) are identified by their attributes, brand names, packaging,
labelling and physical features. These give products distinctive identities that differentiate
them from other products and brands on the market. The brand, packaging and labels
are sometimes more important to the market than the product itself.

7.5.1 Product attributes

The benefit products provide is delivered by the product’s attributes. This includes the
quality, style, design and features of the product.

• Quality. The product quality refers to a product’s ability to perform its function. It
includes the product’s overall durability, reliability, precision, ease of operation and
repair (Kotler et al 2014). Quality costs money and the higher the quality, the more
resources are needed to produce the product. Companies have to choose a quality
level that matches the target market’s needs and expectations.
• Style and design. The style of the product refers to its appearance and the design
influences the performance of the product. Marketers need to realise that the best
looking style does not always perform the best. A good design that is developed
according to customers’ needs improve product performance and creates a competitive
advantage.
• Features. Product features include the functions of the product which is capable of
gratifying a particular consumer need and is seen as a benefit of owning the product.
It is also the characteristics that distinguish the product from others and provide the
usefulness of the product to the target market (Business Dictionary 2016b). The main

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 purpose of a cell phone, for example, is to make and receive telephone calls. Text
messaging is a basic function, but features such as camera and video are optional.

7.5.2 Branding decisions

Brand names not only identify a product but are vital because they enable companies to
command premium prices for their products. When marketers make branding decisions,
they have to decide on the type of brand, the name, the design of signs and symbols,
and the story the brand will tell.

7.5.2.1 Definitions and the nature of brands

Kotler et al (2014) define a brand as a name, term, sign, symbol or design – or a combination
of these – intended to identify the goods or services of one seller or group of sellers and
to differentiate them from those of competitors.

Each word in the definition has a meaning that marketers need to know to understand
the concept of branding.

• Branding is the process involved in creating a unique name and image for a product in
the consumer’s mind, mainly through advertising campaigns with a consistent theme.
Branding is aimed at establishing a significant differentiated presence in the market
that attracts and retains loyal customers (Business Dictionary 2016c).
• The name of a brand is the part of a brand that can be spoken, for example Toyota
and Steers. This name also has a signature, which is the distinctive way of printing the
brand name.
• The logo is the sign and the symbol is the brand mark that has a distinctive design
and communicates a product, company or organisations. For example, the Swoosh
of Nike and the Acacia tree in First National Bank’s (FNB) logo.

For names and logos, companies have copyright – the exclusive legal right to reproduce,
publish and sell the brand in order to protect the owner of the brand.

Brands differentiate products from those of competitors and make promises to customers.
Branding is beneficial for companies and customers in the following ways:

• For companies. A brand facilitates product diversification, creates a differential advantage,

enables a company to ask a premium price and helps to build loyalty from customers.
• For consumers. A brand communicates the features and benefits of a product, makes
it easier to identify, and helps consumers in the evaluation of the product and the
reduction of risks when the product is bought.

When companies brand products, they not only have to decide on a name or logo but
also on the type of brand and whether it will be unique or identify a group of products/
services. In the following section, we discuss the different types of brands.

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7.5.2.2 Types of brand strategies
Marketers have to decide if a brand will identify a specific manufacturer and if it will be
generic, unique to a specific product or part of a family of products.

• Manufacturing brands. These are also called national brands and are owned and used
by the organisation that produces the product. Toyota, Volvo and Audi are car brands.
• Private brands. These are owned by dealers such as wholesalers and retailers. Pick n
Pay has a “no name” brand. Shoprite Checkers, Spar, Edgars and most other retailers
also have brands that are not available at other retailers.
• Generic brands. Products that do not have a distinctive brand name but is only identified
by the product itself are generic brands. Tea bags, spaghetti or sweets in a plastic
rapper with no brand to identify it are examples of this. This type of branding is used
when consumers do not see big differences between the different brands and the
low-cost packaging makes it more economical for them to buy.
• Individual brands. Individual brands are used when a manufacturer wants a product
to be unique and different, for example a company that produces perfumes will give
each smell a unique name, bottle and packaging. Revlon, for example, sells Red Door
perfume.
• Family brands. Family brand names are assigned to product mixes and lines. Nestlé
has baby food products, coffee, sweets and dairy products that all identify the Nestlé
family to which it belongs.

When companies decide on the type of brand, they have to consider how it will fit in
with the rest of their product lines and mixes. The risks involved for their reputation if
something goes wrong with one of the products or brands are also a serious consideration.

7.5.3 Packaging decisions

Marketers know the power of good packaging to create instant recognition from
consumers. Packaging decisions involve the design and production of the container in
which the product will be sold and stored. The package design should link the product
and brand with other products and brands of the company. Poorly designed packaging
can damage a company’s image and result in breakages, problems for consumers and
loss of sales.

Packaging adds value to a brand through its appearance, functionality and re-usability.
There are many functions for packaging, including:

• Protection. Packaging protects and encloses a product when it is transported, stored,

handled and used. For example, the shelf life of milk is extended for 15 to 20 days
by using packaging that adequately protect it from light and oxygen (Griffiths 2010).
• Distribution. Different size packages enable products to be transported and stored
according to the specific needs of transport facilities, wholesalers, retailers and
consumers. For consumers, toothpaste is packaged in a tube; for retailers, it is packaged
in boxes; and for shipping, it is packed in crates.

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• Communication. A package is often the last advertisement a customer sees before
buying a product. The packaging communicates the product, brand and image of
the company to consumers.
• Differentiation. The design, brand name, colour and labels on the packaging differentiate
the product from other companies’ products. Consumers should be able to identify
FMCGs in a self-service store such as Spar in a matter of seconds, otherwise a competitor’s
product will be bought.
When marketers evaluate packaging to see if it is a good package, they use the VIEW
model. VIEW is the acronym for visibility, information, emotional appeal and workability
(Shrimp & Andries 2013; Akabogu 2013).

• Visibility. This refers to a package’s ability to attract attention. This includes the colours,
graphics, size and shape of the package.
• Information. This includes all the product information, such as the ingredients, product-
usage instructions, claimed benefits and warnings on the package.
• Emotional appeal. This refers to the package’s ability to evoke a desired feeling or mood
from a consumer so that he or she wants to buy the product. It includes thought and
emotions such as elegance, prestige, fun or nostalgia.
• Workability. This refers to the functionality of the package. Protection, storage, simplicity
of use, retailers’ handling and environmental friendliness are aspects that are evaluated
with workability.

7.5.4 Labelling decisions

A label identifies a product and describes aspects of the product. It is important that
consumers know when the product was produced and what the expiry date of the product
is. A label should communicate which company made the product, where it was it made,
what the content of the product is and how to use it.

Labels not only provide information about a product, but are used to position the
product in the minds of consumers, differentiate it from those of competitors and use
it as a promotional tool. Words such as “New” or “20% free” are powerful promotional
tools on a product.

Labelling decisions not only include positive aspects to promote a product, but also
legal concerns such as health and safety instructions. Labels can be used to protect the
organisation against prosecution or civil liability. It is important that marketers ensure
that their labels contain all the necessary information required by consumers and the law.

Activity 7.4

For a fun exercise, visit http://www.quiz-magic.com/quiz/105/451/Identify_the_

brandlogo and see how many of the brand logos you can identify. You can find more
brands and logos at http://www.logospike.com/logo-quiz-level-2-1024.

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33 Feedback

How many of the brands could you identify? Did you mainly identify car brands such
as Toyota, Volvo and Mazda; clothing brands such as Puma and Nike; or technological
brands that relate to computers and the internet?

7.6 NEW PRODUCT DEVELOPMENT

New products enter the market on an almost daily basis. This is due to the rapid changes in
technology, consumer tastes, competition, and pressure to produce environment=friendly
and energy=sufficient products. Companies that want to stay competitive have to conform
and develop new products. Toyota, for example, introduced three hybrid models: Prius,
Camry Hybrid and Highlander Hybrid.

New product development relates to the development of original products, product

improvements, product modifications and new brands through the company’s own
research and development efforts (Kotler et al 2010).

7.6.1 Types of new products

To develop new products, companies need to know the marketplace and understand the
different categories of new products in terms of how they are perceived by the business
and by consumers. New product development is expensive, risky and the failure rates
are very high.

Types of new products are:

• New to the world product. These products are entirely new and the riskiest to produce
because they are new to the market as well as to the company.
• New to the marketer products. These products are already available on the market and
the company decides to also produce it in order to compete against competitors in
the market. A company can also enter into a whole new industry or type of product
that is not related to its current range of products. Nokia, for example, used to be in
the forestry industry and then moved into communications and cell phones.
• Line extensions. Line extensions are produced to fill a gap in a company’s product line
or mix. (The strategies were discussed in Section 7.4.)
• Repositioned products. These products are already in the market and satisfy a specific
need of the market segment. A company that uses this strategy identifies another
segment, for example, consumers whose needs can be satisfied with the same or
similar products. Nivea used this strategy when they developed their Men’s Care
product range.
• Improved products. This is the least risky and involves changes to existing products
that provide better performance and greater perceived value to consumers.

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No matter which type of new product the company develops, there are always risks
involved and they need to have a systematic new product development process and plan.

7.6.2 New product development process

The new product development process follows logical steps that start with a systematic
search for new ideas. The following figure gives an overview of the steps of the process.

Figure 7.4: The new product development process

Step 1: Idea generation

To stay competitive, companies have to search for new product ideas on a continuous
basis. The objective of this step is to generate as many ideas as possible. It is about quantity,
not quality. The screening of the ideas is done at a later stage.

Ideas come from many sources. The research and development department can do
surveys and focus group interviews, and look at customer comments on blogs. Companies
can do basic research by conducting a SWOT analysis and analysing market trends and
competitors to get ideas for new products. Employees and top management are also
sources and a technique such as brainstorming can be used to get ideas.

Step 2: Idea screening

Ideas that are not feasible are eliminated during this step. The objective is to eliminate
impractical concepts before resources are allocated to them. The ideas are assessed to
see if they will fit the strategic plans of the organisation and satisfy its needs.

The following questions are asked to screen an idea:

• Will consumers benefit from the product?

• What is the size and growth forecasts for the market?
• What will competitors’ reactions be?
• Is it technically feasible to manufacture the product?
• Will the product be profitable?

Step 3: Concept development

In this step, the selected ideas are developed into concepts. A concept is a detailed
description of the possible product and how consumers will perceive the idea. At this
stage, the idea is still on paper and a product is not made yet. Techniques such as CADCAM
and computer-aided designs are used to simulate a real product and to aid in testing the
concept.

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Step 4: Market strategy development
The next step is to develop an initial marketing strategy based on the product concept.
The target market has to be described, how the product will be positioned in the target
market and how it will be differentiated from competitors’ products. Aspects such as
market share, sales and profit goals should be estimated and possible strategies for price,
distribution and communication have to be decided.

Step 5: Business analysis

A new product has to add value to the company, and a business analysis is done to
see if and how much value the proposed new product will add. The business analysis
includes reviews of the revenue, cost and profit. The viability to produce the product,
space, storage, labour and mechanical requirements must be included in the analysis.
Everything that has an impact on the cost of producing the product and maintaining it
has to be considered. A breakeven analysis has to be done to see if the product will be
financially attractive, when it will start to make a profit and if it meets the requirements
of the business.

Step 6: Product development

Up to this stage, everything is on paper and a physical product now has to be produced.
The research and development department turns the idea into a workable product that
undergoes rigorous testing to ensure the performance and safety of the product. Marketers
then test the product with actual consumers. The product must have the functional
features that were intended and communicate the characteristics that were planned.

Step 7: Test marketing

After successful product testing, the product and the proposed marketing programme are
ready to be tested in a real marketing setting. The product is offered in a limited geographic
area for a limited period. The aim of test marketing is to establish if consumers will buy
the product in a competitive environment and to identify changes to the marketing
programme.

Elements of the marketing programme (such as the price, distribution and marketing
communication) are tested and changed if necessary. Research on the target market’s
perception and attitude about the features are done to identify any product improvements
before the product is launched in the total market.

Step 8: Commercialisation
This is the final step of the new product development process. The product is now ready
to enter the market and the marketing department starts with strategies to launch the
product. The main alternatives for launching a product are an immediate national launch
and a rolling launch.

• Immediate national launch. When this strategy is used, the product is made available
at the same time in all the geographic areas, outlets and target markets. An advantage
of this strategy is that marketing communications can be focused and the launch has
a greater impact. A disadvantage of the strategy is that if anything goes wrong, it will
take a lot of time to erase the impressions that were made.

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• Rolling launch. With this strategy, the new product gradually enters new geographic
areas and outlets. This enables marketers to make changes to the marketing mix as
the product is rolled out to the total market.

Marketers have to consider the timing of the launch, product and place, advertisements,
promotions and distribution. Commercialisation is also the stage of the product life cycle
when the product is introduced into the market. The product life cycle is discussed next.

7.7 PRODUCT LIFE CYCLE

A product has a life cycle with stages that have specific characteristics. When a product is
launched, it is born in the introduction stage of the product life cycle. During this stage,
when it is young, it needs a lot of care before it starts to grow. In the growth stage, it
draws the attention of competitors and consumers, in the same way that teenagers and
young adults get attention from friends and enemies. Eventually, the product reaches
maturity, when friends (consumers) are hopefully loyal and enemies (competitors) stable
and few. In old age, friends move away and the product starts to decline until it is taken
from the market.

Some products go through the stages rapidly and have short life cycles. Cell phones and
computers are good examples of short life cycles, because a consumer can buy the best
and the fastest product one day and discover the next day that there is already something
better and faster. Other products, such as Coca-Cola, stay in a certain stage for a long
time and will still be on the market for years to come.

Each of the stages (introduction, growth, maturity and decline) has its own characteristics
and strategies that guide marketers in their decision making. The characteristics of the
stages relate to changes in consumer demand and competitors’ activities that influence
revenue, profit and cost over time. Marketing decisions for product, price, place and
communication are adapted as the characteristics change. These factors can be seen in
the figure below. Use it to guide you when you study the characteristics and strategies
used at each stage.

Figure 7.5: The changes in revenue, profit, cost and time during the product life cycle
Source: Kotler and Armstrong (2012:274)

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7.7.1 Introduction stage
This is the first stage after development. During this stage, the product is established
and launched into the market. The characteristics and strategic decisions are as follows:

• Consumer demand and sales. Consumers do not know about the product and the first
few innovators start to buy it. Marketers focus on providing information and building
awareness to increase consumer demand for the product.
• Competitor activities. There are only a few competitors at this stage and it gives marketers
time to sort out problems and make changes to the product. The competitive strategy
is to build a leadership position in the market.
• Profit and cost. Profits are negative because of the low demand and high cost per unit
sold. A lot of money is spent on promoting the product and getting distributors, such
as retailers, to keep the product in stock.
• Product decisions. A basic product is on the market and the task of marketers is to fine-
tune the product. Extensions such as extra product lines and mixes are not developed
yet.
• Price decisions. Marketers have to decide between a high and a low price. A high price
will cover the high costs involved, but fewer people will buy the product. A low price
might increase demand and draw more consumers to buy the product.
• Distribution (place decisions). At this stage, a select few distributors carry the product.
The marketers’ tasks are to get retailers and wholesalers to carry the product and
keep inventory.
• Communication (promotion) decisions. Advertising and promotions are used to provide
information to make consumers aware of the product and to get them to try it.

7.7.2 Growth stage

If the first consumers are satisfied, they will buy more and talk about the product. When
this happens, more people start to buy, sales increase and the product moves into the
growth phase. The characteristics and strategic decisions in the growth stage are:

• Consumer demand and sales. Consumer demand increases and sales start to climb at
a rapid rate.
• Competitor activities. Competitors identify an opportunity and new competitors enter
the market. All the competitors have strategies to get the biggest share of the market
and the original product company has to defend their market position.
• Profit and cost. Profit increases because of increased sales, the average cost per product
sold that decreases and the learning curve the company has gone through.
• Product decisions. New product lines and mixed are developed to satisfy the growing
needs of the market and attributes such as quality, design and features are improved.
• Pricing decisions. The growth in sales and more competitors result in lower prices in
order to penetrate the market and increase market share.
• Distribution (place decisions). Distribution increases, as more retailers and wholesalers
are keeping inventory to satisfy the growing demand. Intensive distribution is built
at this stage.

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• Communication (promotion) decisions. Advertising focuses on the brand and getting
consumers interested in a specific brand instead of that of competitors.
All of the above strategies are used to establish a dominant position in the market and
to keep the product in the growth phase for as long as possible.

7.7.3 Mature stage

Eventually, when most new customers have bought the product and growth starts to slow
down, the product enters the mature stage. The characteristics and strategic decisions
in the mature stage are as follows:

• Consumer demand and sales. The majority of consumers have already bought the
product, and sales growth and consumer demand level off. Most sales are due to repeat
purchases and replacements, and only a few new customer remain in the target market.
• Competitor activities. Due to the slowdown in new sales, the competition is intense.
Overcapacity results in sales promotions and marking down prices. Weaker competitors
leave the market, until only the well-established competitors are left.
• Profit and cost. Due to the marking down of prices, profit initially drops. When the
market is stabilised, profits are high because of the cost per product sold that is low.
• Product decisions. The research and development department modifies the product
into a better product to increase the consumption of the product.
• Pricing decisions. Competitors’ prices influence pricing decisions and the marketers’ aim
is to match or have a better price than the competitors. Value for money is important
at this stage.
• Distribution (place decisions). Marketers build more intensive distribution, with the aim
of making the product widely available.
• Communication (promotion) decisions. Advertising and promotion are used to increase
the consumption of the product. Advertising focuses on the benefits of a specific brand.
Promotions are aimed at getting consumers to change from buying the competitor’s
brands.
For some products, the mature stage lasts a long time. Levi’s is is known for high-quality
denim jeans that have been on the market since 1853 and Cartier watches have been on
the market since 1847 (Vijay 2015).

7.7.4 Decline stage

In this stage of a product’s life, market saturation is reached. The decline might be slow
and last for many years. When new technology enters the market, the decline of old
technology can be fast. The characteristics and strategic decisions are as follows:

• Consumer demand and sales. Consumer demand starts to decline as consumers’ tastes
change. This results in a decrease in sales.
• Competitor activities. A decline in sales leads to competitors withdrawing from the
market.
• Profit and cost. Profit declines and the company tries to keep the cost per consumer low.

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• Product decisions. Weak products are phased out to apply resources to more profitable
products. The management have to decide whether to maintain, harvest or drop each
of the declining products (Kotler & Armstrong 2012).
• Pricing decisions. Prices are cut, but companies are careful not to start a price war.
• Distribution (place decisions). Retailers fill shelf space with more profitable products.
Unprofitable distributors are phased out and selective distribution strategies are again
used.
• Communication (promotion) decisions. Advertising and promotions are reduced to a
minimum. The advertising and promotion budgets are cut to rather spend money on
products that can be more profitable for the company.
At a certain time, the management have to decide to withdraw the product from the
market. To keep a weak product is not good for the company’s image. Marketers must
constantly be aware of each stage of the life cycle so that they can implement the most
appropriate marketing plan at each stage.

7.8 SUMMARY
In this study unit, we discussed all the decisions involved in developing
the product element of the marketing mix. The definition and nature of
the product, which included the product concept, were discussed first.
Thereafter, the different product classifications that guide marketers in their
decision making were discussed. These product classifications are based
on the durability of the product and whether the product is a consumer or
industrial product. Next, we explained the marketing decisions that identify
a product (namely the attributes, brand, packaging and labelling).
The last two sections covered new product development and the product life
cycle. We briefly discussed the eight steps of the new product development
process. Lastly, we discussed the characteristics (such as changes in sales,
competition, profit and cost) and provided strategies for the marketing mix
elements (product, price, place and promotion).
In the next study unit, we discuss the decisions marketers have to make
when they decide on the price of a product.

7.9 CASE STUDIES AND QUESTIONS

The following case studies are in the form of an activity. Do the activity and answer the
questions that follow.

Activity 7.5

Some of the world’s best-known brands and case studies were selected for this activity.
Watch the following videos on YouTube that cover the product life cycles of Coca-
Cola, McDonald’s and the Barbie doll.

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 • Coca-Cola: https://www.youtube.com/watch?v=SgZUaLTSAQI – 128 Years of Coca-
Cola’s history in 2 minutes (2014).
• McDonald’s: https://www.youtube.com/watch?v=wcawawyVzYo – 75 years of Mc-
Donald’s marketing in two minutes.
• Barbie Doll: https://www.youtube.com/watch?v=_lvM8v36kTs (Abaya 2013). The
product life cycle of a Barbie doll. This video was selected to provide you not only
with information about the product life cycle, but also to give you insight into the
manufacturing and distribution of a product. When you watch the video, do not
think that it is a doll’s life cycle; it could be the life cycle of any product (a car, a cell
phone or a piece of clothing).

Questions
(1) Can you identify all the aspects of the product discussed in this study unit that
are practically demonstrated in the videos?
(2) Did you notice how the brands and products changed during their life cycle,
from development to the stage in which they are currently?
(3) What are the major issue currently regarding product development?

34 Feedback

Coca-Cola: This video is about the brand evolution of Coca-Cola since 1886. The origin
of the brand, the signature and the unique bottle packaging that was designed to even
be recognised in the dark are shown. The video shows the influence Coke has had on
societies and the symbols that have meaning for us. For example, the way we see Santa
Claus was cemented by a Santa Claus in a Coke advertisement. Expanding the Coke range
in the 1980s into the diet soda market with Diet Coke is discussed. It also covers the lesson
Coca-Cola has for businesses, namely not to change a well-known brand with the “New”
and “Classic” Coke disaster they had. The brand message is that Coke is associated with
shared experiences, happiness and positivity. In the past decade, sales have declined
because consumers have become more health conscious. Obesity and healthy living are
issues they have to face for the future.

McDonald’s: The video shows the McDonald’s brand evolution from 1940 to the present.
How marketing communication changes messages, such as the success they had with
Ronald McDonald, is shown. Product changes, for example, the 1979 introduction of the
happy meal and cheap tasty meals are shown as well as other changes that was made
to their menu and contributed to their success. In 2004, the obesity crisis started with the
negative effects of the supersize menu and society put pressure on McDonald’s to market
a healthier happy meal. In 2014, McDonald’s sales declined steeply. The question that is
asked is whether McDonald’s can keep on reinventing itself in a health-conscious world.

Barbie Doll: The video shows the product life cycle of a Barbie doll from the creation of
the doll in 1959 up to today. It is estimated that a Barbie doll is sold every three seconds
somewhere in the world. Product development, prototypes and the manufacturing process
are discussed. The video also shows the different lines and mixes the company has in the
Barbie doll range. These include the Pink, Silver, Gold and Platinum labels that range from
economical to the exclusive Platinum label with only 1000 produced per doll style. The
prices and costs are also discussed to give you some insight into the profits and expenses.
Controversies, such as the unrealistic figure of the dolls which led to changes in the doll’s
waistline, are mentioned. The manufacturing section explains that Barbie dolls have

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 never been manufactured in the US. The only part of the doll that is made in the US is the
cardboard packaging in which the doll is sold. Environmental pressure forced Martel, the
owning company, to switch to more eco-friendly packaging materials. Lastly, the video
shows the final stage of the doll’s life cycle. The doll can become a collector’s item for the
owner or end up in the trash. The latter is an environmental problem, with almost one
billion Barbie dolls sold annually. This is a problem Martel has to address in the future.

From the above examples, it can be seen that it is not only the brand and the product
design, lines and mixes that contribute to a brand’s success but also the marketing
communication (such as creative advertising) that plays a role.

