Chapter 11: Marketing

Chapter learning objectives

Upon completion of this chapter you will be able to:

• analyse customers and markets in a commercial setting
• analyse the effect of e-business (internet and customer extranets) on the relationship with customers
• explain, with examples, what is meant by the term 'customer relationship management' and how a suitable software package could support this
• describe the common different buyer behaviours among on-line customers
• explain the use of e-marketing and how its use might affect the marketing mix
• describe a process for establishing a pricing strategy for products and services that recognises both economic and non-economic factors
• explain the characteristics of the media of e-marketing using the '6Is'
• explain, with examples, how electronic media can be used to acquire customers, retain customers and to increase income from them
• explain the importance to a business of e-branding.

1 Stages in the marketing process

There are a number of techniques for marketing a product, but they generally follow a number of distinct stages:

(1) Market analysis – used to identify gaps and opportunities in a business' environment (as explored in chapter 2)

(2) Customer analysis – examining customers so that potential customers can be divided into segments with similar purchasing characteristics

(3) Market research – determining characteristics of each segment such as size, potential, level of competition, unmet needs etc.

(4) Targeting – deciding which segments to target (again, chapter 2 techniques such as PESTEL, 5 forces and forecasting would be used here)

(5) Marketing mix strategies – developing a unique marketing mix for each segment in order to exploit it properly.

Marketing mix strategies are an important element of downstreamsupply chain management (explored in the previous chapter). This chapterfocuses primarily on this element of marketing, though you should havean awareness of all 5 stages.

Market and customer analysis

Market analysis

Market analysis helps identify the appropriate marketing strategy. This analysis will include the following:

• appraisal and understanding of the present situation – this would include an analysis for each product showing its stage in the product life cycle, strength of competition, market segmentation, anticipated threats and opportunities, customer profile
• definition of objectives of profit, turnover, product image, market share and market position by segment
• evaluation of the marketing strategies available to meet these objectives, e.g. pricing policy, distribution policy, product differentiation, advertising plans, sales promotions, etc.
• definition of control methods to check progress against objectives and provide early warning, thereby enabling the marketing strategies to be adjusted.

There are two purposes of the analysis:

• to identify gaps in the market where consumer needs are not being satisfied
• to look for opportunities that the organisation can benefit from, in terms of sales or development of new products or services.

Customer analysis

There are three sets of strategic questions that are used to analyse customers – segmentation, motivation and unmet needs.

Segmentation – sets of strategic questions include the following.

• Who are the biggest, most profitable existing customers and who are the most attractive potential customers?
• Do the customers fall into any logical groups on the basis of characteristics, needs or motivations?
• Can the market be segmented into groups requiring a unique business strategy?

Traditional segmentation focuses on identifying customer groups based on a number of variables that include:

• geographic variables, such as region of the world or country, country size, or climate
• demographic variables, such as age, gender, sexual orientation, family size, income, occupation, education, socioeconomic status, religion, nationality/race, and others
• psychographic variables, such as personality, life-style, values and attitudes
• behavioural variables, such as benefit sought (quality, low price, convenience), product usage rates, brand loyalty, product end use, readiness-to-buy stage, decision-making unit, and others.

Value-based segmentation looks at groups of customers interms of the revenue they generate and the costs of establishing andmaintaining relationships with them.

For example, a food manufacturer will approach supermarket chainsvery differently to the small independent retailer, probably offeringbetter prices, delivery terms, use different sales techniques anddeliver direct to the supermarket chain. They might also supplyown-label products to the large chain but they are unlikely to be ableto offer the same terms to the corner shop. The benefit of segmentationto the company adopting this policy is that it enables them to get closeto their intended customer and really find out what that customer wants(and is willing to pay for). This should make the customer happier withthe product offered and, hence, lead to repeat sales and endorsements.

Motivation – concerns the customers' selection and use oftheir favourite brands, the elements of the product or service that theyvalue most, the customers' objectives and the changes that areoccurring in customer motivation.

Unmet needs – considers why some customers aredissatisfied and some are changing brands or suppliers. The analysislooks at the needs not being met that the customer is aware of.

Customer lifecycle segmentation model

This is another method for segmenting customers – as visitors use online services they pass through seven stages:

(1)First-time visitor

(2)Return visitor

(3)Newly registered visitor

(4)Registered visitor

(5)Have made one or more purchases

(6)Have purchased before but now inactive

(7)Have purchased before and are still active and e-responsive.

Illustration 1 – Customers and markets

The market for package holidays can be split up into a variety ofdifferent sub-markets – the family market, the elderly market, theyoung singles market, the activity holiday market, the budget holidaymarket, etc.

Because it would be virtually impossible to provide one singleproduct that would satisfy all people in all markets, an organisationcan tailor its marketing approach with a specific product and go for:

• undifferentiated marketing – one product and one market with no attempt to segment the market, e.g. sugar is a product that is marketed in a relatively undifferentiated way
• differentiated marketing – the market is segmented with products being developed to appeal to the needs of buyers in the different segments, e.g. Toyota offers a wide range of different types of vehicle (sports car, 4x4, estate) in response to differing customer needs
• niche or target marketing – specialising in one or two of the identified markets only, e.g. Ferrari only make expensive luxury sports cars.

2 Marketing mix strategies

The marketing mix is the set of controllable variables that thefirm can use to influence the buyers' responses (Kotler). The variablesare commonly grouped into four classes that McCarthy refers to as 'thefour Ps' – product, price, promotion and place (or distribution).

The original 4Ps model

• Price – pricing strategies include price skimming, when a premium price is charged because the product has a technological advantage or brand loyalty that outweighs a price difference and market penetration, a deliberately low price to dominate the market and block competition entry.
• Promotion – the promotion mix consists of four elements: advertising, sales promotion, public relations and personal selling.
• Place – the design of a channel of distribution will be influenced by the type of product, the abilities of the intermediaries and the expectations of the consumer.
• Product – the product needs to be augmented if it is to stand out from rivals' products. This can be done by changing its brand name, its aesthetics, its quality, its packaging, or by widening the product mix or increasing/improving the services that the product comes with.

Test your understanding 1

Suggest how the marketing mix might differ for a consumer product in the first two stages of the product's life cycle.

E-marketing: the 7Ps

E-marketing is marketing carried out using electronic technology.

Opportunities for e-marketing can be examined using the traditional4Ps of product, price, promotion and place, plus an additional 3Ps –people/participants, processes, physical evidence. The additional 3Psare particularly relevant to the marketing of services.

Here are examples of the effects of electronic methods on marketing:

Test your understanding 2

Hartley's Books is a firm who specialise in selling antiquarianbooks. Antiquarian books are usually in excess of 50 years old and oftenout of print, and collectors pay a premium price for books which arelikely to increase in value over time, such as first editions signed bythe author.

Hartley's have 6 stores spread across the company. James Hartley,the grandson of the original founder, has recently taken over the roleof Managing Director of the company. He is concerned with the downturnin sales that has been experienced in the recent tough economic climateand he believes that the stores need to be better marketed if they areto take advantage of the likely upturn in the economy that he believesis 'just around the corner'.

One of the areas where he is considering investing is in launching an e-commerce website to run alongside the existing business.

Required:

Consider how Hartley's Books could be marketed, paying particular attention to the e-commerce aspect of James's plans.

3 More on pricing

An accountant can play an important role in determining a pricingstrategy – for example, in determining product costs, value analysis,likely market volumes, market conditions, competitor reactions etc. Forthis reason pricing may be explored in more detail in exam scenarios.

Pricing should be determined with reference to four factors:

• Cost (i.e. we should ensure that all costs are covered)
• Customers (we should consider how much customers are willing to pay)
• Competitors (we should consider how much competitors are/will be charging)
• Corporate objectives (we should consider what we are aiming to achieve – for example, a low price might be necessary when we are trying to break into a market).

Further discussion of pricing objectives

Dibb, Simkin, Pride and Ferrell, in their book Marketing Concepts and Strategies, identify a number of different objectives that a business may be aiming to achieve with its pricing strategy:

• survival – this is a break even requirement. Companies might accept a price that just covers costs in the short-term in order to cope with a short-term crisis (e.g. a recession).
• profit – in the longer-term, businesses will hope to achieve a level of profit that satisfies their longer-term objectives.
• return on investment – a business may have a ROI target that it needs to satisfy and this could be used to determine the price.
• market share – often with new products and markets the initial objective is to achieve a level of market share. This may mean that prices are set below those of rivals' in order to win customers away from rivals.
• cash flow – if a business has cash flow problems it might price products in order to bring in cash to the business more quickly (e.g. by offering settlement discounts).
• status quo – the business may pursue a strategy of non-price competition (e.g. cola companies generally use this approach) in order to maintain an existing (often mature) position.
• product quality – price is often used as an indicator of quality. So a business who want to promote the quality of their product might use a higher selling than that of rivals.