7.10 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. Do you have a clear understanding of the decisions that have to be taken when
products are developed? Do you understand the definition of a product and the
product concept?
2. Do you have a practical understanding of how marketers classify products according
to durability and into consumer and industrial products? Can you explain the
characteristics of a service?
3. Can you explain the different aspects of a product’s identity? Would you be able
to explain the different types of branding, how packaging is evaluated and what
marketers need to include when they make labelling decisions?
4. Do you understand the different stages of new product development and of the
product life cycle? Can you explain the characteristics and decisions marketers make
in each stage of the product life cycle?
5. What did you find interesting in this study unit? Why?
6. How long did it take you to work through this study unit? Are you still on schedule
or do you need to adjust your study programme?

7.11 REFERENCES
Abaya, L. 2013. The product life cycle of a Barbie doll. https://www.youtube.com/watch?v=_
lvM8v36kTs (accessed 1 February 2017).
Akabogu, OC. 2013. Application of the “VIEW” concept of packaging in evaluation of
promotional effectiveness. Business Management Dynamics 3(1):47–57.
Armstrong, G & Kotler, P. 2015. Marketing: An introduction. 12th edition. Essex: Pearson
Education.
Business Dictionary. 2016a. Durability. http://www.businessdictionary.com/definition/
durability.html (accessed 23 December 2016).
Business Dictionary. 2016b. Product features. http://www.businessdictionary.com/defini-
tion/product-feature.html : (accessed 26 December 2016).
Business Dictionary, 2016c. Branding. http://www.businessdictionary.com/definition/
branding.html (accessed: 2 January 2017).

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Cant, MC & Van Heerden, CH. 2010. Marketing management: A South African perspective.
Cape Town: Juta.
Cant,M.C, et al 2010 Essentials of Marketing: CapeTown: Juta& Co., The other co-authors
are Strydom,J, Brink,A., Jooste, C,. Machado, R.,
Coca-Cola. 2014. 128 Years of Coca-Cola’s history in 2 minutes. https://www.youtube.com/
watch?v=wcawawyVzYo (accessed 21 January 2017).
Coca-Cola Company History. [Sa]. http://www.coca-colacompany.com/history (accessed
21 January 2017).
Griffiths, MW (ed). 2010. Improving the safety and quality of milk: Improving quality in milk
products. New York: CRC Press.
Kotler, PT & Armstrong, G. 2012. Principles of marketing. 16th edition. Upper Saddle River,
NJ: Pearson Education.
McDonald’s. 75 years of McDonald’s marketing in two minutes. https://www.youtube.
com/watch?v=wcawawyVzYo (accessed 19 January 2017).
Nivea: Men’s care range. http://www.nivea.co.za/products/mens-care (accessed 19 De-
cember 2016).
Shrimp, TA & Andres, JG. 2013. Advertising, promotion and other aspects of integrated mar-
keting communication. 9th edition. Mason, OH: South-Western Cengage Learning.
Vijay, P. 2015. The oldest fashion brands in the world. http://www.onceagainstore.com/
blog/ten-oldest-fashion-brands-in-the-world/ (accessed 18 January 2017).

7.12 SELF-ASSESSMENT QUESTIONS

Question 1
The level of a product that satisfies consumers’ need to know how a product is used is
the … .
(1) core product
(2) tangible product
(3) augmented product
(4) product image

Question 2
Which of the following product classifications are based on the buying behaviour of
consumers?
(a) durable products
(b) non-durable products
(c) convenience products
(d) shopping products
(e) speciality products
(1) a b c
(2) c d e
(3) a b e
(4) b c d

Question 3
Which of the following is not a characteristic of a service that marketers use to differenti-
ate product from services?

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(1) inseparability
(2) invisibility
(3) perishability
(4) variability

Question 4
Products that are displayed close to till points to draw a customer’s attention are called
… products.
(1) convenience
(2) staple
(3) impulse
(4) emergency

Question 5
The total number of items in the product line of a company is its ... .
(1) consistency
(2) width
(3) length
(4) depth

Question 6
Spar realises that the price of coffee increases continuously and decides to put an eco-
nomical plastic bag of coffee on the market. The product is only labelled as Coffee and
strong, mild or light, and has a small Spar emblem in the corner of the packaging. Which
brand strategy is this?
(1) private brand
(2) generic brand
(3) individual brand
(4) family brand

Question 7
Select the combination of alternatives that best reflect the main uses of packaging.
(a) Communicate aspects of the product.
(b) Protect the product.
(c) Make it easier to store and transport the product.
(d) Make it easier to use the product.
(1) a b c
(2) b c d
(3) a c d
(4) a b d

Question 8
The VIEW model is used to evaluate packaging. Which one of the factors in the model
do marketers evaluate when they want to know what consumers think when they see
a package?
(1) information
(2) emotional appeal
(3) visibility

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(4) workability

Question 9
When companies want to protect themselves against prosecution or civil liability, they
can do it with … decisions.
(1) quality
(2) style and design
(3) feature
(4) labelling

Question 10
During which stage of the new product development process does the management look
at the value which the proposed new product will add to the organisation?
(1) idea testing
(2) test marketing
(3) concept development
(4) business analysis

Question 11
In which stage of the new product development process will marketers ask whether it is
technically feasible to manufacture the product?
(1) idea screening
(2) concept development
(3) business development
(4) product development

Question 12
In which stage of the product life cycle does advertising messages focus on providing
information about the product?
(1) introduction
(2) growth
(3) maturity
(4) decline

Question 13
In which stage of the product life cycle will marketers mark prices down to get rid of
overcapacity?
(1) introduction
(2) growth
(3) maturity
(4) decline

Question 14
in which stage of the product life cycle does marketers want their product to stay for as
long as possible?

(1) introduction
(2) growth

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(3) maturity
(4) decline

Question 15
What are the main reasons why marketers have to continuously develop new products?
(a) changes in consumer taste
(b) competitor pressure
(c) environmental pressure
(d) technological changes
(5) a b c
(6) b c d
(7) a c d
(8) a b c d

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Study unit 8
Distribution decisions
Contents
Introduction
Overview
Key concepts
Definition of a distribution channel
8.2 Distribution channel participants
8.3 Industrial distribution channels
8.4 Distribution channel strategy
8.4.1 Market factors
8.4.2 Product factors
8.4.3 Producer factors
8.5 Distribution structure decisions
8.5.1 Levels of distribution intensity
8.6 Channel activities or functions
8.7 Functions and activities performed by intermediaries
8.7.1 Intermediaries resolve discrepancies
8.7.2 Intermediaries close gaps and provide utility
8.7.3 Distribution activities
8.8 Channel management
8.8.1 Cooperation and conflict
8.8.2 Potential channel conflict
8.9 Physical distribution (logistics)
8.10 Cross-section of the physical distribution system
8.11 Managing the components of physical distribution
8.11.1 Transportation
8.11.2 Warehousing
8.11.3 Inventory control
8.11.4 Materials handling
8.11.5 Order processing
8.11.6 Customer service
8.12 Supply chain management
8.12.1 Definition
8.13 Franchising
8.13.1 Definition
8.13.2 How franchising works
8.13.3 Advantages and disadvantages of franchising for the franchisor
8.13.4 Advantages and disadvantages of franchising for the franchisee
8.13.5 Services provided by the franchisor to the franchisee
8.14 Vertical Marketing system arrangements
8.15 Summary
8.16 Case Study with Questions
8.17 Reflection
8.18 References
8.19 Self-assessment questions

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OVERVIEW
Distribution decisions within the marketing mix are aimed at getting the product to the
target market (that is, to the place where the consumer buys the product). If the product
is not available where the consumer wants it, the company will most likely not survive.
Think about how many times you would go to a lot of trouble to get a particular brand
– very rarely. This is the reason why even before the product is ready for the market,
the management must decide on the methods and routes they will use to get it there.
This entails establishing strategies for the products’ distribution channels and physical
distribution. Distribution decision making starts with identifying the characteristics of the
product/service and the different target markets or segments to be served. The ultimate
aim is to make the right products and services available in the right quantities, at the right
time, in the right place, and when and where the customers want them.

A distribution channel usually consists of producers, consumers and any intermediaries

that are aligned to provide a means of transferring title or possession of a product/service
from the producer to the consumer. The participants are selected on their ability to satisfy
consumers in terms of product availability, convenience, price, location and after-sales
service. The various participants are, in a sense, customers of one another. The chosen
channel structure should enhance customer satisfaction and support, the marketing
objectives of each participant and distribute the product efficiently by minimising the
total distribution costs. Finally, the nature of the product (such as its perishability unit
value, handling characteristics, technical complexity and standardisation) may lend itself
to a particular type of distribution channel.

LEARNING OUTCOMES

On completion of this study unit, you should be able to

• distinguish between the different types of participants in the distribution channel
• discuss distribution channel design
• identify and discuss various distribution channel activities
• critically examine distribution channel management
• appraise physical distribution
• evaluate customer service
• analyse the supply chain and the value chain
• investigate distribution channels for services
• explain import and export channels
• discuss franchising
• understand vertical distribution systems or multilevel distribution

KEY CONCEPTS
• distribution
• distribution channels
• channel strategy

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 • channel management
• physical distribution
• customer service
• supply chain management
• franchising
• vertical marketing systems

8.1 DEFINITION OF A DISTRIBUTION CHANNEL

The word “distribution” refers to the methods or ways that are used to bring the product
within reach of the consumer.

A distribution channel is the way in which a firm sells its products, including all the parties
that play a part in the process, from the production of the products to the end-user or
final consumer. It usually consists of producers, consumers and any other intermediaries
that provide a means of transferring a product/service from the producer to the consumer.
For example, from the manufacturer Tiger Brands to the wholesaler Makro to the retailer
spaza shop to Thembie the consumer.

Every producer has to decide on the distribution channel to use in order to get the product
to the consumer. This is called the distribution decision. The main aim of the distribution
decision is to make the right products and services available in the right quantities, at
the right time and in the right place – in other words, when and where the customers
want them.

The distribution decision starts by identifying the characteristics of the product/service

and the target market to be served, and then the distribution channel participants are
selected.

8.2 DISTRIBUTION CHANNEL PARTICIPANTS

The following figure shows the different distribution channels for consumer products.

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Figure 8.1: Distribution channels for consumer goods
Adapted from Lamb, Hair, McDaniel and Mason (2015)

A wholesaler is a business that sells goods to other businesses (such as retailers) and
industrial, institutional or commercial users, which then resell those goods to the end-user.

A retailer is a business that conducts all the activities of selling goods and services directly
to customers for their personal, non-business use.

Activity 8.1

(1) Name the various distribution channels that you have learned about.
(2) In the above diagram, identify the various distribution channel participants and
explain their role in the system.
(3) Give an example of each distribution channel participant that you have identified.

35 Feedback

(1) The major distribution channels are:

• producer to consumer
• producer to retailer to consumer
• service producer to agent to consumer
• producer to wholesaler to retailer to consumer
• Producer to wholesaler to agent to wholesaler to retailer to consumer

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 (2) The various distribution channel participants include:
• A wholesaler is a business that sells goods to other businesses (such as retailers)
and industrial, institutional or commercial users, which will then resell those
goods to the end-user.
• A retailer is a business that conducts all the activities of selling goods and services
directly to customers for their personal, non-business use.
(3) Examples of distribution channel participants:
Wholesaler: Makro and Jumbo
Retailer: Pick n Pay, Woolworths and Game

Note: You should be able to identify and list the different distribution channels and
the various participants in each channel.

8.3 INDUSTRIAL DISTRIBUTION CHANNELS

According to Cant (2013), there are two ways to analyse industrial distribution channels.

1. Focus on the basic flow of industrial materials between manufacturers and end-users.
In this instance, end-users are not regarded as an end-consumer who purchases
a product for himself/herself or his/her household. End-users may range from
manufacturers, producers and processors to resellers. The goods distributed in such
a channel may be iron ore, limestone, cement, tools and so on.
2. Focus on the network of intermediaries involved in processing of raw materials
into eventual consumer goods. The network includes producers (such as farmers
or cotton growers), processors (such as yarn spinners), wholesalers (such as clothing
wholesalers) and retailers (such as clothing stores).
The outcome is that the consumer has a wider choice, which may range from buying cotton
for sewing purposes or buying a shirt or other clothing item from a retail clothing outlet.

Another measure of the effectiveness of the distribution channel is the value added by
each participant.

8.4 DISTRIBUTION CHANNEL STRATEGY

There are two major decisions to make in devising a channel strategy (Cant 2013; Lamb et
al 2008): the structure of the distribution channel and the level of distribution intensity.
The structure of the distribution channel is affected by various factors that impact one
another, including elements of the marketing mix, the availability of resources and
environmental factors.

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8.4.1 Market factors

8.4.1.1 Target market

The most important considerations are those affecting the target market. Marketing
managers must ask the following questions:

• Who are the potential customers

• What do they buy?
• When do they buy?
• How do they buy?

8.4.1.2 Industrial consumers

The choice of channel also depends on whether the producer is selling to customers or
industrial consumers, because their buying patterns are very different in terms of quantity
as well as the customer service required.

8.4.1.3 Geographic location

As a rule, if the target market is concentrated in one or more specific areas, direct selling
through sales personnel is appropriate; whereas, where markets are geographically more
widely dispersed, intermediaries are the less expensive option.

8.4.1.4 Market size

Generally: the larger the market, the more the required intermediaries.

8.4.2 Product factors

8.4.2.1 Product complexity

Products that are more complex, customised and expensive (such as jewellery) tend
to benefit from shorter and more direct distribution channels and sell better through
a direct salesforce. Examples include aircraft, scientific instruments, pharmaceuticals
and mainframe computers. However, the more standardised a product is, the longer its
distribution channel can be and the greater the number of intermediaries that can be
involved. For example, the process of manufacturing chewing gum is about the same from
producer to producer, except for the shape and flavour. Chewing gum is also inexpensive
and as a result, the distribution channel tends to involve many wholesalers and retailers.

8.4.2.2 Product life cycle

The choice of a distribution channel also depends on what stage the product is at in its
life cycle. The choice of the channel may change over the life of the product. As products

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become more common and less intimidating to potential users, producers tend to look
for alternative channels of distribution.

8.4.2.3 Product delicacy

Perishable products such as vegetables and milk have a short life span, and fragile products
such as china and crystal require minimum handling. Therefore, a fairly short distribution
channel will suit both.

8.4.3 Producer factors

1. Availability of resources. In general, producers with large financial, managerial and
marketing resources are better able to use direct channels. Smaller, weaker firms
must rely on intermediaries to provide these services for them.
2. Number of products. Compared to producers with only one or two product lines,
producers that sell several products in a related area are able to choose channels
which are more direct. Sales expenses can be spread over more products.
3. A manufacturer’s desire to control pricing, positioning, brand image and customer
support also tends to influence channel selection.

8.5 DISTRIBUTION STRUCTURE DECISIONS

8.5.1 Levels of distribution intensity

Marketers have three basic distribution options to choose from. The best channel system
should achieve the desired market exposure. Ideal exposure may be intensive, selective
or exclusive (Cant 2013).

8.5.1.1 Intensive distribution

Intensive distribution is selling a product through as many suitable wholesalers or retailers
as possible that will stock and sell the product (Cant 2013).

It is aimed at maximum market coverage. The marketer tries to have the product available
in every retail outlet where potential customers might want to buy it. If buyers are unwilling
to search for the product, the product ought to be easily accessible to buyers. This is true
of most convenience products such as milk, bread or cooldrinks. Therefore, a low value
product that is purchased frequently may require a lengthy distribution channel (Lamb
et al 2015).

8.5.1.2 Selective distribution

Selective distribution is selling only through those middlemen who will give the product
special attention (Cant 2013). It is achieved by screening retailers to eliminate all but a few
in any single geographical area so that customers seek out the product. Several screening

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criteria are used to identify the right dealers. An accessory equipment manufacturer such
as Pineware may seek a company that is able to service its products properly; a television
manufacturer such as Samsung may look for service ability and quality dealer image. If
a manufacturer expects to move a large volume of merchandise through each dealer, it
will choose only those dealers that seem able to handle such volumes. As a result, many
smaller retailers may not be considered.

8.5.1.3 Exclusive distribution

Exclusive distribution is selling through only one middleman in a particular geographic
area.

It is the most restrictive form of distribution, and involves only one or a few dealers in
a given area. Usually, buyers have to search or travel extensively to buy the product. As
a result, exclusive distribution is usually confined to consumer speciality goods, a few
shopping goods and major industrial equipment. The objective of limited distribution
is to limit the availability of the product to a very small number of locations (Cant 2013;
Lamb et al 2015).

Table 8.1: Distribution intensity strategies

Exclusive Selective Intensive

Characteristics
distribution Distribution distribution
Objectives Prestige image, Moderate market Widespread market
maximum channel coverage, solid coverage, channel
control and dealer image, some acceptance, high
loyalty, price channel control volume sales
stability and high and dealer loyalty, but lower profit
profit margins good sales and margins
profits
Distribution Few in number, Moderate in Many in number, all
intermediaries well-established, number, well- types of companies
reputable established, (outlets)
companies better companies
(outlets) (outlets)
Customers Fewer in number, Moderate in Many in number,
trendsetters, number, brand convenience
higher income, conscious, oriented
willing to travel to somewhat willing
store, brand loyal to travel to store
Marketing Personal selling, Lower level of Mass advertising,
emphasis pleasant shopping personal selling, nearby location,
conditions, good pleasant shopping items in stock, buy
service, price not conditions, good on price
very important service, price of
some importance

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 Major disadvantage Limited sales May be difficult to Limited channel
potential carve out a niche control
Examples Automobiles, Furniture, clothing, Household
designer clothes, mechanics’ tools, products, groceries,
capital equipment, industrialised office supplies,
complex services services routine services

Source: Lamb et al (2015)

Activity 8.1
Consider the following brands. Under which of the three levels of distribution above
does each of these brands fall and why?
(1) Porsche
(2) Albany bread
(3) Land Rover
(4) Caterpillar earth moving equipment
(5) Audi
(6) Russell Hobbs
(7) Magnum ice cream
(8) Apple iPhone
(9) Zando shoes
(10) Michael Kors handbags
(11) Chanel
(12) Prada

36 Feedback

Product Level of distribution

1. Porsche Exclusive distribution
2. Albany bread Intensive distribution
3. Land Rover Selective distribution
4. Caterpillar earth moving equipment Exclusive distribution
5. Audi Selective distribution
6. Russell Hobbs Selective distribution
7. Magnum Ice cream Intensive distribution
8. Apple iPhone Selective distribution
9. Zando shoes Selective distribution
10. Michael Kors handbags Exclusive distribution
11. Chanel Exclusive distribution
12. Prada Exclusive distribution

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 Note: You should be able to list various products and services, and identify under
which of the three distribution levels each one falls and why?

8.6 CHANNEL ACTIVITIES OR FUNCTIONS

Channel intermediaries perform a variety of functions, including breaking bulk,
accumulating bulk, sorting, creating assortments, reducing transactions, transporting,
storing, communicating, financing, and providing management services and other
facilitating functions.

Broadly speaking, members of the marketing channel perform the following key functions:

• They gather information about potential and current customers, competitors, and
other actors and forces in the marketing environment.
• They develop and disseminate persuasive communication to stimulate purchasing.
• They reach agreement on price and other terms so that the transfer of ownership can
be effected.
• They place orders with manufacturers.
• They acquire funds to finance inventories at different levels of the marketing channel.
• They assume risks connected with carrying out channel work.
• They provide for the successive storage and movement of physical products.
• They provide for buyers’ payment of their bills through banks and other financial
institutions.
• They oversee the actual transfer of ownership from one organisation or person to
another.
There are many variations of the traditional distribution channels we discussed earlier
(see Table 8.1). Wholesalers could be eliminated and replaced by sales personnel, for
example. The key to setting the structure of a channel of distribution is to determine how
the necessary activities or functions can be carried out most efficiently and effectively. All
marketers, even of non-profit and service organisations, engage in distribution because
there is always some gap between the marketer and the customer that must be bridged
(Cant 2013).

8.7 FUNCTIONS AND ACTIVITIES PERFORMED BY

INTERMEDIARIES
The main channel intermediaries (namely, wholesalers and retailers) perform different
functions and are involved in a wide range of activities which improve efficiency of
exchange. Their overall performance and service levels have made them dominate most
distribution channels.

The functions performed by channel intermediaries include the following.

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8.7.1 Intermediaries resolve discrepancies
Intermediaries are introduced into distribution channel structures when their specialisation
facilitates the overall exchange process and will resolve certain discrepancies. These
discrepancies are:

• Spatial discrepancy. Supply sources are geographically dispersed throughout the

country and a basic need for physical transportation is created. The wine industry is
predominantly located in the Western Cape, but certain raw materials and equipment
are manufactured in other provinces of the country and overseas. Wine consumers are
also dispersed all over South Africa. The transportation problem is further aggravated by
the fact that buyers that are far from producers often require small product quantities,
resulting in the need for intermediaries that transport these smaller quantities to
address spatial discrepancies. A channel that delivers inventory nearer to the customer
can close the spatial distance between the manufacturer and the consumer, and add
value to the product being sold.
• Timing discrepancy. Goods are manufactured in large quantities but retailers order
smaller ones, thus creating a timing discrepancy. Emphasis is subsequently placed
on the best timing of product flow through distribution channels via production
scheduling, just-in-time ordering systems and inventory control procedures.
• Temporal discrepancy. In agricultural production and multi-manufacturing, goods are
produced or grown at substantially different times than when they are demanded. The
consumer wants the manufacturer’s product immediately rather than whenever the
manufacturer can supply it; thus, there is a temporal discrepancy that a distribution
channel can solve by stocking the product. Intermediaries adjust and process products,
and then store them until they are needed or in a form that allows for long-term
storage (such as wine or cheese).
• Discrepancy of quantity and assortment. A discrepancy of quantity and assortment exists
because manufacturers make large quantities of products, whereas consumers purchase
in single units as part of an assortment. Intermediaries who categorise product offerings
through sorting resolve this problem. Sorting is the ability of channel partners to create
a unique and need satisfying product assortment through the following processes:
– Standardisation: Collecting uniform products from alternative suppliers and manu-
facturers. These products are subsequently graded according to aspects such as
size, quality and weight.
– Accumulation: Assembling standard products according to aspects such as size,
quality and weight into large quantities for transport to other distribution channel
intermediaries.
– Allocation: The general wholesale stage of providing adequate supply for numer-
ous customers such as tools, hardware and building materials.
– Assortment: The assembly of specific goods into a customised order for specific
customer groups, such as department stores that offer merchandise assortment
consisting of clothing, appliances, hardware and furniture (for example Woolworths).
• Discrepancy of possession, knowledge and/or ownership. Intermediaries are also involved
in the transfer of possession of the goods from the manufacturer to the customer.
Discrepancies of possession, knowledge and/or ownership require that intermediaries

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 provide information about the items and perhaps temporary credit, guarantees or
adjustments to complete the sale to the consumer (Cant 2013).

8.7.2 Intermediaries close gaps and provide utility

Channel activities performed by intermediaries fill gaps in form, time, place and possession,
and provide form, time, place and possession utility between the manufacturer and the
consumer.

Table 8.2 below shows how distribution channels create form, time, place and possession
utility by closing the six gaps of quantity, assortment, time, space (spatial), knowledge
and ownership between manufacturers and consumers. Let us take a closer look at the
way channels close the quantity gap. Manufacturers manufacture tennis balls by the
thousands, but consumers want to buy only three or four balls at a time. Wholesalers
and retailers buy tennis balls in batches of 100 packs of three each and break bulk into
smaller quantities such as one pack containing three Dunlop tennis balls. Wholesalers
and retailers also aggregate the consumer’s desired assortment of tennis balls, racquets,
presses, covers, shoes, visors, socks and other tennis apparel.

Retailers create utility advantages such as form, time, place and ownership utility. The
creation of utility adds value to products and enables consumers to pick and choose
what they want. Form utility is created when a product is changed to fulfil the needs of
the consumer. Butcheries provide form utility by providing different cuts and quality of
meat products. Convenient locations and direct marketing methods create place utility
for the consumer through catalogue purchasing, home delivery and the proximity of the
convenience store “around the corner”. Buying and selling transactions between retailers
and consumers create ownership utility, because ownership of products is transferred
to the consumer. Retail trading hours and wide product mix create time utility, because
consumers can choose when they want to purchase what they want to purchase and
how much they want to purchase.

Table 8.2: Distribution Intermediaries offer Utility and bridge gaps

 
Manufacturer
close gaps . . . Intermediaries
. . . and provide utility
receive
Consumers
value
       
  1. Quantity gap Form utility  
  – Bulk breaking – Smaller, assortment,  
graded and repackaged
  – Storage  
  – Packaging  
       
  2. Assortment gap Time utility  

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   – Accumulation or – In storage, paid for –  
aggregation of waiting to be collected
   
an assortment or is to be delivered
  – Grading  
       
  3. Time gap  Place utility  
  – Storage – Delivered to consumer  
  – Inventories  
  – Warehousing    
  – Financing    
       
  4. Spatial gap Possession utility  
  – Transportation – Product(s) received by  
consumer
  – Materials  
handling
  – Delivery    
       
  5. Knowledge gap    
  – Promotion or    
information
  – Feedback or    
information
gathering
       
  6. Ownership gap    
  – Buying and    
selling
  – Credits    
  – Collections    
  – Financing    
accounts
receivable
  – Passing title    
  – Servicing such    
as product
adjustments,
technical service
and warranty
service
Source: Strydom, Grove, Van Heerden & Nel (2005:27)

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8.7.3 Distribution activities

8.7.3.1 Specialisation in the distribution channel

We have explained how numerous intermediaries close the distance between the
manufacturer and the customer. Another way to look at this issue is to investigate specialised
activities performed by intermediaries. For products to move from manufacturers to
consumers, they must be handled, packaged, assembled, stored, shipped, displayed,
sold and serviced. Each of these activities involves cost and is performed by companies
operating in the channel based on their skills and efficiencies. Three main types of
specialised activities may be identified:

1. Transactional activities are involved in moving the goods through the channel, such
as buying, selling, pricing, promoting and risk taking.
2. Physical activities include warehousing, order processing, storing, sorting, transporting
and repairing goods.
3. Facilitating activities are the sale of the goods to end-users, for example product
grading, marketing research, providing advice about the product’s use and assisting
customers with financing for the purchase.
In most distribution channel specialists, service providers have emerged that contribute to
the success and efficiency of distribution channels by closing gaps between production,
supply and consumer demand and by performing certain activities. Two types of specialist
service providers exist:

1. Functional service providers are actively engaged in the day-to-day performance

of the channel-moving, modifying or otherwise physically handling of a product
during the distribution process, or through direct involvement in the selling process.
2. Support specialists are companies that facilitate overall channel performance by
providing essential ingredients or services. Unlike the functional specialist, a support
company does not engage in selling or the logistics processes of the channel. Many
support services are transparent to the physical path a product follows to market.
However, they are essential to satisfactory complete the overall distribution process
(Cant 2013).

8.8 CHANNEL MANAGEMENT

8.8.1 Cooperation and conflict

Channel cooperation occurs when members share harmonious marketing objectives and
strategies. Coordinated efforts by channel members whose marketing objectives and
strategies complement each other reflect channel cooperation (Cant 2013).

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8.8.2 Potential channel conflict
In a distribution channel, there are a variety of different concerns that can lead to conflict
between members of the channel. Inequitable channel relationships are often the source of
channel conflict or because channel members pursue conflicting objectives. For example,
a manufacturer may want special treatment for its product and brand or protect its image
as an exclusive brand. The retailer may not be concerned about the brand’s image and
may happily put the product or brand on promotion or on sale, as long as the product
sells. However, neither action is conducive to building an image of exclusivity and will
not please the manufacturer.

Distribution channels must be organised and regarded as systematic, cooperative efforts if

operating efficiencies are to be achieved. Yet channel members often perform as separate,
independent and even competing forces – a recipe for disagreement and conflict. Two
types of conflict often occur: horizontal and vertical conflict. Both are hindrances to the
effective functioning of distribution channels.

8.8.2.1 Horizontal conflict

Horizontal conflict may develop among channel members at the same level (such as two
or more wholesalers or two or more retailers) or among marketing intermediaries of the
same type (such as two competing discount shops or several retail florists). More often,
however, horizontal conflict occurs among different types of marketing intermediaries
that handle similar products. In other words, this type of channel conflict is found most
often when manufacturers practise dual or multiple distribution strategies.

In the 1990s, considerable horizontal conflict occurred among petrol stations when Pick n
Pay started selling petrol at discount prices. Another example is the conflict between South
African Airways (SAA) and British Airways and Nationwide. British Airways and Nationwide
claim that SAA used uncompetitive means to “persuade’ travel agents to favour them
when booking air travel for customers and have complained to the Competition Board.

8.8.2.2 Vertical conflict

Vertical conflict can occur between channel members at different levels, for example
between manufacturers and wholesalers or retailers. Vertical conflict occurs frequently
and is often the more severe form of conflict in the channel. Conflict may occur between
manufactures and retailers when retailers develop private brands to compete with the
manufacturers’ brands, or when manufacturers establish their own retail outlets or create
operations that compete with retailers. Another example of vertical conflict occurs when
manufacturers (such as furniture makers) attempt to bypass wholesalers and retailers and
sell directly to end-consumers.

When airlines such as SAA started marketing airline seats via the internet, it caused
considerable conflict between airlines and travel agents. Some travel agents threatened
not to sell SAA tickets anymore. In other instances, wholesalers or retailers may promote
competing products to the detriment of other products or brands. If a sportswear retailer

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such as Sportsman’s Warehouse promotes Adidas to the detriment of Nike, the latter will
certainly not be satisfied (Lamb et al 2015).

8.8.2.3 Multichannel conflict

This type of conflict exists when the manufacturer has established two or more channels
that sell to the same market. For example, multichannel conflict can occur when a
manufacturer sells its products through certain retailers and then adds new channels.
Tupperware, for example, started out by selling through independent direct salespeople
and then added selling via the internet.

8.9 PHYSICAL DISTRIBUTION (LOGISTICS)

Physical distribution is concerned with what happens with outbound goods as they move
from the organisation (for example, manufacturer) to its customers. It includes all the
activities concerned with the flow of these materials, components and finished goods.

Logistics encompasses all of this and more; it is a wider concept than physical distribution.
Logistics not only has to do with the outbound goods but also with inbound raw materials
and other goods necessary for the operations (for example, the manufacturing of products)
of the organisation. Logistics, therefore, includes physical distribution and indicates
some of the activities of the value chain concept. All aspects of physical distribution
are relevant when studying logistics management. The diagram below shows the how
physical distribution and logistics are interrelated and how logistics encompasses physical
distribution.

Logistics
  
Materials Physical
Materials supply
management distribution
 Customers

     
Suppliers Manufacturing Field inventory
Scheduling,
order processing, Outbound
Inbound logistics
materials logistics
handling, etc

Figure 8.2: Logistics and physical distribution

Source: Strydom et al (2005)

Logistics also has strategic aspects such as warehousing, inventory management and
information systems, to mention a few.

Logistics management has to do with the management of the flow of goods from
its origin to where it is eventually consumed. According to the Council of Logistics

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Management, logistics management can be described as: The process of planning,
implementing and controlling the efficient, cost effective flow and storage of raw materials,
in-process inventory, finished goods and related information from point of origin to point
of consumption for the purpose of conforming to customer requirements.

Raw
materials
supplier
 Manufacturer  Wholesaler  Retailer  Customer

Figure 8.3: The logistics process

Source: Strydom et al (2005)

Logistics management therefore forms an integral part of distribution management. The

following terms are important:

• The supply chain is all the organisations in the distribution channel. It involves
planning, implementing and controlling the efficient flow of both inbound material
and outbound finished products.
• Supply chain management (SCM) or logistics management involves planning,
implementing and controlling a chain or organisational relationships to ensure the
efficient flow of both inbound materials and outbound finished products.
• Materials management is concerned with bringing raw materials and supplies to the
point of production and moving in-process inventory through the company.
• Physical distribution is used to describe the broad range of activities concerned
with the efficient movement of finished products from the end of the production
line to the consumer. The purpose of physical distribution is to minimise cost while
maximising customer service.

8.10 CROSS-SECTION OF THE PHYSICAL DISTRIBUTION

SYSTEM
Physical distribution activities include transportation, warehousing, inventory control,
materials handling and order processing. These activities are explained below (Cant 2013):

• Inventory management – order timing and order quantities

• Order processing – receiving, filling and handling orders
• Warehousing and storage – accumulating, allocating, assorting, and reading goods for
reshipping to other locations
• Materials handling – moving items within the warehouse using standard pallets and
forklift trucks
• Protective packaging and containerisation – providing appropriate protective covering,
which is essential in reducing the incidents of damaged goods during movement in
transit (also referred to as industrial packaging)
• Transportation – moving products, parts and materials into the production facility;
moving semi-finished goods between production points; and moving finished goods
to retailers or end-consumers.

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8.11 MANAGING THE COMPONENTS OF PHYSICAL
DISTRIBUTION

8.11.1 Transportation
Physical distribution managers must also decide which mode of transportation to use to
move products from the producer to the buyer. The decision is related to other physical
distribution decisions. The five major modes of transportation are railroads, motorised
carriers, pipelines, water transportation and airways. Distribution managers generally
choose a mode of transportation on the basis of the criteria shown in the following table:
Table 8.3: Criteria for ranking modes of transport

  Highest     Lowest
Relative cost Air Road Rail Pipe Water
Transit time Water Rail Pipe Road Air
Reliability Pipe Road Rail Air Water
Capability Water Rail Road Air Pipe
Accessibility Road Rail Air Water Pipe
Traceability Air Road Rail Water Pipe

Source: Lamb, Hair, McDaniel, Boshoff, Terblanche (2008:278)

• Cost is the total amount of specific carrier charges to move the product from the point
of origin to the point of destination.
• Transit time is the total time during which a carrier has possession of goods, including
the time required for pickup and delivery, handling, and movement between the point
of origin and the destination.
• Reliability is the consistency with which the carrier delivers the goods on time and in
an acceptable condition.
• Capability is the ability of the carrier to provide the appropriate equipment and
conditions for moving specific kinds of goods, such as those that must be transported
in a controlled environment (for example, seafood under refrigeration).
• Accessibility is the carrier’s ability to move goods over a specific route or network.
• Traceability is the relative ease with which a shipment can be located and transferred.
The mode of transportation used depends on the needs of the shipper as they relate to
the six criteria described above. Generally, however, air transport will be the fastest and
the most reliable but also the most expensive. Water transport will be the slowest and
often unreliable in terms of scheduling, but it will also certainly be the cheapest form of
transport (Lamb et al 2008).

8.11.2 Warehousing
Warehousing is the holding and housing of goods between the time they are produced
and the time they are shipped to the buyer. It includes all the activities that take place

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from when the goods arrive at the warehouse until they are released for shipment.
Warehousing involves many activities – both large and small – but taken as a whole, it
consists of two major activities: storage and breaking bulk.
Storage consists of holding and warehousing goods in inventory. It is necessary because
of the virtually inevitable discrepancies that almost always occur between the cycles of
production and consumption.

Breaking bulk involves converting large shipments of goods as they arrive at a warehouse
into smaller quantities appropriate for customer needs. Warehousing strategy involves
two basic decisions:

1. determining the optimum number, location and types of warehouses needed, and
2. calculating the proper levels of inventory to be stocked
The “best” plan is the one that maximises customer service, minimises costs and provides
a strategic advantage (Cant 2013).
There are several reasons why organisations store goods in warehouses, including:
• irregular production facing regular demand, as with agricultural products
• regular production facing irregular demand, as with air conditioners
• the desire to postpone the sale of a product until prices are higher
• the desire to have products ready to move when a planned promotional campaign
begins
• the need to have inventories handy to meet buyers’ “emergency demands”
• the need to “age” a product (for example wine), although this is technically a production
activity
• to gain a competitive edge by being able to point to stocks of merchandise
that competitors do not have
• to ease problems associated with a rush season by having merchandise already on
the premises
• to deal better with channel members by handling some aspects of a storage problem

8.11.3 Inventory control

Another important function of physical distribution is establishing an inventory control
system. This is a system that develops and maintains an adequate assortment of products
to meet customer demands. Inventory decisions have a big impact on physical distribution
costs and the level of physical distribution provided. If too many products are kept in
inventory, costs increase – as do the risks of obsolescence, theft and damage. If two
products are kept on hand, the company risks product shortages, angry customers and
lost sales. The goal of inventory management, therefore, is to keep inventory levels as low
as possible while maintaining an adequate supply of goods to meet customer demand
(Lamb et al 2008).

The three major costs of inventory are:

1. acquisition costs – the expenses incurred in obtaining inventory
2. holding costs – the expenses incurred to keep inventory housed

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3. out-of-stock costs – the losses that occur when customers demand goods that the
marketer cannot provide
Economic order quantity is a mathematically determined purchase order size that yields
the lowest total order processing and inventory holding costs.

Just-in-time (JIT) inventory systems have been developed where the idea is to have
supplies arrive as they are needed by an organisation, eliminating the need for stockpiling
(Cant 2013).

8.11.3.1 Just-in-time inventory management

Borrowed from the Japanese, JIT inventory management is a way to redesign and simplify
manufacturing. For the manufacturer, JIT means that raw materials arrive at the assembly
line in guaranteed working order “just in time” to be installed, and finished products
are generally shipped to the customer immediately after completion. For the supplier,
JIT means supplying customers with products (that is, raw materials to be used in the
production process) in just a few days – or even a few hours – rather than weeks. US
manufacturing firms are increasingly using JIT inventory management system and almost
55% of all shipments are now sent just-in-time.

The basic assumption of JIT is that carrying excessive inventory is bad because it ties up
capital. With JIT, the purchasing company can reduce the amount of raw materials and
parts it keeps on hand by ordering more often and in smaller amounts. General Motors
and other car manufacturers, for example, generally maintain just an eight-hour supply
of parts. Packard Electric consolidates and distributes automobile wiring harnesses to
several car manufacturers. Because the wiring harnesses are scheduled to arrive on the
assembly line as they are needed, shipment accuracy is crucial for Packard Electric.

The risks associated with JIT inventory management are:

• implementing JIT principles too quickly

• cutting inventory without implementing other JIT principles
• increased delivery costs
• supplier shock
• employee stress
• potential bottlenecks caused by supplier delays

The benefits of JIT inventory management include:

• reduced inventory levels

• shorter lead times
• improved supplier relations
• lower production and storeroom costs
• better quality supplies
• reduced paper work

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The implementation of JIT is a process of continuous improvement characterised by
many small gains in efficiency over a long period. Because of the lower inventory levels,
JIT demands smaller, more frequent, precisely timed deliveries from suppliers (Lamb et
al 2008).

8.11.4 Materials handling

This component of distribution involves the physical handling and moving about of
inventory into, within and out of the warehouse (Cant 2013; Lamb et al 2008). This process
is increasingly being mechanised and automated. Materials handling includes the following
functions (Lamb et al 2008):

• receiving goods in the warehouse or distribution centre

• identifying, sorting and labelling the goods
• dispatching the goods to a temporary storage area
• recalling, selecting or picking the goods for shipment (which may include packaging
the product in a protective container for shipping)
The goal of the materials handling system is to move items quickly, with minimal handling.
With a manual or non-automated materials handling system, a product may be handled
more than a dozen times. Each time it is handled, the cost and risk of damaging it increases;
each lifting of a product stresses its package. With an automated system, many of these
functions are combined and handled by a computerised system. Automated systems
also help the organisation to have a high degree of control over how orders are handled,
placed, picked and sequenced for shipping.

8.11.4.1 Packaging
Packaging the product for shipment is a major concern for materials management. The
packaging is what protects transported materials against breakage, spoilage, insects
and dirt. Well-designed packaging restricts the material’s movement, for example large
products such as furniture or computer equipment may be shipped in vehicles that are
padded for protection.

8.11.4.2 Automatic identification and bar coding

Like many other subsystems in physical distribution, materials handling is driven by
the need for fast, accurate information. Automatic identification (or auto ID) is the use
of identification technology to mark and read products as they enter and leave the
warehouse or as they are received by a manufacturer or retailer. Auto ID may employ
voice identification, radio frequencies or magnetic strips, although bar coding is the most
common method.

8.11.4.3 Unitisation and containerisation

Two important elements of modern materials handling are unitisation and containerisation.
Unitisation, or unitising, is a technique for handling small packages more efficiently. It

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means grouping boxes on a pallet or skid, which is then moved mechanically by a forklift
or conveyer system. Containerisation is the process of putting large quantities of goods
in sturdy containers that can be moved from ship to truck to aeroplane to train without
repacking. The containers are sealed until delivery, thereby reducing damage and theft.
They are essentially miniature mobile warehouses that travel from manufacturing plant
to receiving dock. A container (often a special form of truck trailer body) can be reused
repeatedly. The average container lasts 10 years and can be repaired if damaged.

8.11.5 Order processing

Another important activity of physical distribution is order processing.

8.11.5.1 Flow of goods and information

As an order enters the system, management must monitor two flows: the flow of goods and
the flow of information. Often the best laid plans of marketers can become entangled in the
order processing system. Good communication among sales representatives, office staff,
and warehouse and shipping personnel is essential for correct order processing. Shipping
incorrect merchandise or partially filled orders can create just as much dissatisfaction
as stockouts or slow deliveries. The flow of goods and information must be continually
monitored so that mistakes can be corrected before an invoice is prepared and the
merchandise shipped.

8.11.5.2 Benefits of automation

Order processing, like inventory management, is also becoming more automated through
the use of computer technology known as electronic data interchange (EDI). The basic
idea behind EDI is to replace the paper documents that usually accompany business
transactions, such as purchase orders and invoices, with electronic transmission of the
needed information. Firms that use EDI enjoy the following benefits (Lamb et al 2008):

• reduced inventory levels

• improved cash flows
• streamlined operations
• increased speed and accuracy of information transmission
• closer relationship between buyers and sellers

8.11.6 Customer service

Customer service includes all those factors that affect the process of making products
and services available to the buyer (Strydom et al 2005). In terms of distribution, customer
service refers to how rapidly and dependably a company can deliver what customers want.
Customers want products, not excuses. In terms of distribution, customer service refers
to how rapidly and dependably a company can deliver what customers want (Cant 2013).

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Distribution managers must balance these two elements. The marketing concept suggests
that managers determine what level of service will fit the buyers’ needs and what prices
are acceptable to them.

Quality is defined in terms of customer satisfaction. Quality is the company’s performance

to deliver customer satisfaction. Service quality therefore depends on expectations
and perceived performance. Customer satisfaction is a service issue and service quality
assurance an operational one (Cant 2013).

8.11.6.1 Performance dimensions to analyse customers’ desired service output levels

Because the point of a marketing channel is to make a product available to customers,
the marketer must understand what its target customers actually want.

• Lot size. This is the number of units the channel allows a typical customer to purchase
on one occasion. Engen prefers a channel from which it can buy a large amount of
fuel, while a single car owner would choose a channel that allows buying an amount
suitable for one car.
• Spatial convenience. This is the level of accessibility that the marketing channel delivers
to the customers. For example, Standard Bank offers better spatial convenience than
Capitec Bank because far more Standard Bank branches and ATMs are geographically
dispersed throughout South Africa.
• Product variety. This is the number of products provided by the channel. Generally,
customers prefer a larger variety, which increases the chance of finding what they
need. Relentless expansion of product variety is the special edge that has helped
Amazon.com maintain its lead in internet retailing.
• Service backup. This refers to the add-on services (credit, delivery, installation and
repairs) provided by the channel. The greater the service backup is, the greater the
work provided by the channel.
• Cost. This is always a concern, even for companies that compete primarily on some
other dimension. In fact, in some industries, competition is so intense that companies
experience unrelenting pressure to reduce costs, even as their performance improves
in other ways. Because operations and supply chain activities often account for most
of an organisation’s costs, they are natural targets in cost reduction efforts.
• After-sales support. This can be a critical performance dimension, especially if the
purchased article/service has a high price tag or is critical to customers’ success. For
example, Mercedes Benz offers an after-sales internet portal and after-sales service
centres for their customers, who expect this type of support, as Mercedes-Benz
vehicles are expensive. At the individual level, a consumer’s decision to buy a new car
may depend in part on his/her previous experiences with the service department at
the dealership.
• Product availability. This is the ability of the supplier to provide products on demand. It
is measured in terms of the percentage of items or lines that can be filled from existing
inventory or as the percentage of orders that are shipped complete.
• Capability. This refers to the length of time required to fill orders, the ability of the
logistics system to adapt to special requirements, and the avoidance of errors such
as damage or incorrect shipments.

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• Information support. This is the ability of the logistics system to support a product
throughout its life cycle, including the ability to handle situations such as installing,
servicing, updating and product recall.
• Waiting time. This is the average time that the customers of a channel wait for receipt
of goods. Customers normally prefer fast delivery channels.
• Quality. The concept of quality is a broad one that can be subdivided into the following
categories:
– Functionality. What are the characteristics or features of a product/service that
determine how well it works? Products with many features or services that provide
superior performance are often thought of as being of “higher quality”.
– Conformance. Was the product made or the service performed to specification?
Examples of conformance quality include the degree of purity, weight of the prod-
uct and amount of time it takes to perform a service.
– Reliability. Will a product work for a long time without failing or requiring mainte-
nance? Does a service operation perform its tasks consistently over time?
– Durability. Can a product withstand adverse conditions such as temperature ex-
tremes or rough handling? What is its expected lifespan?
– Safety. Was the product/service designed to be safe?
– Serviceability. If necessary, can the product be easily repaired or serviced?
– Aesthetics. Does the product/service appeal to the senses?
The relative importance of these quality dimensions will differ from one customer
to the next. One buyer may be more interested in reliability and serviceability, and
another in performance and aesthetics. To compete on the basis of quality, a company’s
operations and supply chain must consistently meet or exceed customer expectations
or requirements on the most critical quality dimensions.
• Delivery performance. Today, many companies require increasingly tighter delivery
windows; whereas in the past, a delivery was considered to be on time if it was made
within a few days of the promised date. The acceptable timeframe is now as little as
two hours – even for goods that are not perishable. One car manufacturer in the US
charges suppliers a penalty fee of $10 000 for every minute delivery is late. This practice
may seem extreme until one considers that late deliveries may shut down an entire
production line. Delivery performance has two basic characteristics:
1. Delivery Speed is the time that elapsed from the receipt of an order to final
delivery. A company with superior delivery speed can deliver more quickly than
its competitors or meet a required delivery date when only some or even none
of the competition can do so. Typical strategies for improving delivery speed
include streamlining the order entry process, holding inventory at key points in
the supply chain (in stores or regional warehouses), maintaining excess capacity
with which to meet “rush” orders and using faster transportation.
2. Delivery reliability refers to the ability to deliver products/services on time. Note
that a company can have long lead times but still maintain a high degree of
delivery reliability. Typical measures of delivery reliability include the percentage
of orders that is delivered by the promised time and the average tardiness of late
orders. Delivery reliability is especially important to companies that are linked
together in a supply chain. Consider the relationship between a fish wholesaler
and its major customer, a fish processing facility. If the fish arrives too late, the

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 processing facility may have to shut down. However, fish that arrives too early
may spoil before it can be processed. Obviously, these supply chain partners must
coordinate their efforts so that the fish arrives within a specific time “window”,
usually a few hours.
• Accuracy. Another measure of delivery reliability is the accuracy of the quantity shipped.
For example, a company may demand 95% accuracy in stock deliveries from suppliers.
If suppliers ship more than the quantity ordered, they are still considered to be in
error. Some companies will consider a partial shipment to be on time if it arrives by
the promised date, but others will accept only complete shipments delivered within
the scheduled window.
• Flexibility. Many operations and supply chains compete by responding quickly to the
unique needs of different customers. Both manufacturing and service companies can
demonstrate flexibility.
1. Mix flexibility refers to the ability to produce a wide range of different products.
2. Changeover flexibility is the ability to begin the production of a new product
with minimal delay.
3. Design flexibility refers to the ability to change the design of a product to
accommodate specific customers.
4. Volume flexibility is the ability to produce whatever volume the customer needs.
(Cant 2013)

8.11.6.2 Improving customer service

Today the emphasis in organisations is moving towards improving customer service.
Customer service has become part and parcel of organisations. Each organisation has
customers who need to be treated well to ensure that they return to the organisation
if they have to do more business of a similar kind. An organisation’s customers can
consist of a diverse group of people, namely other businesses, wholesalers, retailers and
end-consumers.