Further discussion of competitor prices

It is important to analyse competitor prices as part of a business'own pricing strategy. Often the position on the strategy clock willdetermine where prices must be set in relation to competitors. Forexample, a low cost provider will have to ensure that prices are belowthat of competitors whilst a differentiator might want to have higherprices to reflect the extra product features or services offered.

A key problem in achieving this in the real world is in obtainingaccurate, up-to-date information on how much competitors are charging.In some industries (such as publishing) it may appear to be straightforward as prices are often openly advertised, listed on websites oreven printed on products. However, this might not disclose bulkdiscounts given to larger customers or special rates given to contractedcustomers. There may even be 'hidden extras' that are not disclosed asclearly as the advertised price.

Therefore businesses will often outsource this task to specialist agencies.

Practical pricing methods

• Penetration pricing – a low price is set to gain market share.
• Perceived quality (or prestige) pricing – a high price is set to reflect/create an image of high quality.
• Periodic discounting – this is a temporary reduction in prices for a limited period such as a 'Holiday Sale'.
• Price discrimination – different prices are set for the same product in different markets, e.g. peak/offpeak rail fares.
• Going rate pricing – prices are set to match competitors.
• Price skimming – high prices are set when a new product is launched. Later the price is dropped to increase demand once the customers who are willing to pay more have been 'skimmed off'.
• Negotiated pricing – the price is established through bargaining between the seller and the customer.
• Loss leaders – one product may be sold at a loss with the expectation that customers will then go on and buy other more profitable products.
• Captive product pricing – this is used where customers must buy two products. The first is cheap to attract customers but the second is expensive, once they are captive.
• Bait pricing – this is also used by companies with wide product ranges, but often the lowest priced model is advertised in the hope to attract customers to the line and hope that they will actually decide to buy a higher priced item from the range.
• Bundle pricing – two or more products, usually complementary, are packaged together and sold for one price.
• Cost plus pricing – the cost per unit is calculated and then a mark-up added.

Initiating price increases

A major circumstance provoking price increases is cost inflation.Companies often raise their prices by more than the cost increase inanticipation of further inflation or government price controls in apractice called anticipatory pricing.

Another factor leading to price increases is over-demand. When acompany cannot supply all of its customers, it can raise prices, rationsupplies to customers or both.

A company needs to decide whether to raise its prices sharply on aone-time basis or to raise it by small amounts several times. In passingprice increases on to customers, the company must avoid the image ofbeing a price gouger. Customers memories are long.

There are techniques for avoiding this image. A sense of fairnessmust surround any price increase and customers must be given advancenotice so they can do some forward buying or shop around. Sharp priceincreases need to be explained in understandable terms. Companies canalso respond to higher costs or over-demand without raising prices.Possibilities include:

• Shrinking the amount of product instead of raising the price.
• Substituting less expensive materials or ingredients.
• Reducing or removing features to reduce cost.
• Removing or reducing product services such as free delivery and installation.
• Reducing the number of sizes and models used.
• Creating new, economy brands.

Test your understanding 3

Consider an appropriate pricing strategy for each of the following products:

(1)An international consumerelectronics company who are launching a personal (MP4) video playerwhich can take even 'normal', two-dimensional video material and displayit as 3D images.

(2)A company launching a new magazine on practical plastic surgery.

(3)'Robin Hood Stickers' are launchinga sticker album to tie in with the popular children's character. Thealbum comes with blank spaces where children can attach sticky pictures(sold separately) with pictures of scenes and characters from thestories. The company want children to firstly buy their sticker albumand then go on to buy the stickers regularly for the album.

(4)A high-end automobile manufacturerare introducing a new model with a range of high-end features such asmonitors in the front head rests for passengers in the rear to use onjourneys. The monitors will be able to accept games consoles, dvds andblu-rays. The car will cost around $18,000 each to produce.

(5)James Gower who has just qualifiedas a plumber in a local town that is already serviced by 12 otherindividual plumbers (though due to the size of the community he shouldbe able to find plenty of willing customers). All plumbers in the areaadvertise their services and prices in a local business directory whichthe community use when choosing service providers.