Customer service goals where distribution takes place can be divided into several
performance categories. Each is discussed briefly below.

8.11.6.3 Customer service performance categories

Customer service can be divided into several categories, namely: order lead time,
dependability, convenience, inventory availability and flexibility.

(1) Order lead time

Time plays a crucial role in customer service. Ultimately, the quicker customers’ orders
are delivered to them, the higher the degree of customer satisfaction. The time it takes
from the placement of an order to its delivery to the customer is known as the order lead
time. Quicker deliveries increase customer expectations of the service to be provided.
Decisions about information systems and transport are about two aspects that are crucial
in this regard.

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 McDonald’s swift customer service
McDonald’s entry into the fast food industry in South Africa in October 1995 caused
positive changes. These included improved service levels and cleaner and brighter
restaurants. The Chief Executive Officer of McDonald’s SA said that other organisations
in the industry had to implement changes that included refreshing restaurants and
introducing Drive Through. He said that McDonald’s had caused a resurgence in this
regard. All these aspects helped to increase customer service in the fast food industry.

(2) Dependability
Dependability refers to the degree of consistency and accuracy shown by the supplier. If
goods are delivered too soon after an order is placed, it may mean that an organisation
cannot store them due to a lack of space. However, if goods are delivered too late, it will
cost the organisation money because of stockouts and possible production standstills.
The variability in the order cycle should therefore be minimised. The smaller the variance
or inconsistency of the order lead time, the better for the customer. Organisations must
strive towards a consistent lead time, as this helps the customers to plan their inventory
management more accurately.

Customers want suppliers to be accurate with their orders. The right quantity and quality
products must be delivered at the right place at the right time. This also applies to invoicing
procedures as administrative errors such as inaccurate billing can irritate customers.
Customer service can easily be enhanced when these unnecessary mistakes are eliminated.
These can also be done with good communication between an organisation and its
customers.

(3) Convenience
Convenience refers to how favourably customers experience service delivery. Aspects
included here are operating hours, the degree of difficulty experienced when placing
an order and payment terms. Some organisations have order size constraints where a
minimum amount of goods must be ordered, which can be seen as inconvenient to
customers. The information levels of an organisation’s personnel are also factors that can
influence the convenience of customer service. Organisations that want to improve their
customer service levels must ensure that the salespeople have sufficient information about
the organisation’s inventory. These levels of information must constantly be improved.
Organisations must also be proactive in this regard and can, for example, notify customers
in advance when delays in processing orders are likely. There are also post-transactional or
after-sales variables that will certainly influence the convenience of service experienced by
the customer. These variables include guarantees, delivery and/or installations of goods,
customer complaints or claims, and repair services.

(4) Inventory availability

Customer satisfaction is also determined by the availability of inventory. Organisations
must, therefore, determine which goods they want to stock. The range and variety will
have to be calculated carefully. Customer satisfaction will be increased if inventory levels
are raised or if the variety and assortment of the inventory held are increased, as this will

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mean that goods will always be available. Care must be taken to ensure that the product
reaches the customer without being damaged. Adequate packaging and careful handling
are therefore also essential (Strydom et al 2005).

(5) Flexibility
Many operations and supply chains compete by responding quickly to the unique needs
of different customers. Both manufacturing and service companies can demonstrate
flexibility. Many manufacturers distinguish between different types of flexibility:

• Mix flexibility refers to the flexibility to produce a wide range of different products.
• Changeover flexibility is the ability to begin production of a new product with minimal
delay.
• Design flexibility refers to the ability to change the design of a product to accommodate
specific customers.
• Volume flexibility is the ability to produce whatever volume the customer needs.
Different types of flexibility may require different operations and supply chain solutions.
Companies must decide which types of flexibility are important to their customers, and
adjust their operations and supply chain efforts accordingly (Cant 2013).

8.12 SUPPLY CHAIN MANAGEMENT

8.12.1 Definition
A supply chain is a system that includes all the organisations, activities, people, information
technology and resources involved in the process of getting a product from the
manufacturing phase to the final phase where it is sold to the end-consumer (Cant 2013).

In the broadest sense, a supply chain starts from the origins of the raw material that is
used in the production of the product and ends once the product has been discarded
or recycled. SCM has even been described as moving a product from “cradle to grave”
or from “dirt to dirt”.

SCM is the integration of the logistics requirements of the supplier, distributor and customer
into one cohesive process that includes demand planning, forecasting, materials requisition,
order processing, inventory allocation, order fulfilment, transportation services, receiving,
invoicing and payment. SCM also involves the management and control of all materials,
funds and related information in the logistics process from the acquisition of raw materials
to the delivery of finished products to the end-user, as well as reverse distribution such
as repair work and recall, product withdrawal, and discarding and recycling products.

This all means that a supply chain extends from a company’s customer’s customer to its
supplier’s supplier and includes the primary decisions made in the supply chain, namely
developing, planning, sourcing, manufacturing, warehousing and delivering of products:

• Developing. New product development and design; deciding how much raw materials
to order; and designing transportation channels.

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• Planning. Determining the quality of the end-product, designing or adapting
manufacturing processes.
• Sourcing. Choosing suppliers, locating suppliers, deciding how much raw materials to
order and designing transportation channels.
• Production. Location of production plants (domestic and/or international factories);
whether to make, buy or lease production facilities, plants and tools; deciding on the
capacity of production plants; decisions about manufacturing products according
to quality specifications and market focus (low cost leader, differentiation strategy).
• Inventory. How much inventory of raw materials, intermediate products, semi-finished
products or finished products to hold (safety stock), deciding on whether the company
should follow a JIT approach (just in time according to orders), how much to order
and when to order.
• Transportation logistics. The best way to get the product to the customer (road, rail or
air), mode of transport, shipment size, location of distribution centres to keep customer
service high and costs low.
Some of the objectives of a supply chain manager include the following:
• Increase communication along all the modes of the supply chain to create an
uninterrupted flow of materials and products.
• Decrease inventory while still maintaining high customer service levels.
• Reduce the suppler base and develop supplier relationships to reduce overall costs.
• Standardise parts as much as possible to reduce the amount of inventory to be carried
to fulfil customer orders within an acceptable timeframe.

8.13 FRANCHISING
According to the Franchising Association of Southern Africa (FASA), franchising means
“privilege” or “freedom”, and in this sense it offers people the freedom to own, manage
and to direct their own businesses. It means being in business for yourself but not by
yourself. Franchising is an arrangement between the franchisor (seller or grantor of a
privilege) and the franchisee (recipient or purchaser of a privilege). The franchisor owns
the right to the name or trademark of the business, while the franchisee purchases the
right to use the trademark and system of the business.

8.13.1 Definition
Franchising may be defined as an agreement between a business owner and an independent
individual to increase the business’s geographic reach by releasing additional branches in
separate areas. The owner of the business (franchisor) gives the right to the independent
individual (franchisee) to operate his/her business; terms and conditions are set which
stipulate, among other things, how to maintain the same image of the brand throughout
all the branches, the support that the franchisor will give to the franchisee, and the fee that
the franchisee will pay the franchisor for the use of the intellectual property (Cant 2013).

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8.13.2 How franchising works
Franchising is a “business marriage” between an existing business (the franchisor) and
the new comer to business ownership (the franchisee). The franchisee buys licenced
rights from the franchisor to clone the whole business package in a specific territory for
a specific period. The franchisor provides a ready-made, established and tested business
format, including the name, corporate power, know-how, training and support services.
The franchisee invests capital, time and any relevant past experience to create his/her
business, replicated from the franchisor’s business formula/system. The franchisor gains
a new outlet in a new territory with minimal capital investment in setting it up; the
franchisee gets a safer way of moving into independent business. The franchisee gets a
safer way of moving into independent business; the franchisor expands his/her network
cost effectively.

Franchising is an arrangement of interdependent business relationships that allows a

number of people to share the following:

• a brand identity (trade name)

• a successful method of doing business
• a proven marketing and distribution system

8.13.3 Advantages and disadvantages of franchising for the franchisor

8.13.3.1 Advantages
The advantages are:

• Franchisors are easily able to acquire funds.

• Sharing ownership through equity financing is eliminated (no shareholding takes place
because the franchisee operates on a licence basis and does not acquire any direct
ownership in the franchisor’s business).
• A high level of flexibility in the use of capital and the ability to accumulate capital
(franchisors can use the franchise income to fund national advertising, franchisee
training and other business operations).
• The potential exists to reduce distribution costs (franchisees absorb much of the
overhead costs).
• Franchisees, as independent entrepreneurs, are more likely to be motivated to succeed
than employees who work for a salary.
• Franchising allows for an alternative to the development of company-owned outlets
and branches (this reduces costs) by setting up independent entrepreneurs (this creates
the opportunity for a more rapid market penetration).
• Franchising creates cooperative advertising opportunities (which are partially funded
by the franchise fees).

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8.13.3.2 Disadvantages
The disadvantages are:

• Governments all over the world are scrutinising ways to curb or limit the channel
power of franchisors.
• Franchisors have to find sources of power other than legal ones to exercise control
over franchisees (as stipulated in the franchise agreement).
• Franchisees who mismanage their enterprise (such as providing inadequate service)
harm the image of the franchisor.
• Franchisees who have the ability to buy products from other, independent, sources
adversely affect the franchisor’s profitability.
• Franchisees often resist expansion by the franchisor, even when market opportunities
allow for more franchises in a given area (they are unwilling to share the market).
• Franchisors are concerned that franchisees do not always report their real gross sales (if
the franchise fee is based on a percentage of gross sales, the franchisor loses income).
• Trade secrets, marketing strategies and strategic plans are often revealed to competitors.

8.13.4 Advantages and disadvantages of franchising for the franchisee

8.13.4.1 Advantages
The advantages are:

• The risk of business failure is greatly reduced when the particular business approach
being offered by the franchisor has been proven over time or has a good reputation.
• The franchise concept often offers proven products or concepts, well-known trade-
marked products/services, recognisable brands and/or images, and established business
procedures and practices.
• The franchisor not only offers initial services but also provides continuing services
during the running of the franchise agreement.
• Many franchise packages include standardised methods for operations, promotion,
site location analysis, accounting and finance, and personal training.
• Franchising allows an entrepreneur to enter a business that would be prohibitively
expensive if tried on his/her own.
• Franchising offers the opportunity to realise a higher ROI than is the case for independent
ventures.

8.13.4.2 Disadvantages
The disadvantages are (Strydom et al 2005):

• Franchisees may have the impression that operating a franchise will in itself guarantee
profits (acceptable business practices and hard work are still required).
• Encroachment may occur when the franchisor opens another franchise too close to
an existing franchisee (especially when franchisors are chasing profits and have not
properly analysed and calculated the optimum trading area for every franchise).

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• Encroachment may also occur due to changes in the local market and demand situations
(lower demand means that franchises will have to attract customers from further away
– from the trading areas of sister-franchisees).
• Encroachment may also occur due to the proliferation of similar but competitive types
of franchisees, such as fast-food outlets (an increase in the number of competitors).
• Franchisees have to give up some independence because they have to adhere to
regulations and conditions set out in the franchise agreement.
• Conflict may arise concerning how and when the franchisee launches promotional
campaigns.
• The pricing strategy may be unprofitable to the franchisor but not to the franchisee
(especially when the franchisee is forced to purchase products from the franchisee).

8.13.5 Services provided by the franchisor to the franchisee

8.13.5.1 Services offered at the beginning of the franchise endeavour

These services are:

• facilities – design and layout of the site, lighting, signage and banners, and decoration
• training – training for managers and staff to embed the culture of the business in their
minds
• operating advice – operating manuals, market studies, business forms and merchandising
methods
• financing – franchise fee, equipment, lease of building and service fees
• market surveys – trade area analysis, site selection and market forecasting

8.13.5.2 Services offered during the running of the franchise outlet

These services are:

• business counselling – ongoing advice on profitability (cost control and budgeting) and
business activities (marketing, customer service and financial management)
• image building – ideas on how to build and maintain the image of the brand more
effectively
• supervision – employee retention and field supervision, and advice on how to deal
with employee challenges
• quality control – regular inspections, maintaining cleanliness and plans for improvement
• sales promotion – point-of-sale materials, competitions and free samples
• product development and packaging – upgraded products and new packaging

8.14 VERTICAL MARKETING SYSTEM ARRANGEMENTS

A vertical marketing system (VMS) is a distribution channel arrangement where the
channel operates as an integrative system with joint objectives instead of the traditional
channel where all intermediaries are working for themselves.

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In a VMS arrangement, primary channel intermediaries are interdependent. One of the
members acts as a channel leader because of size and willingness to take risks. The
following are examples of VMS arrangements:

1. Corporate VMS. This is defined as a single company that owns and operates two or
more consecutive levels of the distribution channel, such as the Ford Motor Company
which manufactures cars and owns dealerships through which it sells its cars. It is
characterised by total ownership (Cant 2013).
2. Contractual VMS. This is a vertical marketing system characterised by a legal
relationship. In a contractual VMS, dependency is defined in a formal contract such
as a franchise or an exclusive dealership. When channel coordination and leadership
are specified in a contractual agreement, a contractual VMS exists.
There are three types of contractual VMS arrangements:

1. Wholesaler-sponsored voluntary chains organise groups of independent retailers to

compete better with large chain organisations. Wholesalers such as Drug Guild work
with participating retailers (for Drug Guild independent pharmacies) to standardise
their selling practices and achieve buying economies so that the group can compete
effectively with chain organisations.
2. Retailer cooperatives arise when the stores take the initiative and organise a new
business entity to carry on wholesaling and possibly some production. Members
of retailer cooperatives concentrate their purchases through the cooperative and
plan their advertising jointly. Profits are passed back to members in proportion to
their purchases.
3. Franchise organisations are created when a channel member (called a franchisor) links
several successive stages of the production and distribution process. Franchises include
manufacturer-sponsored retailer franchises (such as McDonald’s) manufacturer-
sponsored wholesaler franchises (SABMiller licences wholesaler bottlers to buy
its ingredients and then bottle and sell their products to retailers) and service-
company-sponsored retailer franchises (the way Hertz licences participating car
rental businesses).
• Alliance VMS. These are a voluntary form of extended organisation typically not
formalised by contractual arrangements. Examples include partnerships, vertical
strategic alliances between factories and clothing stores, and horizontal strategic
alliances such as Spar outlets which form a buying cooperative.
• Administered VMS. The member companies acknowledge their dependency and
adhere to a dominant company leadership. However, dependency is based on
the realisation of participating channel members that it is necessary to follow the
leader if they desire continued participation in the administered arrangement,
such as the relationship between SA Breweries and liquor retailers.
Cooperation and control are the primary advantages of a VMS. A smoothly operating VMS
may achieve technological, managerial, distributional, promotional and other economies of
scale. Having one organisation in control ensures that things will continue to run smoothly.
An example of a VMS is franchising, which was discussed in detail above (Strydom et al
2005; Cant 2013).

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8.15 SUMMARY
In this study unit, we discussed the different types of channel participants.
Wholesalers and retailers are important role players in distribution channels.
We highlighted channel design aspects and identified a wide range of
channel activities. We examined channel management critically and
compared the various physical distribution activities. We also examined
customer service in logistics and analysed the supply chain. Channels for
services and export were illustrated. We also discussed franchising and
vertical marketing distribution systems (or multilevel distribution).
The role of distribution in the marketing mix is to get the product to the
target market (that is, to the place where the customer buys the product).
If the product is not available where the customer wants it, the company
will likely not survive. Only rarely will customers go to a lot of trouble to
obtain a particular brand. Even before the product is ready for the market,
the management must decide on the methods and routes that they will use
to get there. This entails establishing strategies for the product’s distribution
channels and physical distribution. Obviously, accurate channel decisions
require a sound knowledge of the places where target customers shop for
the product they want.

8.16 CASE STUDY AND QUESTIONS

Getting fresh with the customers

Numerous changes have taken place at Pick n Pay in the last few years. And all for the
better. In fact, the company has assumed a fresh appearance. No one is more aware
of this than Chris van Rooyen, director of logistics, distribution and corporate brands.
For fresh is his business. Each day, Van Rooyen has to ensure that all the outlets have
fresh produce in their food hall. This is what customers have come to expect. It is a
challenge with fresh problems arising every day. And they have to be solved every day.
There are Pick n Pay fresh distribution centres in the Western and Eastern Cape and
Natal. But there is nothing to compare with the sophistication of the computerised
Meadowbrook depot in Johannesburg. It is the only fully automated, chilled distribution
centre in the southern hemisphere and is capable of handling about 10 000 distribution
units (crates or cartons of goods) every hour. Around 70 000 distribution units are moved
from the centre each day, and it is capable of pushing through as many as 240 000.
At the Meadowbrook cross-docking facility, goods are delivered, sorted into the store
requirements and dispatched – all at a temperature of five degrees Celsius. There
are six receiving ports where bar-coded distribution units are automatically directed
into refrigerated trucks for delivery to 63 outlets. About 1500 stock-keeping units are
handled each day.

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 A key factor is the computerised system used for scheduling vehicles. The computer is
given store delivery requirements and the various volumes of units. The computer then
directs drivers on which route to take. Through the system, Pick n Pay has been able
to reduce the truck fleet from 70 to 38. When the Meadowbrook centre opened, the
Pretoria and City Deep fresh produce distribution centres were closed with substantial
savings.
Another feature is truck design. Every truck has a tailgate for the roll-on and roll-off
facility. Products from the conveyor belt are packed on a roll-a-tainer and rolled onto
a truck. When the truck reaches its destination, a roll-a-tainer with units for the store is
placed on the tailgate which is dropped and then rolled directly on to the shop floor.
“We have taken about 24 hours out of the cycle from the time goods are picked by the
farmer to them reaching the point of sale. It used to take more than 48 hours, but now
takes 24 to 30 hours,” says Van Rooyen.
Source: Getting fresh with the customers. Pick n Pay Corporate Report, Supplement to
the Financial Mail, 30 May 2007, pp 31 & 32.

Questions
1. Do you think the charges to Pick n Pay’s distribution system described above enhances
its efforts to be the lowest-priced retailer in South Africa?
2. Can an efficient distribution system be a competitive advantage? Explain.
3. Can Pick n Pay’s new distribution system be linked to consumer needs?

8.17 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. How do you think will you be able to use the skills that you learned in this study
unit in your professional life?
2. What did you find difficult about this study unit? Why do you think you found it
difficult? Do you now understand the concept(s) you struggled with or do you need
more help? What are you going to do about getting How will you get more help if
you need it?
3. What did you find interesting in this study unit? Why?
4. Were you able to identify different sources of information or references to deepen
your understanding of the topic?
5. How long did it take for you to work through this study unit? What do you need to
do differently to be able to keep up with your study schedule?

8.18 REFERENCES
Cant, MC, 2013. Marketing: An Introduction. 2nd edition. Cape Town: Juta.
FASA.. [Sa]. www.fasa.co.za (accessed 16 November 2016).
Franchise Association of South Africa. [Sa]. What is franchising? http://www.fasa.co.za/
guidelines.pnp (accessed 18 November 2016).

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Getting fresh with the customers. Pick n Pay Corporate Report, Supplement to the Financial
Mail, 30 May 2007, pp 31 & 32.
Lamb, CW, Hair, JF, McDaniel, C, Boshoff, C & Terblanche, NS. 2008. Marketing. 3rd edition.
Oxford: Oxford University Press.
Strydom, JW, Grove, T, Van Heerden, CH & Nel, D. 2002. Distribution management. 1st
edition. Cape Town: New Africa Books.

8.19 SELF-ASSESSMENT QUESTIONS

Question 1
Which one of the following does NOT form part of the distribution channel?
(1) Producers
(2) Consumers
(3) Intermediaries
(4) Retailers

Question 2
The major channels for organisational products are?
(a) Producer to wholesaler to user
(b) Producer to user
(c) Producer to agent-wholesaler to user
(d) Producer to user to wholesaler
(1) A, B, C
(2) A, B
(3) A, B, C, D
(4) None of the above

Question 3
Channel intermediaries perform three of the following functions. Which one is NOT part
of the channel intermediary function?
(1) They gather information about potential and current customers, competitors and
other actors and forces in the marketing environment.
(2) They carry all cost associated with transportation and delivery of goods.
(3) They place orders with manufacturers
(4) They assume risks connected with carrying out channel work.

Question 4
In the distribution process intermediaries resolve discrepancies. When goods are manu-
factured in large quantities, but retailers order smaller ones what discrepancy is this?
(1) Temporary discrepancy
(2) Discrepancy of quantity and assortment
(3) Spatial discrepancy
(4) Timing discrepancy

Question 5
………means conflict between different levels within the same channel.
(1) Multichannel conflict

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(2) Vertical channel conflict
(3) Horizontal channel conflict
(4) Channel power conflict.

Question 6
There are several major costs associated with inventory control, …. are the expenses
incurred in obtaining inventory?
(1) Holding costs
(2) Out-of-stock costs
(3) Storage costs
(4) Acquisition costs

Question 7
Some of the objectives of supply chain management are mentioned below. Which one
is NOT an objective of supply chain management
(1) Increase communication along all modes of the supply chain to create an
uninterrupted flow of materials and products.
(2) To reduce the supplier base and develop relationships with the supplier to reduce
overall costs.
(3) To provide needed investment incentives by making substantial sales, service and
management assistance.
(4) Decrease inventory while still maintaining high customer service levels

Question 8
Physical distribution managers must also decide which mode of transport to use to
move products from producer to buyer, transport is used to transport huge bulky loads.
Containerisation is used for bulk movement
(1) Air
(2) Water
(3) Rail
(4) Road

Question 9
Distribution managers generally choose a mode of transport based on several criteria.
Which one of these is NOT a criterion used for choosing the mode of transport?
(1) Reliability
(2) Capability
(3) Accessibility
(4) Functionality

Question 10
Warehousing is a necessary activity of logistics as inventory must be stored somewhere
before it is sold. There are several functions of warehouses, the flowing statement describes
one of these functions which function is it? “Goods can be stored until they are required.
The goods will then be retrieved to fill customer’s orders.”
(1) Receiving goods
(2) Storing goods
(3) Sorting goods
(4) Dispatching the order

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Study unit 9
Pricing decisions

Contents

Overview
Learning outcomes
Key concepts
9.1 Nature of pricing
9.2 Steps for determining the price of a product/service
9.3 Managing price changes
10.3.1 Initiating price cuts
10.3.2 Initiating price increases
10.3.3 Buyers’ reaction to price changes
10.3.4 Competitors’ reaction to price changes
10.3.5 Responding to competitors’ price changes
9.4 Segmented pricing
10.4.1 Customer-segment pricing
10.4.2 Product-form pricing
10.4.3 Location pricing
9.4.4 Time pricing
9.5 Psychological pricing
9.5.1 Price as an indicator of quality
9.5.2 Odd/Even prices
9.6 Promotional pricing
9.7 Value pricing
9.8 Summary
9.9 Case study with questions
9.10 Reflection
9.11 References
9.12 Self-assessment questions

OVERVIEW
This study unit deals with the aspects of pricing decisions in which marketers are interested.
Certain pricing activities are done by and depend on accountants, who also provide some
demarcations for the pricing decisions of marketers. A marketer cannot just grasp a price
from the air, but must be guided by factual information provided by the accountant,
such as cost and the price that the customer is willing to pay or can afford to pay. We
will look at how marketers set prices for product offerings. Price means one thing to the
consumer and another thing to the marketer. To the consumer, it is the cost of goods
sold (a sacrifice to buy the product); to the marketer, it is the primary source of revenue.
In this study unit, we look at the price charged for a product/service. We also look at the

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importance of pricing, cost constraints and how marketers set pricing goals, the selection
of an estimated price level and pricing decisions.

From a business point of view, pricing must take into account all the costs incurred to
supply the product. In economics and business, price is the result of an exchange; and
flowing from that trade, a numerical monetary value is assigned to a good, service or
asset. If I trade four apples for one orange, the price of an orange is four apples; inversely,
the price of one apple is ¼ of an orange.

Price is only one part of the information we obtain from observing an exchange. The
other part is the volume of the goods traded per unit, which is referred to as the rate of
purchase or sale. This additional information explains the extent of the market and the
elasticity of demand and supply. Price is central to marketing, where it is one of the four
variables of the marketing mix that businesspeople use to develop a marketing plan. In
this study unit, we focus on price decisions.

We introduce you to the pricing concept and the steps for determining an approximate
price for a product/service. Price is the only marketing instrument that generates income
for a business. The price paid by the consumer represents the income generated for the
business. This study unit deals with the last element of the marketing mix. You need to be
familiar with the material in the previous three study units to understand pricing decisions.

The study unit will unfold as follows:

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LEARNING OUTCOMES

After completing this study unit, you should be able to

• define and discuss the concept of pricing
• give an overview of the different steps of the pricing process
• describe the different pricing constraints
• explain the role of cost in pricing
• describe each of the profit-oriented objectives
• describe the meaning of return on investment (ROI)
• describe the sales volume and market share objectives
• give an overview of how an approximate price level is determined based on the
cost, volume and profit relationship
• discuss the meaning of price determination according to the breakeven analysis
• explain the meaning of profit-based price determination
• explain the meaning of price determination according to the experience curve
• describe the different cost-based pricing methods
• describe the different options of how a marketer can apply demand-based pricing
• explain the different ways in which discounts can be used
• describe the different price adjustment opportunities available to the marketer
• explain the different discount pricing methods
• explain the meaning and components of psychological pricing
• describe the meaning of segmented pricing
• discuss the important facets of consumer research

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 KEY CONCEPTS
• pricing
• pricing constraints
• pricing objectives
• cost
• income
• breakeven
• profit
• profitability
• experience curve
• demand
• psychological pricing
• geographical pricing
• discounts
• cost-based pricing
• demand-based pricing
• price adjustments
• promotional pricing

9.1 NATURE OF PRICING

Pricing is one of the four marketing instruments of a business. Compared to the other
marketing instruments, the unique nature of pricing is that it is the only instrument
that results in an income for the organisation. However, just like the other marketing
instruments, pricing can be used to compete in the market and to differentiate the
organisation or product from other similar organisations or products.

For profit-oriented businesses, it is important to make a profit. Remember that this does
not mean that the business should try to maximise the profit, but rather that it should
determine a price that will maximise the profitability of the business over the long
term (as we explained in the discussion on the marketing concept). This means that the
business should consider the turnover that will be possible at a particular price. A high
sales volume (turnover) at a lower price may be more profitable in the long run than a
lower sales volume at a higher price.

A price is the value given in exchange for something else, which in our modern economic
system is paid in money. We can also say that price is the value of something expressed
in terms of money value. It is simply the amount of money paid to purchase a product or
a service. For marketers (sellers), price is essentially a means to achieve the objective of
making a profit. For consumers and commercial users, it is a means – a money sacrifice
– for acquiring need satisfying goods or services.

There are certain steps involved in determining a price for a product/service. This study
unit is based on these steps. They are:

1. Identify pricing constraints.

• Identify factors that can influence the determination of price.

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 • Identify pricing objectives.
2. Determine cost, volume and profit relationships.
3. Estimate the expected demand, supply and revenue.
4. Select an appropriate price level.
5. Set the listed or quoted price.
6. Make special adjustments.
When consumers are willing to pay to use the need satisfying benefits of a product/service
offering, the price at which the product/service is set is known as the market price. In the
case of a car manufacturer, for example, it is clear that the marketer considers a number
of need satisfying benefits pertinent to the product/service, such as the convenience,
safety, fuel consumption, guarantees, power, brand and reliability of the car.

9.2 STEPS FOR DETERMINING THE PRICE OF A PRODUCT/

SERVICE
Step 1: Identify pricing constraints
The identification of pricing constraints is the first step of determining the price of a
product/service. Various factors or constraints influence the determination of the price
of a product/service. The constraints are aspects that influence the cost of and demand
for the product. Pricing constraints therefore limit flexibility in business pricing decisions,
such as the ceiling price (what the customers are willing to pay) and the floor price (the
lowest price that a business can determine without making a loss by going below the
breakeven point).

The key point that you should understand in this section is that the product prices must
cover the cost of production and marketing. Cost affects the prices charged. The cost of
products differs from product to product. The types of costs important in pricing decisions
are total costs, fixed costs and variable costs.

• Total costs are the total expenses incurred by a company in producing and marketing
the product. Total cost is the sum of fixed and variable costs.
• Fixed costs are those costs which remain unchanged in total over a certain period of
time.
• Variable costs are the company’s expenses that differ directly according to the quantity
of the product/service that is manufactured and sold.
Businesses must also deal with constraints such as the following:
• Government regulated prices: In South Africa, price determination in the
telecommunications, water, electricity, health and education sectors is regulated by
the government.
• Price sensitivity of customer demand for certain products: For some products in some
markets, raising or lowering prices will have little effect on how much customers buy.
For example, when petrol/diesel prices go up or down, people who drive to work and
have no other transportation alternatives still have to buy the same amount of petrol/
diesel each week. When housing costs increase, customers have to pay the prices if

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 they want a place to live in. In other situations, customers can be very sensitive to
price changes. If the price of beef increases, people may buy chicken instead. If one
20-inch (50 cm) floor fan sells for three Rand less than competitive products, the vast
majority of customers may select that product instead of the costlier alternative.
When competing products are very similar, prices can make a difference in people’s
buying habits.
Students sometimes confuse general economic conditions and legal considerations with
one another. Economic considerations are the realised social system of the production,
exchange, distribution and consumption of goods and services in a country or area;
whereas legal considerations deal with the government, taxes and laws of a country. You
should understand the difference between the two.

Step 1: The price of everything is going up in SA

Having lost over 30% of its value against the dollar in January 2016, the weak rand is
causing everything to go up in price – from food, to medicine, to technology. According
to economists, South Africans should prepare themselves for a tough year in 2016.

An ongoing drought in South Africa is severely affecting food producers in the country,
forcing us to import staple foods at higher prices. According to reports from food producers,
food prices are expected to increase by at least 10% by the middle of the year. This is
expected to get even worse by April 2017, when food prices will be 25% higher.
BusinessTech, 19 January 2016

Step 2: Formulate pricing objectives

A pricing objective is a general goal that describes what an organisation hopes to achieve
through its pricing activities. Pricing objectives should be measured so that they can be
evaluated. They should be stated explicitly and should be in line with the overall objectives
of the company.

Pricing objectives can be divided into three categories: (1) profitability-oriented objectives,
(3) sales-oriented objectives and (3) status quo objectives.

(1) Profit-oriented objectives

• Profit maximisation objectives. Sometimes organisations want to set prices to get the
best possible profit from sales or to maximise profit. Profit is basically the difference
between total costs (production, marketing and distribution costs) and the income
produced by sales at a particular price level. Both pricing and profits depend on the
type of competitive environment a business faces, such as being in a monopolistic
position or selling in a much more competitive situation. This method unfortunately
does not take profitability into account.
• Profitability objectives. The profitability objectives relate the closest to the marketing
concept, because the ultimate goal of the marketing concept is the maximisation of
profitability over the long term. The most common profitability objective is the target
ROI objective, sometimes called the organisation’s return on total assets (investment).
ROI is a measure of the management’s overall effectiveness in generating profits with
the available assets. These objectives are the easiest to align with the overall objectives
of the organisation. ROI is calculated as follows:

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Any ROI has to be evaluated in terms of the competitive environment, industry risks and
economic conditions. It can be compared to the interest you earn on money that you,
for example, invest in the bank.

(2) Sales volume and market share objectives

Sales-oriented pricing objectives are based either on market share or on Rand or unit sales.
In this case, the sales objective is aimed at increasing the sales volume of the number of
units sold within a certain time period.

Activity 9.1

(1) Why do companies use sales volume objectives?

(2) Can sales volume objectives also be aimed at lowering the sales volume on
purpose?

37 Feedback

It is quite obvious that a business can aim to lower price in order to meet the price of the
competition. The business may also want to get rid of stock, for example perishable goods.
In the case of technological products where there is a trend in new developments in the
area, the business may decrease the demand for the old technology.

Sales volume objectives can also be aimed at lowering the sales volume on purpose. That
is what happened when the electricity tariffs increased in South Africa in 2016. However,
in this case, the electricity supplier could not keep up with demand and increased the
tariff for electricity as one method of encouraging people to use less electricity. At the
same time, the higher tariff made up for the possible loss in demand and increased the
provider’s income to enable it to build the capacity to supply more electricity. This objective
is sometimes part of demarketing.

• Maintain or increase market share, Market share is an organisation’s product sales as a

percentage of total sales for the industry. Sales can be indicated in Rand or in units of
product. Many companies believe that maintaining or increasing their market share is
an indicator of the effectiveness of their marketing mix. Larger market shares often do
mean higher profits, thanks to greater economies of scale, market power and the ability
to compensate top-quality management. Market share and ROI are strongly related.
• Maintain or increase sales volume. Rather than striving for market share, companies
sometimes try to influence sales volume. This type of pricing objectives is typically used
to achieve rapid growth in sales to discourage potential competitors from entering the
market. The objective is usually expressed as a percentage increase in sales volume
over a particular period of time. In some cases, businesses are willing to set a very low

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 price in order to penetrate the market while introducing the product to the market so
that it can create customer loyalty. When using this objective, the management’s task
is to calculate which price quantity relationship generates the greatest cash revenue.
• Status quo objectives. Competitive objectives are intended to either meet or
prevent competition, or consist of non-price objectives. When the objective is to
meet the competition, the aim is to imitate the price of the major competitor. When
the objective is to prevent competition, the prices are set as low as possible to deter
additional competitors from entering the market. When the objective is based on
non-price, the company opts to rather compete on another basis (such as the quality
of the product/service, location or merchandising strategy) than on price.

(3) Other pricing objectives

• Stabilising prices in the environment. This goal is suitable for the standardised products
of a market leader that sets prices.
• Meeting the competition. Where there is no market leader, an organisation can
deliberately price its products to meet the competition in the market place.

Step 3: Determine an approximate price level based on the cost, volume and profit
relationship
(1) Price determination according to the breakeven analysis
Breakeven analysis is used to calculate the amount of sales in units or Rand that is necessary
for total income to be the same as total costs at a set price. You must understand this,
but the calculations are a function of accounting and accountants.

Figure 9.1: Breakeven analysis

(2) Profit-based price determination

• Price determination according to target profits. This is the simplest profit-based method
of pricing if variable and fixed costs and units sold can be accurately estimated. In this
case, target profit is expressed in Rand value.
• Price determination according to target return on sales. When using this method, total
cost and units sold can be estimated accurately and, together with an acceptable
target-return-on-sales percentage, the unit price is easily calculated.
• Price determination according to ROI. This method is also called target-return pricing.
The target-return percentage, estimated units sold (Q), total cost (unit cost (UC) × Q)

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 and total capital invested are used to calculate the target-return price per unit. It is
calculated as follows:

The three pricing methods referred to above are actually finance-based approaches.
Marketing makes relatively little contribution to the setting of these prices.

(3) Price determination according to the experience curve

The experience curve idea was developed by the Boston Consulting Group in the mid-
1960s (The Economist 2009). They found that costs characteristically decline by between
20 and 30% in real terms each time accumulated experience doubles. This means that
when inflation is factored out, costs should always decline. The decline is fast if growth
is fast and slow if growth is slow. The method of experience curve pricing is based on
the learning-and-scale effect, which means that the unit cost of products and services
declines as a company gains experience at producing and selling its products.

“Learning effect” refers to the phenomenon where products are manufactured more
efficiently as employees gain a better understanding of the manufacturing and marketing
of their product(s).

“Scale effect” refers to the phenomenon of a decline in the unit cost where an increasing
number of units that are manufactured and marketed share the same fixed cost.

(4) Cost-based pricing

There are different pricing methods that are based on cost.

Cost-plus pricing
Supermarkets and other retail stores have such a large number of products that estimating
the demand for each product as a means of setting price is simply impossible. They
therefore use cost-plus pricing, which entails adding a fixed percentage to the cost of
all items in a specific product class. High-volume products usually have smaller markups
than low-volume products. These markups must cover the entire store’s expenses, pay
for overhead costs and contribute to profits.

Markup pricing only works if the price selected actually brings in the expected level of
sales. It remains popular for the following reasons:

• Sellers are more certain about costs than about demand. By tying the price to cost,
sellers simplify pricing – they do not have to make frequent adjustments as demand
changes.
• When all companies in the industry use this pricing method, prices tend to be similar
and price competition is thus minimised.

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• Many people feel that cost-plus pricing is fairer to both the buyers and sellers. The
sellers earn a fair return on their investment, but do not take advantage of the buyers
when demand increases.

Cost-plus-percentage-of-cost pricing
In this case, the markup is not set on the desired return on sales but as a desired percentage
of cost.

Price determination according to cost plus fixed-fee pricing

Cost plus fixed-fee pricing requires that the organisation add a standard fee to the costs.
For example, if the organisation always adds a standard fee of R15 to the costs, a product
costing of R100 would have an initial price of R115.

(4) Demand-based pricing

The next techniques require input from the marketing division based on their research
into customer competition behaviour.

• Value-based pricing. Customers attach different values to products. The organisation

should attempt to determine what value different market segments attach to a specific
product. These findings should feature prominently when deciding on a target.

One can see from this formula that a product’s value in the eyes of the customer
is greater when customers perceive greater benefits or when the price decreases.
Marketers often use the non-price variables in the marketing strategy to enhance
the perceived benefits or value in the customers’ minds. The price is set to reflect the
perceived value.

• Demand-backward pricing. Most successful businesses flourish because customers

are prepared to pay much more for their product than it costs them to manufacture
it. Sometimes, however, this is not the case and then the marketer has to make
adjustments to the other elements of the marketing mix (for example by lowering the
cost of raw materials, cutting down on distribution and promotion costs, or attempting
to persuade customers to pay more for the product through an effective promotion
campaign). Demand-backward pricing is a pricing method whereby prices are set
through determining what consumers are willing to pay and then deducting costs to
see if the profit margin is adequate.
• Prestige pricing. This pricing method is based on the principle that better quality
products usually cost more to manufacture and therefore have to be more highly priced.
Consumers therefore believe that high prices imply better quality. We all know that
this is not always the case, but we still assume it to be true with all products. Prestige
pricing is a deliberate attempt by the marketer to enhance the image of a product by
setting a high price for it.
• Odd-even pricing. Odd prices (such as R9,99 or R2 499,00) are set for products at
psychological levels where consumers distinguish between acceptable and higher
prices. A consumer may regard a specific product priced at R9,99 as reasonable, but

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 as expensive if it is priced R10,00 or higher. This approach is based on the belief that
consumers round off a price to its lower base point (R9,99 becomes R9,00 and R2 499,00
becomes R2 400,00).
• Price lining. Price lining is used if research shows that different market segments for a
specific type of product buy within a specific price range or price band. If such price
ranges or bands can be distinguished, marketers set their prices at the top end of each
price band to maximise profits.
• Traditional pricing. This happens when tradition, a standardised distribution channel
or other competitive factors dictate the price. For example, cold drinks in standard
vending machines have a customary price of R10 and a significant departure from this
price may result in loss of sales for the supplier.
• Bundle prices. By combining several related or even auxiliary products and selling them
together at one price, marketers create a bundle of benefits that meets consumers’
needs and represents better value to them.

Example
Manufacturers of cosmetics frequently put different products together with a gift (such
as a mirror or cosmetic applicators like brushes in one gift box) at a price that is lower
than the prices of the components added together.

• New-product pricing. Basically, a business has three pricing choices when entering a
market with a new product: It can set its price higher or lower than that of its competitors,
or it can come in with a middle-of-the-range price. When setting the price higher or
lower than competitors, a business is using it as a competitive weapon.
– A low price is aimed at selling more products than competitors, which will ensure
an increasing scale-and-experience effect that would lower cost levels and eventu-
ally lead to higher profit margins. This is called a penetration strategy and is one of
the options in the introduction phase of the product. The other option is a price
skimming policy (as explained next).
– If a high price is set, the marketer hopes to sell enough products to the top end
of the market to make above-average profits. If huge development costs were
incurred earlier, the high profit would quickly offset it – allowing prices to be
lowered when competition becomes tougher. This is called a skimming strategy.
It is important to note that this opportunity “to skim the cream off the market” is
available only once.
• Competition-oriented methods. In the highly competitive modern business environment
(mainly due to technological advances and globalisation), a study of the strategic
moves and decisions of competitors is necessary. One area of analysis is their pricing
strategies. Once competitors’ plans are known, the organisation can decide how to
set its own price for optimum results.
• Customary pricing. For some products, customary pricing is used. This happens when
tradition, a standardised channel of distribution or other competitive factors dictate
the price. For example, cooldrinks offered at standard vending machines may have a
customary price of R15 and a significant departure from this price may result in loss
of sales for the supplier.

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• Loss-leader pricing. Many retail stores deliberately sell a product below its customary
price to attract consumers to the store. This is a special type of promotion known as
loss-leader pricing. The purpose of this type of pricing is not to increase the sales of a
particular product but to attract customers to the store in the hope that they will also
buy other products, particularly discretionary items carrying large markups.
1. Sealed-bid pricing. When the government wants to buy school books, it would probably
use sealed bid pricing. The government informs a large number of prospective
companies of the specifications that the books must meet. The companies are invited
to submit a bid or tender that includes a specific price for the quantity ordered. The
bid must be submitted by a specific time at a specific location. Several days later,
the bids are opened in public and read aloud, and the lowest bidder who meets the
specification is awarded the contract. This pricing technique is part of B2B marketing.

Step 4: Price adjustments

Many of what we discussed above depends strongly on the work of the accountants
and financial management. Price adjustments, however, fall within the discretion of the
marketing management.
Instead of a final price, some businesses prefer to have a pricing structure that reflects
variations in geographical demand and costs, market-segment requirements, the time
of the purchase, the size of the order and other factors. The following forms of price
adjustments are discussed: discounts and adjustments according to the geographical
location of the buyer.

(1) Discounts
Trade or functional discounts, quantity discounts, cash discounts and other diverse
discounts are identified and within the discretion of the marketing management.

Trade or functional discounts

Trade or functional discounts are granted to middlemen and are usually calculated on the
retail price (the price the consumer pays). Assume that the retail price on an invoice issued
by the producer is R600 and a trade discount of 30% is granted to retailer purchases and a
trade discount of 10% is granted to the wholesale purchases. The two percentages quoted
indicate that the retailer usually performs more marketing activities than the wholesaler
and therefore the higher trade discount is applicable to the retailer. The trade discounts
are calculated on the selling prices of the various middlemen.

Example
Calculation of retail and wholesale trade discounts: In the example above, the retailer
sells the product to the consumer at R600. The retailer bought the product at R420
from the wholesaler, that is: R600–0.3(R600). The wholesaler sold the product at R420
to the retailer and must pay the manufacturer R540, which is R600–0.1(R600).

Quantity discounts

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Two types of quantity discounts are identified, namely: cumulative quantity discounts
and non-cumulative quantity discounts.

1. Cumulative quantity discounts. These discounts are granted on the basis of the amount
of products bought over a certain period of time from the marketer. The purpose is
not only to promote large orders, but also to establish a long-term relationship with
the buyer and to bind the buyer to the marketer. The cumulative quantity discount is
not calculated per order, but on the total purchases after expiry of a certain period.
2. Non-cumulative quantity discounts. The aim of these discounts is to encourage large
orders per transaction. Quantity discounts usually increase progressively with order
size. One frequently finds that long life milk is sold per unit or in bulk in quantities
of 6, 12 or 24. The price of the larger quantities is normally lower per unit as the
quantity increases. The benefits of these quantity discounts include encouraging
the customer to use more of the product and that the customer for a while uses
only the particular brand and will become brand loyal over time.
Another well-known example is that low quantities of meat cost more per kilogram
than when bought in bulk.

Cash discounts
A cash discount is a price reduction to buyers or customers who pay their accounts
promptly. A typical example is “2/10, net 30”, which means that although payment is due
within 30 days, the buyer can deduct 2% if the account is paid within 10 days.

Seasonal discounts
Seasonal discounts are price reductions to buyers who buy merchandise or services
out of season. Seasonal discounts allow the seller to keep production or sales steady
during the entire year. This can only be applied in certain circumstances. In South Africa,
stewing beef sells better in winter and the price thereof will normally be lower during the
summer time when the demand increases for braai meat instead of for stewing purposes.
Lower tariffs are also frequently charged by hotels and airlines during off-peak seasons.
Promotional pricing is especially prevalent during holidays or around special days like
Christmas, Mother’s Day and Valentine’s Day – although flower sellers will ask a premium
(high) price for their flowers.

Promotional pricing
Promotional pricing involves lowering a price below normal to enhance the effectiveness
of the company’s efforts to sell the product to cost-conscious customers. Department
stores frequently have clothing sales in an attempt to attract shoppers to the store in the
hope that they will purchase other clothing items that are not marked down.

(2) Geographical pricing

The geographical location of the buyer in relation to the marketer means that decisions
have to be taken about who should be responsible for transport costs.

• Free-on-rail pricing. According to free-on-rail (free-on-board) pricing, the seller quotes

prices that exclude delivery costs. The seller pays the cost of loading the products

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 onto a vehicle. The buyer pays the full transport costs of the products from the seller’s
location. All other factors being equal, the buyer who is located a long distance from
the seller has a price disadvantage compared with the buyer who is located nearer
to the seller.
• Freight-absorption pricing. A disadvantage of free-on-rail pricing is that it can help to
create monopolies. To prevent this, some businesses adopt freight-absorption pricing.
Here, the seller absorbs all the freight costs and quotes uniform prices irrespective of
the buyer’s location. The total transport costs are usually estimated and an average
transport cost for each order is included in the cost price of the product.
• Uniform regional pricing. Uniform regional pricing is a combination of free-on-rail pricing
and freight-absorption pricing. Prices in a particular region are therefore uniform, but
vary between regions because of transport costs (free-on-rail pricing).
• Base-point pricing. A base-point price corresponds – to some extent – with a free-on-rail
price, except that the seller quotes prices that include the transport costs from a certain
place (base point). The seller often uses more than one base point. The base point is
an imaginary point and not the physical point of distribution. Some of the advantages
that participants gain from an industry base-point price are that price competition
based on differences in transport costs is eliminated and the market’s geographical
extent is not limited by transport costs. Possible disadvantages are that the elimination
of price competition can result in higher and rigid prices, and consumer resistance
can develop if consumers discover that they are paying transport costs from a place
other than the place of origin.