(6)An airline company who areintroducing a new service between two neighbouring towns. The servicewill have 5 minute check-ins and only a 10 minute journey. Many businesscustomers are looking forward to the service as the roads between thetowns are of poor quality and over-congested.

(7)A building firm who are putting on anew roof to a building in a capital city. There is a lot of competitionbut the potential client owns 12 other buildings in the city which mayalso need new roofs due to potential damage caused by recent adverseweather conditions.

Pricing and e-businesses

It is a common misconception that internet shoppers are onlyconcerned with price. Because they expect goods to be cheaper and canquickly compare prices between sites (there are even specialist websitesthat will perform this task for shoppers such as Kelkoo), there is afeeling that shoppers place 'price' at the forefront of their decisionmaking process.

In reality, shoppers still consider the other elements of themarketing mix. They expect to achieve some savings when shopping on theinternet but they do not necessarily compare prices or perform extensiveprice checks. Research shows that shoppers are e-loyal and will oftenreturn to familiar and trusted sites for their purchases. They often buyfrom the first site that they visit as long as prices are perceived tobe within a reasonable or expected range.

This emphasises that the other elements of the 7P's model such asthe security processes, the ease-of-use etc. for a website are equallyimportant. CRM (covered later in the chapter) will also play a vitalrole in creating the site loyalty in the first place.

Cost based pricing

Cost based pricing is often inappropriate for businesses – itignores customers, competitors, and corporate objectives. However, itmay occasional prove useful for businesses – for example, in times ofrapid inflation or when demanded by a particular, powerful customer.

In previous studies you will have explored cost based strategies such as full cost plus, marginal cost plus and target ROI.

More details on cost based pricing methods

The following should serve as a reminder of cost based pricing strategies that will have been studied in previous papers:

Full cost plus

In this method the total cost associated with the product isdetermined (i.e. all fixed and variable costs) and a net margin isadded.

Retailers use a similar approach to this which is known as mark-uppricing – a 'mark-up' percentage is added to the purchase price of theproduct in order to cover operating costs, risks etc. The level of themark can vary from industry to industry.

Marginal cost plus

In this method only the variable costs are associated with the product and a contribution margin is added.

Target ROI (Return on Investment)

In this method a full cost for the product is determined and thenan amount necessary to give a predetermined ROI is added in order to getthe selling price. The predetermined ROI is calculated as the productinvestment multiplied by the target ROI.

As seen above, relevant cost pricing can sometimes be valid (forexample, in tendering processes). In calculating which costs arerelevant, three criteriamust be satisfied:

• the cost(s) must be incurred in the future,
• only the incremental cost(s) should be included, and
• the cash impact only of the cost(s) should be included.

4 Pricing in economics

Pricing in economics is based on assumptions about demand andsupply and the interaction between these two factors. From a marketingperspective demand will be more important than supply.

Determining demand

The normal assumption about demand is that it will fall as theprice of a product increases. This assumes that a number of variablesremain unchanged:

• the business environment
• the buyer's needs
• the buyer's ability to pay
• the marketing mix.

Different demand curves

A change in any of these variables can lead to a shift in the position, shape or slope of the demand curve for a product.

For example, you may remember from previous studies that in anoligopolistic market – such as international accounting which isdominated by 4 large firms – the demand curve is kinked and pricecompetition rarely arises. Firms know that price increases will lose alot of customers, but price drops will win very few extra clients.

Demand-based pricing is a variable pricing mechanism thatchanges the price in order to fit the demand. It results in a high pricewhen demand is high, and low prices when demand is low. For example, itis used at leisure amenities such as gymnasiums where prices for usingfacilities might be higher at 'peak times' (such as early mornings) andlower when the club typically has less visitors (such as mid-afternoon).

The elasticity of demand

The relationship price and demand is also affected by the elasticity of demand for the product.

Formula for price elasticity of demand

This is calculated as follows:

For products with a low elasticity (i.e. where a large change inprice only creates a small increase in volume) the normal strategy is toincrease prices slightly so that overall revenue and profits increase.(The opposite applies when elasticity is high.)

Inelastic products are usually ones where there are few substitutes and customer needs are high (such as utilities and petrol).

Further details on price elasticity

More than ever, companies need to understand the price sensitivityof their customers (existing & potential), and the trade-offs peopleare willing to make between price and product characteristics.Marketers also need to know how responsive, or elastic, demand is tochanges in price. If demand hardly changes with a small change in price,demand is then inelastic. If demand changes considerably, demand isdeemed to be elastic.