9.3 MANAGING PRICE CHANGES

Organisations often face situations where they must initiate price increases or price
cuts. In either instance, the organisation must anticipate possible buyer and competitor
reactions to the price changes. The organisation may also have to initiate a response to
competitors’ price changes.

9.3.1 Initiating price cuts

Several situations may lead an organisation to consider cutting its price. One is excess
capacity. In this case, the organisation needs more business and cannot get it through
increased sales effort, product improvement or other measures. It may drop its “follow-
the-leader pricing” and aggressively cut prices to boost sales. An organisation may also
cut prices in a drive to dominate the market through lower costs. Either the organisation
starts with lower costs than its competitors or it cuts prices in the hope of gaining market
share that will cut costs even more (as a result of larger volume).

9.3.2 Initiating price increases

Over the last decade, it became necessary in many cases for many organisations to raise
their prices.

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Factors necessitating price increases include mainly aspects such as the following:
• Cost inflation. Rising costs squeeze profit margins and lead organisations to implement
regular rounds of price increases.
• Excessive demand. When an organisation cannot fulfil all its customers’ needs, it can
raise its prices or ration products to customers.
Organisations can increase their prices in a number of ways to keep up with rising costs:
• Prices can be raised unobtrusively by dropping discounts and adding higher-priced
units to the line.
• The price can be increased by making a package slightly smaller while still charging
the same price for the unit.
• Prices can be raised openly (for example, increase the price from R100 to R110).
Where possible, of course, the organisation should consider ways to meet higher costs
or demand without raising prices.

9.3.3 Buyers’ reactions to price changes

Whether the price is raised or lowered, the action will influence buyers, competitors,
distributors and suppliers. Customers are generally resistant to price increases, although
many customers are accepting it as a trend. If the price of petrol increases, for example,
the customers will not be happy but will accept that it is the result of unavoidable levies
and the exchange rate. If a certain manufacturer of cake flour suddenly increases the
prices of its products, it may result in customers starting to buy another brand.

9.3.4 Competitors’ reaction to price changes

Competitors are most likely to react when the
• number of organisations involved is small
• product is uniform
• buyers are well informed

9.3.5 Responding to competitors’ price changes

The organisation has to consider several issues:
• Why did the competitor change the price? Was it to gain more market share, to use
up excess capacity, to meet changing cost conditions or to create a price change in
the industry as a whole?
• Is the price change temporary or permanent?
• What will happen to the organisation’s market share and profits if it does not respond
to the competitor’s price change?
• Are other organisations going to respond?
Besides these issues, the organisation must do a broader analysis by considering its own
product’s stage in the life cycle, the product’s importance in the organisation’s product

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mix, the intentions and resources of the competitor, and possible consumer reactions to
price changes.

If the organisation decides that effective action can and should be taken, it might respond
in one of four ways:

1. Reduce its price to match the competitor’s price.

2. Decide that the market is price sensitive and that it would lose too much market
share to the lower-priced competitor.
3. Be concerned about the difficulty of recapturing lost market share later on.
4. Maintain its price, but raise the perceived quality of its product/service.

9.4 SEGMENTED PRICING

In segmented pricing, the organisation sells a product/service at a number of different
prices even though the difference in prices is not based on differences in costs.

9.4.1 Customer-segment pricing

Different customers pay different prices for the same product/service. Museums, for
example, may charge a lower admission for students and senior citizens. At most rugby
stadiums, scholars pay a reduced fee.

9.4.2 Product-form pricing

Different versions of the product are priced differently, but not according to differences
in costs. For example: Ryobi prices its most expensive drill at R1700, which is R1400 more
than the price of its least expensive drill. The top model has extra features, but these extra
features cost Ryobi only a few more Rands to make.

9.4.3 Location pricing

Different locations are priced differently, even though the cost of the offering at each
location is the same. For example, theatres vary their seat prices because of audience
preferences for certain seats.

9.4.4 Time pricing

Prices vary by season, month, day and even hour. Telkom offers lower “off-peak” rates
and swimming pool builders offer lower prices in winter.

For segmented pricing to be an effective strategy, certain conditions must exist:

• The market must be able to be segmented.

• The segments must show different degrees of demand.

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• Members of the segment paying the lower price should not be permitted to resell the
product to another segment paying the higher price.
• Competitors should not be permitted to undersell the organisation in the segment
being charged the higher price.
• The costs of segmenting and monitoring the market should not exceed the extra
revenue obtained from the price difference.

9.5 PSYCHOLOGICAL PRICING

9.5.1 Price as an indicator of quality

Price often causes emotional reactions in people. For example, many consumers use
price to judge the quality of products. When using psychological pricing, sellers consider
the psychology of prices and not simply the economics. When consumers can judge the
quality of a product by examining it or by referring to past experience with the product,
they rely less on price to judge quality. But when consumers cannot judge quality because
they lack the information or skill, price becomes an important quality signal.

Activity 9.2

Can you think of products where customers associate price with quality? Give reasons
for your answers.

38 Feedback

The easiest answer may be cosmetics. It is difficult to determine the quality and fragrance
of such products. Here, the customers rely on price as an indication of quality. Another
example is toothpaste. They appear much the same at face value, but each manufacturer
claims unique benefits for its brand/s. This can be very confusing and a high price may
convince some customers that it is a good brand that will live up to the claimed benefits.
A very low price, however, may put the quality of the product under suspicion and may
be questioned by the customer.

Another aspect of psychological pricing is found in reference prices. These are the
prices that buyers have in their minds and refer to when looking at a given product. The
reference price might be formed by noting current prices, remembering past prices or
assessing the buying situation. Sellers can influence or use these consumer reference
prices when setting prices. For example, an organisation could display its product next
to more expensive ones to imply that it belongs in the same class.

Sometimes retailers are a little more indirect when it comes to pricing from a psychological
point of view. Woolworths and Edgars often sell women’s clothing in separate departments
differentiated by price. The higher priced brands are meant to reflect better quality.

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Customers are also frequently very brand conscious and expect the more desirable status
brand to cost more, although there may not be any apparent difference apart from the
logo. This happens especially frequently in the case of suits, shirts, denim jeans and shoes.

9.5.2 Odd/Even prices

Even small differences in price can suggest product differences. Consider a magazine
priced R50,00, compared with one priced R49,95. The actual price difference is only five
cents, but the psychological difference can appear much greater.

9.5.2.1 International pricing

Organisations that market their products internationally must decide what prices to charge
in the different countries in which they operate. In some cases, an organisation can set a
uniform worldwide price. However, most organisations adjust their prices to reflect local
market conditions and cost considerations.

9.5.2.2 Pricing on the internet

The unique World Wide Web has and is introducing new paradigms that impact price
management. The transparent nature of the internet is likely to result in easier price
comparison and greater price competition, more standardised pricing, and ultimately
lower prices and greater value for customers.

The internet

• facilitates the buyer’s acquisition of quality information for various goods

• enables suppliers to update prices dynamically in response to observed demand
• enables the seller to create a meaningful market of potential buyers with price being
the outcome of an auction process rather than a pre-specification of the seller
• permits the prospective buyer to specify in detail the product’s requirements and put
fulfilment out to bid to an organised market of potential buyers

9.6 PROMOTIONAL PRICING

In the case of promotional pricing, organisations will temporarily price their products
below list price and sometimes even below cost.

Promotional pricing takes several forms:

Supermarkets and department stores price a few products as loss leaders to attract
customers to the store in the hope that they will buy other items at normal markup.

Sellers use special event pricing in certain seasons to draw more customers.

Some manufacturers offer low-interest financing, longer warranties or free maintenance

to reduce the price the consumer pays.

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The seller may simply offer discounts on normal prices to increase sales and/or reduce
inventories.

9.7 VALUE PRICING

During the recession of the 1990s, many organisations adjusted their prices to bring them
into line with economic conditions and the fundamental shift that occurred in consumer
attitudes toward quality and value. Increasingly, marketers have adopted value pricing
strategies offering just the right combination of quality and good service at a fair price.

9.8 SUMMARY
Pricing is one of the major aspects of a business. It is essential that the
correct formulas are used to ensure that an organisation is able to sell its
products at a profit. This will enable an organisation to make revenue,
maximise profits and grow. The unique nature of pricing is that it is the
only instrument that results in an income for the organisation. However,
just like the other marketing instruments, pricing can be used to compete
in the market and to differentiate the organisation or product from other
similar organisations or products.

9.9 CASE STUDY WITH QUESTIONS

aQuellé
aQuellé water is found buried along a fault line close to Kranskop. Initially
sought after to serve the needs of the community, it was discovered, when
tested, that the water was too pure to bath in or garden with. It had to be
bottled! The name “aQuellé” finds its origins in Latin and Germanic dialects.
The Latin word aqua which means “water” and the Germanic word Quellée,
which means “source” are joined to create “water source”–hence aQuellé.
Packaging has played an intricate role in the evolvement of the brand. When
launched in September 1998, aQuellé was bottled in standard PET bottles
with vibrant labels and a dynamic logo. Within the second year, coloured
caps were added to match the label and flavour. In 2004, aQuellé brought
out their customised, unique bottle to make aQuellé stand out and easily
recognised. The bottle was then updated a few years later to modernise
the look and a new bottle shape was launched for the natural spring water range to
differentiate the flavoured and natural waters.
Keeping abreast of technological advancements, the bottles are also continually light-
weighted to significantly reduce aQuellé’s carbon footprint.
The aQuellé product is flavoured, carbonated and bottled in a completely sterile
environment. The plant is equipped with the latest filling technology.
Flow-meter technology is used to avoid cross-contamination of the product. In addition,
all filling stations are located in laminar-flow units. aQuellé is very different from most
other South African bottled water producers.

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 • Firstly, it is different in its ownership. It is part of a non-profit organisation set up in the
1960s, located about 60 km from KwaDukuza, KwaZulu-Natal. Its founder experienced
people in the rural areas to be in dire need of good quality water and employment,
and set about establishing a range of projects including farming initiatives, a dairy
and the aQuellé bottling plant which provide employment, community upliftment
and share the premium quality water with the nation.
• Secondly, another major difference is that from the beginning, aQuelle’s managers
rejected the notion that the bottled water products could only be directed at
higherincome consumers. They believed that they could attract a broad range of
consumers.
Of course, this was partly because when they started producing in 1998, aQuellé
opted to focus on flavoured, lightly carbonated water products, which are closer to
the mainstream carbonated soft drinks (CSDs) market than natural (unflavoured) water.
This strategy was unlike that of any other South African bottled water producer at that
time, when flavoured waters were anyway hardly known in the market.
The result is that today aQuellé has a larger franchise in the “black” market, even in
rural KwaZuluNatal, and it sells across a broad range of income groups even though
its flavoured waters are priced at a premium to plain bottled water.
(Received and approved by Suzelle Stegen. Marketing Official. aQuellé. All in line with
the company’s slogan: aQuellé, 100% FOR PEOPLE.)
Source: Stegen (2016)

Questions

9.10 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. How do you think you will be able to use the skills you learned in this study unit in
your professional life or business?
2. What did you find difficult about this study unit? Why do you think you found it
difficult? Do you now understand the concept(s) you struggled with or do you need
more help? How will you get more help if you need it?
3. What did you find interesting in this study unit? Why?
4. Were you able to identify different sources of information or references that will
deepen your understand of the topic?
5. How long did it take you to work through this study unit? Are you still on schedule
or do you need to adjust your study programme?

9.11 REFERENCES
Stegen, S. 2016. All in line with the company’s slogan – aQuellé, 100% FOR PEOPLE. Case
study drafted for Unisa by aQuellé.

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The Economist, 14 September 2009. http://www.economist.com/node/14298944 (accessed
12 February 2017).

9.12 SELF-ASSESSMENT QUESTIONS

Question 1
Pricing objectives should be ... and should be in line with the overall objectives of the
company.
(1) based on cost
(2) stated explicitly
(3) competitive
(4) profitable

Question 2
… is a measurement system that calculates the margin of safety by comparing the amount
of revenues or units that must be sold to cover fixed and variable costs associated with
making sales. In other words, it is a way to calculate when a project will be profitable by
equating its total revenues with its total expenses.
(1) Return on investment (ROI)
(2) Breakeven analysis
(3) ROI analysis
(4) The experience curve

Question 3
Perceived benefits and value are part of … pricing.
(1) Demand-based
(2) experience curve
(3) demand-backward pricing
(4) price-lining

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Study unit 10
Promotion decisions

Contents

Overview
Learning outcomes
Key concepts
10.1 Integrated marketing communication as a backdrop to promotion decisions
10.1.1 Marketing communication planning
10.1.2 Marketing communication process
10.3 Advertising
10.3.1 Different types of advertising
10.3.2 Steps of managing the advertising campaign
10.4 Personal selling
10.4.1 Roles of salespeople
10.4.2 Types of salespeople
10.4.3 Types of sales jobs
10.4.4 Steps of the personal selling process
10.5 Sales promotion
11.5.1 Consumer sales promotions
11.5.2 Trade promotions
10.6 Direct marketing
10.6.1 Direct marketing methods
10.7 Public relations and sponsorship
10.7.1 Public relations activities
10.7.2 Sponsorship activities
10.8 Publicity
10.9 Summary
10.10 Case study with questions
10.11 Reflection
10.12 References
10.13 Self-assessment questions

OVERVIEW
Promotion refers to the sets of activities that communicate a product, brand or service to
consumers. Promotions decisions have to be made to accomplish synergy in communicating
the products, brands and services. Moreover, the promotion decision is an integral part
of communicating a product in marketing. Promotion activities influence the consumer’s
decision on whether or not to purchase a product/service. Promotion is aimed at informing,
persuading and reminding consumers about the products and brands in the market. This
is done intrinsically or extrinsically, hence it is important that when making promotion
decisions, managers understand the elements of integrated marketing communication

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(IMC): advertising, personal selling, sales promotion, direct marketing, public relations,
sponsorship and publicity. These elements are the focus of this study unit.

Figure 10.1: Integrated marketing communication

This study unit begins with the definition of IMC and an explanation of the communication
process. This is followed by a discussion of the promotion decision elements, namely
advertising, personal selling, sales promotions and direct marketing. Public relations and
sponsorships are also discussed. We conclude with a discussion on publicity.

This study unit will unfold as follows:

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 LEARNING OUTCOMES

On completion of this study unit, you should be able to

• define IMC.
• understand marketing communication planning
• discuss advertising, the different types of advertising and the steps of managing
the advertising campaign
• discuss the steps of the personal selling process
• define sales promotion
• discuss the different types of promotions
• define direct marketing and the different types thereof
• discuss public relations and sponsorships
• define and discuss publicity

KEY CONCEPTS

• integrated marketing communication (IMC)

• advertising
• personal selling
• sales promotion
• direct marketing
• public relations
• sponsorship
• publicity

10.1 INTEGRATED MARKETING COMMUNICATION AS A BACK-

DROP TO PROMOTION DECISIONS
IMC provides a backdrop to promotion decisions. The definition of the concept states
that it is concerned with a variety of communication disciplines.

The American Association of Advertising Agencies defines IMC as “…a comprehensive

plan that evaluates the strategic roles of a variety of communication disciplines –
advertising, public relations, personal selling, and sales promotion – and combines
them to provide clarity, consistency, and maximum communication impact”.

IMC was the buzzword during the late 20th century. Due to the impact of information
technology, changes occurred in the domains of marketing and marketing communications
which led to the emergence of IMC (Kitchen, Brignell, Lit & Jones 2004; Phelps & Johnson
1996; Duncan & Everett 1993). IMC is a controversial concept that has evolved from
coordinated promotional tools to a complex strategic process.

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Identifying the communication paths that influence consumer behaviour is an essential
marketing communications activity, the ultimate goal of which is creating marketing
messages to reach target audiences through the most appropriate channels. Adopting
the approach of IMC is not part of the marketing mix, but a holistic concept that involves
using marketing mix elements to create and strengthen relationships with consumers and
to send a unified message (Mihart 2012). The marketing mix consists of promotion, price,
product and place. These influence promotion decisions in that an advertisement normally
includes a product (for example, Dolce and Gabbana perfume) that is communicated,
at times the price of the product, and the place (for example, Edgars) where consumers
can find or purchase the product.

It is therefore important to look at marketing communication planning as these activities

must be planned prior to being implemented.

10.1.1 Marketing communication planning

Marketing communication planning is the blueprint for an IMC plan. The plan encompasses
the IMC elements (which we discuss in detail in subsequent sections). The planning
follows the basic management principles of planning, implementation and control.
Marketing communication is an integral, and somewhat complex, aspect of a company’s
communication or promotion decisions. The marketing communication plan describes the
message and media that can be used to communicate with the target market or audience.

A sound marketing communication plan integrates all the marketing activities of the
various departments in an organisation. The plan details what media can be used (for
example print or electronic media) to achieve the objectives. (The types of media are also
discussed in the section that follows which relates to promotion decisions.)

Let us now look at the communication process, bearing in mind that the main aim is to
create awareness and interest so that the consumer can purchase the product/service
communicated. A typical example is a Mercedez Benz car advertisement, where the
medium which the company uses is the television and communication focuses on key
features of the car. Another example is a Nando’s advertisement, which focuses on the
special pack of chicken it sells and includes the price of the product.

10.2 MARKETING COMMUNICATION PROCESS

The marketing communication process is defined as consisting of integrated activities to
identify the targeted audience and to prepare a well-coordinated promotional programme
to generate the desired response from the audience. It consists of the following steps:

• Set communication objectives. The main objective of communication is to inform,

persuade and remind consumers about the products/services offered. This creates
awareness, understanding and perceptions, and ultimately an organisation that can
reward positive behaviour (which is the repeated purchase of the product/service).
• Identify communication media. Companies must identify the appropriate media for
the target audience. The media that can be used are print, electronic or broadcast

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 media. Examples of print media are magazines, billboards and newspapers; examples
of electronic media are e-mails and social media platforms such as Facebook and
Twitter; and examples of broadcast media are television and radio.
• Implement the plan. Timing is extremely important when implementing a
marketing communication plan. It must be determined if a communication campaign
will run for a week, a month or bi-annually. The identified media also inform the decision
to implement the plan. The implementers must be specified. The steps of managing
an advertising campaign (in Section 11.3.2 we provide a detailed discussion of some
of these aspects as they are interlinked).

Figure 10.2: Communication process

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Figure 10.2 depicts an effective and affective communication process. Every communication
process has a set objective, for example to create awareness of a product/service. In the
case of an organisation with a cause such as the Cancer Association of South Africa, it could
be to create cancer awareness. The figure further shows that once goals and objectives
are set, an action plan that includes a strategy and recommendations are outlined so that
appropriate tools (in this case, media vehicles such as websites, social media or newspapers)
are considered for evaluation and approval prior to releasing the communication (such
as an advertisement). Different individuals or teams are responsible for the various stages
of the communication process. Once the process has been completed, there might be a
need to go back to the strategy and provide recommendations.

Note: It is important to understand the communication process in terms of decision

making and to be able to discuss it.

In the next section, we look at advertising, the different types of advertisements and the
steps of managing the advertising campaign to get the message across to consumers.

10.3 ADVERTISING
What is the first word that comes to mind when you think about advertising? Also, what
image(s) come to mind? Remember there is no correct or incorrect response. You probably
thought about communication or even the television. There is nothing wrong with that,
as advertising is a form of communication that is aimed at the masses to communicate a
product, service or organisation and that is done through various channels or platforms
such as television. In this age of technology, social media are also used as a platform
to communicate information about a product, service or organisation. The image that
possibly came to your mind was that of your favourite brand (perhaps Nike or Unilever),
product (Nike Air Max or Sunlight dishwashing liquid) or organisation (Nike or Unilever).
Most of the brand names are also organisation names.

Now let us unpack the definition of advertising.

Advertising is any paid form of non-personal presentation and promotion of ideas,

goods or services by an identified sponsor to mass target audience (Kotler & Keller, 2006:
Mortartv. Mitchell et al, 2013).

Advertising is non-personal in that it is communication that is targeted at the consumers

of a specific brand or product (Kotler & Keller 2006). In most cases, the identified sponsor
is the organisation or company that manages the product or brand. For example, Tiger
Brands manages portfolios of brands such as Albany, Purity and Jungle Oats. Another
example is Nike, which is a company name and product name (Nike Air Max or Nike Air
Jordan).

To sum up advertising, it can be said that it comprises of six basic components:

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1. Advertising is a paid form of communication, whether direct or indirect. Direct payment
can be a company paying the SABC or DSTV for advertising space, while indirect
payment can be donated space and time for advertising.
2. A sponsor is identified. This can be a marketer or advertiser, even though it might not
always be obvious to the audience, viewers or readers.
3. Advertising is persuasive. It involves positioning a brand or product in the mind of
consumers to build a relationship and create awareness.
4. It is aimed at a large audience. Looking at the media channels and platforms used, it
tries to be cost-efficient in reaching the masses.
5. Communication channels. The message is conveyed through, for example, the internet
and interactive media.
6. It has ever-expanding ways to convey the message.
Now that you have an understanding of what advertising is and entails, let us look at the
different types of advertising.

10.3.1 Different types of advertising

Before we look at the different types of advertising, consider some of the key terms used
in advertising.

Table 10.1: Key advertising terms and explanations

TERM EXPLANATION
Tag line This is an advertisement slogan that helps consumers to remember
a particular brand.
Brand This is the name of a product/service that is very easily recognised.
A logo, sign or colour can also identify a brand.
Campaign An advertising campaign is a series of advertisement messages
that share a single and consistent idea and theme that make up
the strategy to communicate a product/service.
Target audience This is the primary group of people at whom the advertisement
message is aimed.

Considering the table above, can you think of a tag line? What about the brand? Would
you say you purchase a product/service because of its brand name? Surely you have seen
an advertising campaign on the television or heard one on the radio or social media. What
advertisement do you recall and why? Do you think that it captured the target audience?

Do you see how these questions are interlinked and sum up an advertisement campaign
and its significance for consumer decision making and the company’s turnover.

Do the simple but interesting activity below. Identify the tagline that matches the brand
in the opposite column.

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 Activity 10.1

Tagline Brand
1. The best or nothing

A.
2. Think different

B.
3. Just do it

C.
4. I’m loving it

D.
5. Life is Good

E.

39 Feedback

Below are the correct matches.

Tagline Brand
1. The best or nothing B
2. Think different C
3. Just do it A
4. I’m loving it E
5. Life is Good D

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Now let us look at the different types of advertising. Bear in mind that advertising is
a one-way mass communication. There are two main advertising that are, advertising
products and services and advertising social issues.

10.3.1.1 Advertising products and services

There are three main types of advertising for products/services: comparative advertising,
generic advertising and advertising consumer products to men. These types of advertising
guide marketers in choosing the ideal advertisement for the company’s products/services.

(1) Comparative advertising

This is an advertisement for a particular product/service that mentions a competitor by
name in an attempt to show that the competitor’s product/service is inferior. This type
of advertising is regarded as not being creative and mimicry, and is ineffective. In South
Africa, there is a law that speaks to this type of advertising. The Advertising Standards
Authority of South Africa (ASA) established general principles for advertising. Use the
following link to familiarise yourself with ASA’s general principles:
http://www.asasa.org.za/codes/advertising-code-of-practice/section-ii-general.
This is a video clip link of an example of comparative advertising:
https://www.youtube.com/watch?v=LPka0zYMOQE.

(2) Generic advertising

Generic advertising is ideal for products in the introduction stage of their life cycle. This
type of advertising, because of the generic elements of brand advertising and competitive
brand advertising, serves to expand the market for the product class. Generic advertising
captures a general segment of the market and is mostly subject to government-supported
programmes. Think of the Arrive Alive advertisement that is driven by the government
to reduce the carnage on our roads. This link provides images, video clips and articles
about the campaign: https://www.arrivealive.co.za/.

The following link will take you to a video clip that shows generic advertising: https://
www.youtube.com/watch?v=2YBtspm8j8M. Remember that generic advertising is aimed
at influencing industry demand, compared to brand advertising which is aimed at
influencing brand consumption.

(3) Advertising consumer products to men

Women are known as regular shoppers, while men seldom go shopping. The aim of
this type of advertising is to try and persuade male consumers to purchase products
traditionally purchased by women. Below is a video link of such an advert:
https://www.youtube.com/watch?v=WypekECQUFE.

10.3.1.2 Advertising and social issues

Since advertisements tap into people’s emotions, they are deemed manipulative. The
argument is that some advertisements appeal to subconscious motives and can also

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be indirect emotional appeals (Akbari 2015). A question can be posed, are adverts
manipulative? Some might say no others yes. The thing is, it depends on the mind-set
of the receiver of the message.
Now that we have looked at the different types of advertising, we will now focus our
discussion on managing the advertising campaign. There are steps for managing the
advertising campaign. Before developing and managing an advertising campaign, it is
important to understand what will be advertised and why. Once this is clear, the process
can start.

10.3.2 Steps of managing the advertising campaign

It is important that marketers manage an advertising campaign, as advertising is an
effective way of reaching a large number of potential consumers. The steps of managing
the advertising campaign are discussed below.

Step 1: Analyse the present situation

It is important for marketers have an understanding of the competitors and customers;
they and/or other decision-makers should, therefore, conduct a situation analysis of the
present situation. The analysis provides valuable information to direct the advertising
campaign in that the marketer will know what are consumers’ specific needs, wants and
behaviour. Remember that change is the only thing that is constant and that consumer
behaviours evolve. Demographical data can be collected to profile consumers. These
could include information the age, race, gender, income and educational level of the
consumer. Psychographic and geographic data can also be collected as in marketing,
consumers who live in the same area and share similar behaviour are considered to have
similar consumption patterns.

Step 2: Set the advertising objectives

The advertising objectives are set to determine the target audience and the basic message
that should be delivered to the target audience. Furthermore, the desired results and
criteria to measure the campaign’s success must be set. Seasonal products can also be the
reason to develop an advertising campaign; in this case, the objectives must be aligned to
the season and the target audience. During the festive holidays, most retailers advertise
ornaments, food and gifts. Even tourism destinations advertise the different packages
that are available during the season.

Step 3: Determine the advertising budget

The budget is an important element and should be considered carefully, as it influences
the media to be used as a vehicle to communicate the product/service. If Jaguar products
are advertised in the Daily Sun newspaper, the target audience will not be reached. An ideal
media vehicle will be car magazines, television advertisements and online advertisements
on the company’s website. So, the budget is dependent on the media to be used and
how much the company wants to spend.

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Step 4: Select the media
The media that are to be selected depends mainly on the target audience, their reading
habits, what they listen to, what media they view the most and their buying habits. There
are different types of media to choose from: print, audio visual and broadcast media.
Examples of these media are advertisements in newspapers and magazines, outdoor
advertisements, advertisements on the radio and television, cinema advertisements,
and advertisements on websites and social media. Social media platforms are Facebook,
Twitter and WhatsApp when companies have a database with clients or consumers’
mobile numbers. A company like BMW would create a WhatsApp group or send individual
customers video clips on WhatsApp.

Step 5: Create the message

When creating an advertising message, the media play a significant role. There are different
approaches to creating a message, including rational, humorous and fear-inducing
approaches. The rational approach is based on facts. The humorous approach is full of
humour, for example the Nando’s adverts which are also relevant and incorporate what
is happening currently. Surely you can think of one Nando’s advert. The following link
will take you to a Nando’s advert: https://www.youtube.com/watch?v=2jaOd1v1B0Q.
The fear-inducing approach highlights the consequences of actions. Examples of such
advertisements are tobacco campaign and Arrive Alive advertisements. The following
link will take you to an advertisement where this approach is used:
https://www.youtube.com/watch?v=SfAxUpeVhCg.

Step 6: Pre-test the advertising campaign

Campaigns are pre-tested to determine if they convey the intended messages. Consumer
panels are normally used for pre-testing. Consumer panels must consist of customers
from the target audience for pre-testing to be meaningful. The content, language and
visuals are assessed by the consumer panel.

Step 7: Launch the advertising campaign

The timing of launching an advertising campaign is crucial. If retailers start advertising
festive holidays merchandise during Easter, would that make sense? A definite no –
remember that when launching an advertising campaign (particularly for a product), the
company or marketing manager is basically saying that the products are available. Will
their fruit cakes be available at retail stores at the wrong time of the year? The answer
is no. Will Christmas trees be available in Easter? The answer is also no. The advertising
campaign must be synchronised with the manufacturer’s products to ensure that the
advertised products are available at the right time and place, and the quantity is sufficient
for the targeted audience and market.

Step 8: Coordinate the advertising campaign

The advertising campaign must be coordinated with management and other departments.
There are different functional departments, including finance, human resources and
marketing. These departments must be coordinated. Before the management authorises
the campaign, finance considers the budget for the campaign, human resources determine

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the number of people to employ, and marketing considers the media and other marketing-
related needs for the campaign.

Step 9: Revisit the campaign

The advertising campaign should be revisited to ascertain whether or not the objectives
have been achieved. A company can conduct small-scale research to find out this
information. Online or self-administered surveys can be conducted to collect information.

Note: You should be able to discuss the steps of managing the advertising campaign
and provide examples of each step.

Activity 10.2

Moseki & Co, a new company, approached your agency to develop an advertising
campaign for its product launch. As a newly appointed intern, your manager delegated
the task of handling the media selection for Moseki & Co’s VIP mobile toilets to you.

40 Feedback

The first thing that you should consider is Moseki & Co’s target market. The advantage
with this company’s product is that it can focus on small and medium enterprises such
as Thuthukani events and also individual households. There are print, broadcast and
social media platforms that can be considered as media vehicles to communicate Moseki
& Co’s product. Print media that the company could consider are local and community
newspapers such as the Sowetan and Daily Sun. Think about other examples of local and
community newspapers. Social media platforms that are available are Facebook, Twitter
and WhatsApp when companies have a database with clients or consumers’ mobile
numbers. Moseki & Co could create a WhatsApp group or send individual customers a
video clip via WhatsApp that shows their VIP mobile toilets.

In the section that follows, we look at personal selling, the types of salespeople and the
steps of the personal selling process. Before we discuss these, however, it is important to
show the link between advertising and personal selling and its importance.

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Figure 10.3: The link between advertising and personal selling

Advertising and personal selling are concerned with creating recognition of a product/
service, reminding consumers of the offering and reassuring them about the benefits of
the products for consumers.

10.4 PERSONAL SELLING

Before we discuss personal selling, we have to define the term.

According to Kotler (2003), "Personal selling is defined as a face to face interaction

with one or more perspective purchasers for the purpose of making presentations,
answering questions and purchasing orders".

Personal selling is another form of promoting, persuading and informing the consumers
or clients about a product/service offered by an organisation or company. What is unique
with personal selling is that it is a face-to-face interaction with potential and existing
consumers. Traditionally, personal selling was door-to-door selling and this still happens.
If you live in the townships, you are probably familiar with salespeople who sell pillows,
duvet cover sets, cosmetic items and other consumer goods. These people come into your
yard to sell their products to everyone in the house. They are basically doing personal
selling. Personal selling also occurs in department stores such as Edgars or Woolworths,
where employees approach you in the aisle to provide product-related advice. Let us
look at the different types of salespeople.

Figure 10.4 shows different examples of personal selling. In the previous paragraph, we
touched on field (door-to-door) selling and retail selling.

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Figure 10.4: Examples of personal selling

Now that you have a picture of what personal selling is, it is important to look at the
roles salespeople play before discussing the types of salespeople in the sales industry
and environment.

10.4.1 Roles of salespeople

The roles of salespeople differ from company to company and according to the industry
where they work. Their roles are directed according to customer needs, sales tasks
and the application of the selling process. According to Cant (2016), the major roles of
salespeople are:

• Sales role. With this role comes the responsibility of stimulating demand and purchase
of the product/service offered. The aim of the sales role is to persuade customers to
purchase the product/service and this can be done using various selling techniques
such as focusing persuasion on the benefits of the product/service. There are other
persuasive techniques which are not the focus of the learning outcomes of this study
unit. They are not discussed here; however, the following links provide a video clip
and discussion on the techniques:
– https://www.youtube.com/watch?v=KlduzG27hjI
– https://www.youtube.com/watch?v=TraGMC4MDgk
• Marketing role. The main objective of the marketing role is for the salespeople to close
a sale on what they are offering to the customer. When you read about the marketing
role, think about what marketing is. The general impression is that marketing is
synonymous with selling. Is this correct? Yes, to some extent it is and they complement
each other. Marketing is the action of promoting and selling products and services.

276
 Consumer needs take centre stage as companies have learned over the years that the
outside-inside approach is ideal and sustainable in that the customer should come
first in everything they do.
• Customer relationship role. It is important to build rapport with customers. The role
of salespeople in this context is to build long-term relationships with customers
which have positive financial benefits for companies in the long run. This can be
achieved when salespeople develop trust in the relationship with customers. There
is an advertisement which epitomises/depicts the definition of trust; refer to the
following link: https://www.youtube.com/watch?v=6FFAcPBuimk. Once trust is earned,
it is easier to have interpersonal relationships with customers. What distinguishes
the customer relationship role from the sales and marketing roles is the fact that this
role is concerned with interpersonal communication in building and maintaining
relationships with customers.
We have looked at the roles salespeople play at their respective companies. Now we
will briefly discuss the types of salespeople. When reading the section, bear in mind the
different roles they play to get a clear picture and understanding of what is discussed.

10.4.2 Types of salespeople

There are three basic types of salespeople:

1. Order getters. These are salespeople who look for new customers, that is prospecting
(in sales management terminology and language). Order takers pursue consumers for
repeat purchases and make certain that customers have sufficient product quantities
where and when they need it. This does not require extensive sales effort. Inside
order takers receive orders by mail or phone, while retail salespeople take orders in
a retail store such as Woolworths or Starbucks. Field order takers go to customers
for orders and usually use laptops to improve the tracking of inventory and orders,
for example, a Kimberly-Clark salesperson who goes to companies for orders.
2. Order takers. These are salespeople who take orders from customers once the order
getters have qualified the prospects. Prospects are qualified on the basis of whether
they have the means to purchase the products/services offered by the salespeople
or their companies. The other qualifying base is the fact that there is a need for the
product. The challenge with taking an order from a company or individuals who
do not have a need for the product/service is that they are more likely to see what
is faulty or wrong with the product/service than those who have a real need for
it. This is because they experience what is called post-purchase dissonance. Post-
purchase dissonance occurs when a customer re-evaluates his/her decision and
feels dissatisfied. The customer would then lodge a complaint or return the product.
An example of order takers are individuals who are tasked with taking orders from
order getters and contact the suppliers for the products.
3. Support personnel. The evolution of customer service has promoted the notion of
providing after-sales service, which is an important component of sales. Customers
appreciate companies that make after-sales follow-ups, since it translates into
organisations being concerned not only about transactions (particularly monetary
ones) but also about how customers experience the goods/services sold to them.

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 Support personnel provide a service which creates a competitive advantage for
companies offering such service. It is not easy to copy a company culture supported
by after-sales service. After-sales service can be seen as a culture in that it is the way
things are done in a specific company. An example of support personnel is a technical
support team. In some cases, order getters also assume this role.
Now that we have looked at the types of salespeople that are in the sales environment,
let us briefly discuss the types of sales jobs in the sales industry prior to looking at the
process they go through in the selling process.

10.4.3 Types of sales jobs

Drotsky (2016) suggests that most salespeople are employed in one of three categories
of sales jobs. These three broad categories are discussed below.

1. Retail salespeople. These are salespeople who sell products/services to consumers

for personal use. Think about salespeople at Makhams or Aldo stores. They might
help you look for the right size of pants or shoes, or even suggest a perfume that
is new on the market. What these people are basically doing is to provide you with
retail sales assistance; they can even go so far as to suggest a different fabric for the
pants that you intend to buy for personal use. Salespeople who do door-to-door
selling and telesales have retail sales jobs. I am certain that most of you have had
experiences with various telesales personnel; most of the time, customers are not
keen to listen to what they are offering.
2. Wholesale salespeople. These salespeople are known as wholesalers or distributors.
What they basically do, is to purchase products from manufacturers such as Parmalat,
Nestle or BMW and from wholesalers such as Makro or Kit-Kat to sell to retailers for
resale or other manufacturers as end-consumer products. For example, salespeople
might purchase cheese and yoghurt from Parmalat to sell to retailers such as those
in a typical township Reitikile shop. In the case of BMW, for example, car dealerships
would buy directly from manufacturers to sell to the end-consumer who will purchase
and drive the car. This type of salespeople might buy in bulk from Makro to sell to
small retailers such as spaza shops; however, in most cases in South Africa, such
retailers purchase directly from wholesalers than have middlemen such as salespeople
do that on their behalf. A typical example of wholesalers is in technical sales, the
salespeople selling computers and its accessories to internet cafés in townships and
even those located in towns’ central business districts.
3. Manufacturer salespeople. These salespeople are employed in companies or
organisations that manufacture the goods offered in the markets. Their jobs include
delivering products to retailers, for example Blue Ribbon has salespeople who deliver
bread to all the retailers that sell it. If you are from the townships, you might have
seen the delivery vans/trucks delivering crates of bread to spaza shops and stores.
There are also salespeople who sell medical products to stores such as Dischem and
Clicks pharmacies and to medical practitioners.
Now that we know the roles and types of salespeople , let us look at the steps of the
personal selling process.

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10.4.4 Steps of the personal selling process

Figure 10.5: The steps of the personal selling process

The steps of the personal selling process are typical steps that salespeople follow to
get orders, take orders and provide after-sales support to customers (as it can be seen
in Figure 11.5). However, they may not always follow the process in sequential order.
Various authors who have written about the process seem to have different views on
the number of steps involved (Cant 2013, 2016; Drotsky 2016). However, for the purpose
of this module and study unit, we follow the nine steps discussed by Cant (2013). These
steps are discussed below.

Step 1: Attaining knowledge

It is imperative that salespeople acquire knowledge of the customers’ needs, wants,
behaviour, characteristics and motives for buying specific products/services or whatever
product/service the company wants to sell to the market. Knowledge of these is valuable
as consumers with similar behaviour, motives, characteristics, needs and wants tend to
have similar consumption patterns. Having this knowledge can assist in the selling process
because the salespeople can plan and present the products with detailed information
according to the needs and wants of the customers.
• Example in a formal business: This can be done by insourcing or outsourcing services such
as research to companies like Ask Afrika, searching for information on websites such
as AMPS or having the marketing division of the company sending out questionnaires
to determine customers’ behaviour, motives and characteristics.
• Example of an informal business: A typical local business owner of a spaza or tuck shop
may ask customers about the products that they would like him or her to stock in future.

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Step 2: Prospecting

Figure 10.6: Process of qualifying prospects

Figure 10.6 depicts the process salespeople use to qualify prospects. Prospecting is looking
for new customers who have a need or want for the products that salespeople offer. In
addition, prospects must have the means to purchase the products/services offered.
Imagine that as a salesperson, you are looking for prospects that do not necessarily
have the means to purchase the product/service you offer. It would be a futile exercise
because you will not be able to close the sale at the end of the day and that is important
in personal selling. Salespeople have technique to identify prospects.

• Example in a formal business: In retail stores such as Jet, Ackerman’s, Edgars and
Foschini, some customers just browse to see what styles or trends are in stock. It is
easy for experienced salespeople to identify these customers. Unilever or Procter and
Gamble salespeople might use referrals, networking or advertising as techniques for
prospecting. The advantage with such companies is that there is a budget for that.
• Example of an informal business: A spaza shop owner would be in a position to identify
such customers as he or she has experience as the owner. Someone who sells fruit at
a robot will certainly be able to identify prospects due to the experience he/she has in
selling at the specific spot. These street vendors might use networking or perceptions
about specific car brands and models as techniques. A Jaguar owner would prefer to
purchase fruit at Food Lover’s Market or Woolworths. The opposite holds true with
reference to budget when it comes to informal businesses; they rely on creative and
unique prospecting means. Thanks to technology, some registered informal businesses
are in a position to use WhatsApp, Facebook, Twitter and Instagram.

Step 3: Pre-approach to selling

In this step, the salesperson must gather as much information as possible to be able to make
a sound presentation. He or she learns more about the prospects that have been qualified
and learns about their environment, operations, clients, competitors and suppliers. With

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this kind of knowledge, the salesperson can make an informed presentation and this
shows the client that he or she knows the industry and company well.

• Example in a formal business: Imagine a salesperson at GG Boutique or Stuttafords

who knows your likes and dislikes, and preferred colour and style; he or she speaks
to your heart. Although it is not necessarily true for all of us, it is impressive. You may
even want to purchase an item in the particular retail store.
• Example of an informal business: The spaza shop owner could interview customers to
understand them better and to inform future purchases of items and products to sell
in the store. Street vendors may politely ask “madam”, “boss”, “malady” or “lekgoa” (as
they affectionately call their current and potential customers) what their preferences
and favourite fruit are in order to purchase the products that customers want from
the Tshwane Fresh Produce Market.

Step 4: Making the approach

This is the step where the salespeople make the actual approach. The client’s first impression
of salespeople is extremely important as it determines whether the salesperson will be
given an opportunity to make a presentation. The salesperson must make a comment
that captures the client’s attention and evokes interest. There is no time for small talk at
this stage, so the salesperson must get to the point as quickly as possible. Salespeople
can use the following approaches (Drotsky 2016):

• Introduction. The salesperson states his or her name, the name of the company he or
she is representing and the reason for the visit.
• Product demonstration. The salesperson attempts to engage the prospect in trying the
product; alternatively, if it is a service, the salesperson can provide video or audiovisuals.
• Customer benefits. The emphasis is on the benefits that will be derived from purchasing
the product/service.
• Curiosity. The salesperson opens the presentation with a question or statement.
• Question. The salesperson asks a question with the intention of getting a response
that will lead to the presentation.
• Statement. The salesperson opens the presentation with a bold and short effective
statement.
• Survey. The salesperson requests the prospect to complete a survey questionnaire to
gather more information.
• Compliment and shock. The salesperson uses compliments to boost confidence or
shock to play on the prospect’s emotions.
Examples are:
• Example in a formal business: A Kimberly Clark salesperson has an opportunity to make
a first impression. The salesperson will demonstrate the products to the prospect (for
example Unisa) and the management will evaluate the actual products.
• Example of an informal business: A street vendor who sells fruit at the robots will pay the
car driver a compliment to play with his or her emotions. He could say: “Yoh madam,
your hair looks super good today.”

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Step 5: Presentation
Because the presentation is an important step of the process, the salesperson must
stimulate interest from the start. Technology has made it easy for salespeople to make
creative, yet informative, presentations where they provide visuals of the products/services
the company that they are representing offer. Presentations can also involve using flip
charts, demonstrations and PowerPoint slides which incorporate visuals. It is ideal that
the salesperson gets the potential client to be actively involved with the product. The
emphasis on the product’s benefits is essential at this stage and it serves as a reminder
to the potential client. The manner in which the benefits are presented should suggest
that the product is a problem solver.

• Example in a formal business: A Kimberly Clark salesperson would highlight and emphasis
the benefits of using handtowels. He or she will emphasise that the basic range of roller
towels can be used for a variety of household cleaning needs, that it is an all-purpose
item to households, and that it is thick and super absorbent.
• Example of an informal business: Tree fellers must present their services as problem
solvers to home owners. The street vendor must convince the car owner or other
passengers about the benefits of the fruits he is selling and would therefore emphasise
the importance of eating fruits.

Step 6: Handling objections

Salespeople must anticipate objections. Some objections are an indication that the
potential client is interested in the product that was presented or that they are genuinely
concerned about the product or just not willing to purchase the product. The main
objections usually involve price, place and timing. If a prospect happens to object to the
price, the salesperson could emphasise the benefits of supporting the amount charged.
According to Drotsky (2016), there are different categories of objections: uncommon,
hidden, stalling, no-need, price, product and source objections. The following link provides
a discussion and explanations of the different categories of objections:
https://www.youtube.com/watch?v=xaY-YpePuio.

• Example in a formal business: Unisa could raise concerns about the price charged for
the Kimberly-Clark products presented, but the salesperson would emphasise the
value for money that the product offers the institution. A house owner would query
the price of hand towels and the salesperson would highlight the benefits of the hand
towels being an all-purpose item which indirectly saves money for the owner.
• Example of an informal business: The street vendor would emphasise the convenience of
buying the packet of fruit at the robots, thus saving petrol money to go to Woolworths;
or he would make a price comparison with Food Lover’s Market for the same, if not
similar, quality products.

Step 7: Closing the sale

This is the critical step where the salespeople pose a question that relates to closing the
sale. It should be timed well though, in order not to impose the product on the potential
client. Verbal cues such as the potential client asking a question like “How soon can you
deliver the products?” is the perfect time to close the sale.

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• Example in a formal business: Unisa representatives or management would ask the
Kimberly-Clark salesperson how soon he or she can deliver the products or whether
the price includes delivery charges.
• Example of an informal business: A street vendor would ask if he can give the potential
client a packet of apples or other fruit.

Step 8: Follow up
It is important to make follow-up calls to clients, as this helps to build a long-term
relationship with them. It can be argued that after-sales service is important for transactions
involving a lot of money. But if you think about it, an SMS from a retailer thanking you
for your recent purchase could go a long way in securing a long-term relationship with
retailers such as Truworths and Rochester. It has the potential of building loyalty from
customers.

• Example in a formal business: In this case, the salesperson from Kimberly-Clark would
send a follow-up e-mail to check if Unisa is satisfied with the products – or better, he
or she can pay a personal visit.
• Example of an informal business: The street vendor would ask the motorists the next
day when they pass if they had enjoyed the fruit. A spaza shop owner would ask the
consumers if they are satisfied with the cans of KOO fruit salad they bought or the
low-fat milk that is now in stock.

Step 9: Staying in close contact

Ideally, a company must keep a database of all its clients’ information. This information
can be useful for future sales.

• Example in a formal business: Kimberly-Clark would have a database of its clients, such
as Unisa and shopping malls to which they supply their products.
• Example of an informal business: The street vendor relies mainly on his memory to
recognise his clients, in comparison to the companies which save the information of
their clients in a computer database. This is what makes SMSs so unique and interesting
through a business lens.

Note: After studying this section, you should be able to discuss the steps of personal
selling in detail and provide examples of each step.

Let us now look at sales promotion.