Demand is likely to be less elastic when:

• There are few or no substitutes or competitors.
• Buyers do not readily notice the high price.
• Buyers are slow to change their buying habits and search for lower prices.
• Buyers think the higher prices are justified by quality differences and/or normal inflation.

Price elasticity depends on the magnitude and direction of thecontemplated price change. It may be negligible with a small pricechange and substantial with a large price change. Price elasticity maydiffer for a price cut versus a price increase.

Long-run price elasticity may differ from short-run elasticity.Buyers may continue to buy from their current supplier after a priceincrease because they do not notice the increase, or the increase issmall, or they are distracted by other concerns, or they do not wish toincur switching costs. But, over time, they may switch suppliers on thebasis of price. Here demand is seen to be more elastic in the long runthan in the short run. Or the opposite may happen, buyers drop asupplier after being notified of a price increase, but return to thesupplier later.

Profit maximisation in economics

(1) In order to maximise profits

(2) In order to maximise revenue

Again, it can be seen how different objectives can lead to different pricing decisions.

Economic assumptions

As with demand, in economics some assumptions are made about costs(for example, that they can be easily slit between variable and fixedelements, and that they don't change in the short-term). In realityeconomic assumptions rarely hold and it is important that economicpricing is therefore not seen as a precise science – as theassumptions change our analysis and pricing must also change.

5 E-marketing: the 6Is

The 6Is of marketing is a summary of the differences between thenew media and traditional media. By considering each of these aspects ofthe new media, marketing managers can develop plans to accommodate thecharacteristics of the new media.

Explanation of the 6Is

Illustration 2 – E-marketing

The Amazon.com (or Amazon.co.uk) site provides the followingfacilities, all of which can be linked to marketing and customerservice, and that help Amazon to acquire customers, retain customers andincrease income from them.

• Home delivery of books/CDs, etc. (place, independence of location).
• Customers can write reviews and read other people's reviews of products (promotion, interactivity).
• Based on previous buying habits, products are recommended (intelligence, promotion, individualisation).
• 'Customers who bought this product also bought these products…' (intelligence, promotion).
• Order tracking (integration).
• Prices of new and used items are displayed. Prices of new items are usually lower than conventional shops (price).
• Very smart-looking interface (physical evidence).
• Search facilities (interactivity, promotion).
• Emails if orders are delayed (processes, individualisation).

6 E-branding

A brand is a name, symbol, term, mark or design that enablescustomers to identify and distinguish the products of one supplier fromthose offered by competitors.

E-branding has become more and more important as companies decideto offer their services and products online. Website design, corporatebranding, e-commerce and search engine optimisation are criticalcomponents in building a company's e-branding.

E-branding strategies

Organisations have a number of choices about how to handle e-branding.

• Carry out exactly the same branding on the website as in other places. The organisation has to be careful to ensure that the website style, quality and commercial offers are consistent with the existing brand.
• Offer a slightly amended product or service, still connected to the original brand. The slight differentiation is often signalled by putting the word 'On-line' after the original brand name. For example 'Timesonline.co.uk'. This site describes itself as 'The best of The Times and The Sunday Times in real time'. So the products are slightly different from the paper-based products, so are differentiated but still strongly linked. The 'on-line' description also promises interactivity and might suggest a free service.
• Form a partnership with an existing brand.
• Create an entirely new brand, perhaps to emphasise a more modern, flexible approach. This has been common with financial institutions such as HBOS and IF. HBOS runs a conventional banking operation and IF is its direct finance operations that makes high use of the internet.

The slight differentiation is often signalled by putting the word'On-line' after the original brand name. For example,'Timesonline.co.uk'. This site describes itself as 'The best of TheTimes and The Sunday Times in real time'. So the products are slightlydifferent from the paper-based products, so are differentiated but stillstrongly linked.

Another example is www.dictionary.Cambridge.org, which gives access to Cambridge Dictionaries online.

Illustration

Aspirin's land-based brand positioning statement was 'Aspirin –provides instant pain relief'. This does not hold true for a meaningfulweb presence, you can't get instant pain relief on the web. So themanagement utilised their new e-branding creative strategies to develop awebsite for Aspirin that made sense to a consumer in thedisintermediated world of brands on the web. The result was 'Aspirin –your self help brand', which offered visitors meaningfulhealth-oriented intelligence and self help, over the web.