10.5 SALES PROMOTION

According to the American Marketing Association, sales promotion is "those marketing

activities other than personal selling, advertising, and publicity that stimulate consumer
purchasing and dealer effectiveness such as display shows, expositions, demonstrations
and various non-recurrent selling efforts not in the ordinary routine".

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Sales promotion is a short-term strategy. It is the process of persuading a potential
customer to buy the product. Sales promotion is designed as a short-term tactic to boost
sales and is rarely suitable as a method of building long-term customer loyalty. There are
sales promotions that are aimed at consumers, but it is mainly used to introduce new
products, clear out inventories, attract traffic and lift sales temporarily.

What word comes to mind when you see the pictures below? You probably thought of
sales, discounts or saving money. That is absolutely correct, as sales promotions give
customers an opportunity to save money because they purchase the product that they
want at a lower price. Most retail stores in shopping malls put their items on sale after
the festive holidays to push the products out of the stores. Think about the Christmas
and Easter holidays or winter, when retailers are bound to put items on sale.

Figure 10.7: Examples of sales promotions

The different types of sales promotions are discussed in the following subsection.

10.5.1 Consumer sales promotions

Consumer sales promotions are marketing promotion decision techniques that are used
to attract consumers to purchase a product/service. These techniques are typically used
for a specific period of time. The most common consumer sale promotion techniques
are sampling, coupons and price reduction.

• Sampling. This type of sales promotion involves giving free samples of products to
consumers for free. This is to encourage them to try out the products. Most beauty
products use sampling so that the market can know about the product. Examples are

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 the 5 ml bottles of Dolce and Cabbana perfume or small sachets of Nivea for men. An
advantage of sales promotion is that consumers get to use or try out the actual product.
• Coupons. Although this is uncommon in South Africa, this type of sales promotion
provides price deals and percentage-off deals that are displayed on a coupon or
poster at the shelf to consumers. Omo once provided percentage-off deals on their
washing powders.
• Price reduction. This is a temporary price reduction on products/services offered.
Consumers can get used to price reductions and wait for them. In South Africa, it
is common knowledge that there will be price reduction sales on products ranging
from cars to clothing and beauty products after every festive season or special holiday.
Other types of sales promotions are:
• Checkout promotions. Pick n Pay price match is a good example of checkout promotions.
The redeemable amount is printed on the grocery slip and indicates the last date by
which to redeem the price.
• Coupon booklets. Shoprite used to have sales promotions where consumers could buy
stamps throughout the year and redeem them for Christmas or other festive grocery
shopping.
• Contest or lucky draw. Lucky draws are linked to a contest. Toyota once ran a Toyota
Buy & Win and Test Drive & Win lucky draw contest where potential customers earned
tan iPad Mini 16 GB by simply test driving a Toyota.
• Kids-eat-free specials. You find these types of sales promotion in most food retailers,
particularly restaurants such as Pavarotti’s and Spur.
• Loyalty/rewards programmes. Most retailers have loyalty cards or rewards programmes.
Examples are the Clicks clubcard, Dischem loyalty benefits card, Panarotti’s loyalty card,
Pick n Pay smart shopper card, Woolworths WRewards, FNB eBucks card, Toys R Us’s
rewardsRus and Edgars Thank you card. Try to identify more of these programmes.
• Mobile couponing. Vodacom customers get talking points that can be redeemed for a
cellphone; there are also power hour promotions. MNT offered yellow deals.
• Money-off deal. The price reduction is marked on the product. Usually a red price
sticker is put on top of the original price of the product.
• Online couponing. These are normally printed online and taken to the stores. Because
of technology, this is also done by sending SMSs to customers with links or a unique
code which they show in-store, Woolworths and Keedo use such sales promotions.
• Price-on-pack deal. This is the famous Makro type of sales promotion, the R100 sale.
• Rebates. These are found in most banks, where customers get interest charges rebates
on a monthly basis. Rebates are more like cashbacks. FNB introduced the savings
pocket, a product where change from a customer’s monthly purchase is saved into
the account. FNB rounds up the amount charged on each successful point of sale
transaction on a debit or cheque card to the nearest Rand. These rounded up amounts
are transferred to the FNB Linked Savings Pocket on a weekly basis.
• Point-of-sales displays: This is ideal for pushing impulse purchases as the products are
put in the rows that leads to the till points. Observe this the next time you go to a
food retail store.

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Successful consumer-oriented sales promotions provide value-for-money perceptions to
customers. They increase value, create an association, create engagement and generate
an immediate consumer buying decision.

Note: After studying this section, you should be able to briefly discuss the different
types of consumer-oriented sale promotions with the aid of practical examples.

10.5.2 Trade promotions

Trade promotions are aimed at wholesalers and retailers as intermediaries to buy and sell
large quantities of a company’s products (Drotsky 2016:191). Trade promotions are also
termed B2B sales promotions. The main types of trade sales promotions are:

• Dealer incentive. This incentive is given to the retailer to encourage purchases of more
quantities of the product and to prominently display the product.
• Point-of-purchase display. These are normally the products that are displayed towards
the till points to create a need for the products. The aim is to push impulse purchases
while customers queue to pay for products. The products that are displayed there are
convenience goods.
• Push money. This is extra commission paid to retail employees to push products; the
employee recommends a certain brand over the others. One can only wonder if this
is ethical.
• Trade allowances. These incentives are given to the retailer to stock up a product.
• Trade contest. This is done to promote increased product purchases. The retail branch
that sells the highest volume of the product during the promotion receives a reward.
Mr Price stores could set a target for say Easter sales and the branch with the highest
turnover for that period will get the reward.
• Training programmes. This is training employees undergo to gain product knowledge.
In the case of high-tech products or dealerships like Jaguar, employees would be
trained to show clients how the car operates so that the customers know the basics
and then read up on the rest of the features in the manual.
The above types of trade sales promotions create interest about the product and encourage
retailers to purchase large quantities of products from manufacturers. These sales
promotions can stimulate in-store merchandising or trade support and also manipulate
the inventory held by the wholesaler or retailer. They can help to expand the distribution
of products to new areas or new types of retail outlets.

Note: After studying this section, you should be able to briefly discuss the different
types of trade-oriented sale promotions with the aid of practical examples.

Now that the different types of consumer and trade sales promotions have been discussed,
we will now look at the definition of direct marketing and the different direct marketing
methods.

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10.6 DIRECT MARKETING
Direct marketing is viewed as a more effective marketing communication method. This
is because it combines elements of the marketing communication mix, advertising, sales
promotion and personal selling and leads to a direct sales transaction without the presence
of an intermediary or salespeople. Direct marketing is defined as follows:

Direct marketing is when marketing materials are provided directly to the consumer on
an individual basis, eliminating the middlemen by communicating information about a
product or service directly, which aims to elicit an action (Cant 2013; Cant & Erdis 2015).

It is important that you understand the definition of direct marketing and are able discuss
it. What is important in direct marketing is that it directly acquires and retains customers.
The foci of direct marketing are response, interaction, relationship, a database and that it
is part of an overall strategy. Let us unpack these foci for a better and clear understanding
of the definition.

• Response. Consumers are meant to send back order forms by mail/e-mail or via a website
in response to an invitation. HomeChoice practises direct marketing in this manner.
• Interaction. This involves the supplier, for example HomeChoice or Direct Axis, and
the customer who has a need or want for the product.
• Relationship. There are cases where the process is ongoing so that a relationship is
developed between the retailer and the customer. Repeat purchases of HomeChoice
products via catalogues are an example of a relationship that has been established.
• Database. This is used to store information of active customers for cost-effective client
management.
• Part of an overall strategy. It is an integral part of the overall marketing communication
strategy.
Now that you know the definition of direct marketing, let us look at the various direct
marketing methods used to elicit a response and interaction and build a relationship and
a database. All these form part of the overall communication strategy.

10.6.1 Direct marketing methods

There are various direct marketing methods; however, the focus of this study unit and
module are on the methods shown in Figure 11.8.

Figure 10.8: Direct marketing methods

These direct marketing methods are discussed below.

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10.6.1.1 Telemarketing/Telesales
Telemarketing involves sales that are done over the telephone. Lately, telephonic marketing
is done by most telecommunications service providers. It involves systematically dialling
listed numbers from a specific database of customers; hence, customers may receive calls
on consecutive days from one company. These salespeople call from the company’s call
centre. Virgin Active used to call potential members to ask if they would like to become
gym members; nowadays they stand in a small stall in the mall promoting the gym.

10.6.1.2 Direct mail

Direct mail uses postal services or private delivery companies such as DHL or RAM to
deliver products to customers. The direct mailing of any marketing communication
materials are done to ensure the distribution of the advertising effort. Normally the
mailed items contain a despatch envelope, a letter explaining the process and purpose, a
brochure to peruse, a prepaid reply envelope in the event that the client places an order
and an incentive to respond like 10% off when an order amounting to R300 or more is
placed. Companies use two types of mailing lists: an internal list that is available from the
marketer or an external list which is collected and sold by outside sources. The external
list is problematic in that South Africa introduced the Protection of Personal Information
Act 4 of 2013 (POPI Act). You can read about the Act online at:
https://www.saica.co.za/Technical/LegalandGovernance/Legislation/
ProtectionofPersonalInformationAct/tabid/3335/language/en-ZA/Default.aspx.
This act requires the citizens of the country to give consent for companies to contact them.

10.6.1.3 Catalogues
Catalogues are photographic in nature and contain descriptions of products with images
so that the customer can know what the products look like and order them. In the past,
customers would get catalogues on products ranging from clothing items to personal
items. A catalogue can be a very effective communication instrument when the company
has a good reputation.

10.6.1.4 Direct-action advertising

This direct marketing method uses mass media and newspapers to stimulate responses
from the audience or readers. This method is similar to telemarketing. Verimark promotes
its products on television and provides viewers with a contact number to call to place an
order. There are also Verimark stores nationwide.

10.6.1.5 Interactive electronic media

Interactive electronic media are digital computer-based systems that respond to the user’s
actions by presenting content such as text, moving image, animation, video, audio and
video games. These actions can also be done on smartphones.

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In the past, these media involved individuals purchasing products seen on television by
phoning the company and providing their banking details. With technological advances,
these media have improved and now consumers purchase products seen on social
media platforms such as Facebook by using their credit cards. Consumers can go to the
company’s Facebook page to view the products and place orders.

10.6.1.6 Internet commerce

This is also called e-commerce. Internet commerce entails commercial activities, including
placing orders, making payments and transferring funds. It provides convenience to
consumers, as they can make purchases in the comfort of their homes. This direct marketing
method requires a computer and access to the World Wide Web so that payments can
be made by using a credit card or electronic funds transfer services. Most transactions
these days are done online. Smart phones also afford consumers the benefits of online
banking services and retail activities. There are eWallet services and cash is sent using
smart phones and online banking. Surely you have used one of these services at some
stage and some of you (and ourselves) are now addicted to online services.

10.6.1.7 In-home personal selling

This method is lately used to create leads because most people are not home during the
day. It is similar to door-to-door selling.

Other direct marketing methods are:

• Television or radio direct response marketing. This involves paid for forms of communication.
The marketers purchase a time slot to advertise their products and services on television
channels and radio stations. Small companies go to a local community radio station,
while big companies like Verimark advertise on television.
• Print media. These media can be cost effective depending on the newspaper and page
where the products/services will be advertised. Companies buy advertising space in
magazines or newspapers depending on the target audience. If a company wants to
reach unemployed people in the townships, it will advertise in newspapers such as
the Daily Sun as they are cheap and affordable to community members.

Note: After studying this section, you should be able to discuss the different direct
marketing methods by means of practical examples.

We will now focus our discussion on public relations and sponsorship.

10.7 PUBLIC RELATIONS AND SPONSORSHIP

According to the Public Relations Society of America, public relations can be defined as:

"Public Relations is a strategic communication process that builds mutually beneficial

relationships between organisations and their publics".

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The definition highlights key points, which are:

• The definition focuses on the basic concept of public relations as a communication

process, one that is strategic in nature and emphasises “mutually beneficial relationships”.
• “Process” is preferable to “management function”, which can evoke ideas of control
and top-down, one-way communications.
• Relationships relate to the public relations role in helping to bring together organisations
and individuals with their key stakeholders.
• “Publics” are preferable to “stakeholders”, as the former relates to the very “public”
nature of public relations; whereas “stakeholders” has connotations of publicly
traded companies.
Public relations become more important and strategic during times of change. While
affecting change, it is also affected by change. Practitioners feel that they have made
an important contribution to social upliftment and black economic empowerment
(Holtzhausen 2005).

Public relations basically involve building good relationships with various stakeholders
by focusing on gaining favourable publicity, creating a positive image, and controlling
unfavourable rumours or potential unfavourable rumours. Hence, we find companies
involved in sponsorships to supplement public relations activities. With this in mind, let
us look at the definition of sponsorship.

Sponsorship is defined as aligning a brand with the marketing assets of an entity to

exploit the associative and commercial potential created by the alignment thus aiding
to meet specific objectives for a positive brand image, reputation and sales (Mathapati
2014).

Sponsorship is a powerful marketing tool that increases the visibility of a company and
creates brand associations. If done well, it can enhance relationships with customers
through emotional bonds and once a company has tapped into consumers’ emotions, it is
somewhat guaranteed their loyalty. A benefit of sponsorship is that it can be tailor made
according to the events or objectives set by both the sponsor and the beneficiary. The
following link will take you to PowerPoint slides with a detailed discussion on sponsorship.
It will give you a picture of how public relations positions are advertised in the real working
world and shows how public relations and sponsorships are linked:
http://joblistsouthafrica.com/bp-africa-public-relations-and-sponsorship-manager.html.

Now that public relations and sponsorship have been defined, let us look at the public
relations and sponsorship activities.

10.7.1 Public relations activities

There are four main public relations activities. These activities promote positive attitudes
and behaviour towards a business or company. The main types of public relations activities
are:

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• Open-house policy and tours. This public relations activity is aimed at creating
transparency and goodwill between the manufacturer and the clients or customers.
An example is in companies such as BMW, Parmalat and Nestlé, where clients or
customers are given the opportunity to see how products are manufactured (in terms
of BMW) and processed (in terms of Parmalat and Nestlé).
• Exhibitions and shows. Here companies are in a position to exhibit and show the
products and services that they offer in an attempt to build a positive image of the
organisation. Exhibitions are focused on creating awareness and enhancing the
reputation of the company with the opportunity to sell the products at the end of
the day. Exhibitions and shows are an effective way of communicating with external
stakeholders.
• Organised social activities. These are used to project a favourable image of the company.
It is also a platform for networking. A typical is a company’s golf day. The company
will organise tickets and refreshments for its clients. The clients get an opportunity
to network with the company’s CEOs, CFOs, directors and external stakeholders.
• Lobbying. This is mostly done in government by government representatives. These
representatives are tasked with informing and persuading the government on behalf
of the company to influence parliament decisions. The following link will take you
to a page where different lobbying activities can be seen in relation to influencing
parliament: https://www.parliament.gov.za/.

10.7.2 Sponsorship activities

Sponsorship is known to exploit the associative and commercial potential of a company to
create and build a positive brand image, reputation and sales. To achieve a positive brand
image, reputation and sales, companies consider the various sponsorship categories/types:

• Sponsorship for an event. To sponsor something is to support an event, activity, person

or organisation financially or by providing products/services. A sponsor is the individual
or group that provides the support, similar to a benefactor. An example is Nedbank
sponsoring wildlife.
• Corporate sponsorship. Corporate sponsorship is a form of advertising where companies
pay to be associated with certain events. When the sponsorship of a non-governmental
organisation or charitable event is involved, the sponsorship activity is often referred
to as event marketing or cause marketing.
• Advertising sponsorship. Sponsorship advertising is a type of advertising where
a company pays to be associated with a specific event. In fact, sponsorship advertising
is prevalent for charitable events. Apart from charitable events, companies sponsor
local sporting teams, sports tournaments and other community events.
• Sales sponsorship. Sponsorship is a vehicle a business can use to help raise awareness of
the company and its brand by supporting what is typically a charitable or community
effort. For example, sponsoring a local baseball team by purchasing their uniforms and
putting the business logo on the back of the uniforms. Jaguar sponsors local comedian
Tumi Morake in a bid to increase awareness of and the sales of their products.
• Brand sponsorship. This involves supporting an event, activity, person or organisation
financially or by providing products/services. The individual or group that provides
the support (similar to a benefactor) is known as the sponsor.

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• Sports sponsorship. This entails providing support for sports events by, for example,
sponsoring the cars for Formula 1 racing or soccer kits for sporting clubs. The Sun City
golf challenge is another example of a sponsored sports event. Some events, like the
Olympics and the FIFA World Cup, attract huge audiences and this is good for sponsors’
visibility. The Mamelodi Sundowns soccer team has an academy for young soccer
players and sponsors their academic activities and soccer events and kits. The following
link will take you to the newspaper article on the Mamelodi Sundowns sponsorship:
http://www.kickoff.com/news/48887/
mamelodi-sundowns-in-line-for-new-sponsorship-deal-this-season.

Note: You should be able to define public relations and sponsorship. You should also
be able to discuss the different public relations and sponsorship activities.

Now that you understand what public relations and sponsorship are, let us look at what
publicity entails.

10.8 PUBLICITY
Publicity is an element of the marketing communication functions that influence
promotions decisions about the products/services of an organisation.

Publicity is defined as non-personal communication regarding an organisation, its

position on certian issues and its activities (Du Plessis, Bothma, Jordaan & Van Heerden
2003:276).

Non-personal communication about an organisation includes announcements, editorials

and news stories. Publicity must be credible in order for it to be impactful. The media
can influence a company’s publicity campaign or activities, either negatively or positively.
Visit the following website to see negative publicity about the Uber company:

https://www.forbes.com/sites/quora/2017/03/02/is-ubers-recent-negative-publicity-
helping-or-hurting-the-snap-ipo/#5395d83a3010.

There are various forms of publicity:

• Press or news release. This is an official statement issued to print media such as newspapers
to provide information on a particular matter. It contains positive newsworthy information
about a product, brand or service. This link will take you to a page on how to write a press
release: http://www.cbsnews.com/news/how-to-write-a-press-release-with-examples/.
• Special events. These are organised by an organisation to gain attention and create a
favourable opportunity for journalists to report about the business. Spar sponsors the
Spar Women’s Challenge (also known as the beautiful race) during Women’s Month
in South Africa. This event gets a lot of media attention and other sponsors who
collaborate with Spar.
• Sponsorship. Companies engaged in sponsorships as part of their corporate social
responsibility, which creates a positive image and reputation for the company. Sports

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 sponsorships are an example of positive publicity. Sponsorship creates awareness
about the company and its offerings.

10.9 SUMMARY
Promotion decisions are centred on creating awareness, providing
information and communicating a company’s offering to influence the
consumer’s decision to purchase the product/service. These decisions
are crucial in getting the product/service to the target market. Because
communication is important in any context, we defined IMC and discussed
the communication process and the elements of IMC as the core aspects
of this study unit.
A clear understanding of the IMC concepts or elements can set companies
on the right path to make sound promotion decisions. What is clear from
the discussions is that consumer behaviour, characteristics, needs and wants
are pivotal in promotion decisions.

10.10 CASE STUDY WITH QUESTIONS

Read the case study below and answer the questions that follow.

Aaisha is an up and coming local clothing designer from Pretoria who designs and sells
her own brand of clothing, StrangeOlive, at local flee-markets. You are a local investor
who has noticed Aaisha's designs and has approached her with an opportunity to grow
the StrangeOlive brand further. Aaisha has asked you to provide her with a brand strategy
of how you plan to grow the StrangeOlive brand before she makes any decisions.

Questions
1. Explain the different types of promotions that Aaisha can use to increase her product
sales.
2. Discuss the steps of managing an advertising campaign and give examples from
the StrangeOlive case study.
3. Define and discuss public relations and sponsorship, and advise Aaisha about
the different public relations activities and sponsorship categories to consider in
promotion decisions.

10.11 REFLECTION
Before you continue with the next study unit, reflect on the following questions:

1. How do you think you will be able to use the skills you learned in this study unit in
your professional life?

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2. What did you find difficult about this study unit? Why do you think you found it
difficult? Do you now understand the concept(s) you you struggled with or do you
need more help? How will you get more help if you need it?
3. What did you find interesting in this study unit? Why?
4. Were you able to identify different sources of information or references that you can
use to deepen your understanding of the topic?
5. How long did it take you to work through this study unit? Are you still on schedule
or do you need to adjust your study programme?

10.12 REFERENCES
Akbari, M. 2015. Different impacts of advertising appeals on advertising attitude for high
and low involvement products. Global Business Review 16(3):478–493.
Cant, MC. 2013. Marketing: An introduction. 2nd edition. Cape Town: Juta.
Cant, MC. 2016. Essentials of marketing. 5th edition. Claremont: Juta.
Drotsky, A. Sales management. 2nd edition. Cape Town: Juta.
Duncan, TR & Everett, SE. 1993. Client perceptions of integrated marketing communica-
tions. Journal of Advertising Research 32(3):30–39.
Du Plessis, F, Bothma, N, Jordaan, Y & Van Heerden, N. 2003. Integrated marketing com-
munication. Claremont: New Africa Education.
Holtzhausen, DR. 2005. Public relations practice and political change in South Africa.
Public Relations Review 31(3):407–416.
Kotler, P & Keller, K. 2006. Marketing management. 12th edition. Upper Saddle River, NJ:
Pearson Education.
Kitchen, PJ, Brignell, J, Lit, T & Jones, GS. (2004). The emergence of IMC: A theoretical
perspective. Journal of Advertising Research 44(1):19–30.
Phelps, JE & Johnson, E. 1996. Entering the quagmire: Examining the “meaning” of inte-
grated marketing communications. Journal of Marketing Communications 2(3):159–172.

10.13 SELF-ASSESSMENT QUESTIONS

Question 1
… is a paid form of communication that Msizi Trading can use to present and promote
the business’s purified water to the households in Ga-Rankuwa township.

(1) Sales promotion

(2) Advertising
(3) Sponsorship
(4) Direct marketing

Question 2
A tagline is … .

(1) a message that shares the single and consistent idea and theme that make up a
strategy
(2) a logo, sign or colour that helps consumers to remember a particular brand
(3) a message that shares multiple ideas and themes that make up a strategy
(4) an advertising slogan that helps consumers to remember a particular brand

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Question 3
In managing an advertising campaign, consumer panels are ideal for … .

(1) creating the advertising message

(2) timing the launch of an advertisement
(3) pre-testing the advertisement
(4) media selection

Question 4
Stimulating the demand for and purchase of a product is a responsibility that comes
with the role of the salesperson.

(1) customer relationship

(2) support personnel
(3) marketing
(4) sales

Question 5
… salespeople sell products and services to end-consumers for personal use.

(1) Wholesale
(2) Retail
(3) Manufacturer
(4) Corporate

Question 6
PowerPoint slides are a good use of technology when … in the personal selling process.

(1) handling objections

(2) prospecting
(3) presenting
(4) closing a sale

Question 7
When Clinique gives small bottles of 5 ml Aromatics products to customers who walk
into retail stores that sell the products, it is giving … which are consumer-related sale
promotion.

(1) coupons
(2) rebates
(3) samples
(4) rewards

Question 8
Tupperware sellers use … which contain descriptions of the products with images that
assist customers to know what the products look like.

(1) brochures
(2) catalogues
(3) sponsorship
(4) advertising

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Question 9
Nike’s move to sponsor Caster Semenya, the South African Olympic gold medallist, is an
example of … sponsorship.
(1) event
(2) brand
(3) sports
(4) corporate

Question 10
… is/are non-personal communication about an organisation, its position on certain
issues and its activities.
(1) Publicity
(2) Sponsorship
(3) A press release
(4) Public relations

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