7 Customer relationship management (CRM)

Introduction

The objective of CRM is to increase customer loyalty in order to increase profitability and is thus a key aspect of e-business.

Definitions

• CRM is an approach to building and sustaining long-term business with customers.
• e-CRM is the use of digital communications technology to maximise sales to existing customers and encourage continued usage of online services.

Research

Research into e-businesses suggests the following.

• It is 20–30% more expensive to acquire new online customers than for traditional businesses.
• Retaining an extra 5% of customers can boost online company profits by between 25 and 95%.

The customer lifecycle

CRM involves four key marketing activities (the 'customer lifecycle').

(1)  Customer selection â€“ defining what type of customer is being targeted.

• Who are we targeting?
• What is their value?
• Where do we reach them?

(2)  Customer acquisition – forming relationships with new customers.

• Need to target the right segments.
• Try to minimise acquisition costs. Methods include traditional off-line techniques (e.g. advertising, direct mail) and online techniques (e.g. search engine marketing, online PR, online partnerships, interactive adverts, opt-in e-mail and viral marketing)
• Service quality is key here.
• Choice of distribution channel also very important.

(3)  Customer retention – keeping existing customers.

• Emphasis on understanding customer needs better to ensure better customer satisfaction.
• Use offers to reward extended website usage.
• Ensure ongoing service quality right by focussing on tangibles, reliability, responsiveness, assurance and empathy.

(4)  Customer extension (or 'customer development') – increasing the range of products bought by the customer.

• "Re-sell" similar products to previous sales
• "Cross-sell" closely related products
• "Up-sell" more expensive products

Customer acquisition

Methods of acquiring customers can be split between traditionaloff-line techniques (e.g. advertising, direct mail, sponsorship, etc)and rapidly-evolving on-line techniques:

Search engine marketing

• Search engine optimisation – improving the position of a company in search engine listings for key terms or phrases. For example, increasing the number of inbound links to a page through 'link building' can improve the ranking with Google.
• Pay per click (PPC) – an advert is displayed by search engines as a 'sponsored link' when particular phrases are entered. The advertiser typically pays a fee to the search engine each time the advert is clicked.
• Trusted feed – database-driven sites such as travel, shopping and auctions are very difficult to optimise for search engines and consequently haven't enjoyed much visibility in the free listings. Trusted Feed works by allowing a 'trusted' third party, usually a search engine marketing company, to 'feed' a website's entire online inventory directly into the search engine's own database, bypassing the usual submission process.

Online PR

• Media alerting services – using online media and journalists for press releases.
• Portal representation – portals are websites that act as gateways to information and services. They typically contain search engines and directories.
• Businesses blogs (effectively online journals) can be used to showcase the expertise of its employees.
• Community C2C portals (effectively the e-equivalent of a village notice board) – e.g. an oil company could set up a discussion forum on its website to facilitate discussion on issues including pollution.

Online partnerships

• Link-building – reciprocal links can be created by having quality content and linking to other sites with quality content. The objective is that they will then link to your site.
• Affiliate marketing – a commission-based arrangement where an e-retailer pays sites that link to it for sales. For example, hundreds of thousands of sites direct customers to Amazon to buy the books or CDs that they have mentioned on their pages.
• Sponsorship – web surfers are more likely to trust the integrity of a firm sponsoring a website than those who use straight ads.
• Co-branding – a lower cost form of sponsorship where products are labelled with two brand names. For example, as well as including details about their cars, the website Subaru.com also includes immediate co-branded insurance quotes with Liberty Mutual Insurance and pages devoted to outdoor lifestyles developed with LL Bean.
• Aggregators – these are comparison sites allowing customers to compare different product features and prices. For example, moneysupermarket.com allows analysis of financial services products. Clearly a mortgage lender would want their products included in such comparisons.

Interactive adverts

• Banners – banners are simply advertisements on websites with a click through facility so customers can surf to the advertiser's website.
• Rich-media – many web users have become immune to conventional banner ads so firms have tried increasingly to make their ads more noticeable through the use of animation, larger formats, overlays, etc. For example, an animated ad for Barclays banking services will appear on some business start-up sites.
• Some ads are more interactive and will change depending on user mouse movements, for example generating a slide show.

Opt-in e-mail

It is estimated that 80% of all e-mails are spam or viruses.Despite this e-mail marketing can still deliver good response rates. Onesurvey found only 10% of e-mails were not delivered (e.g. due to spamfilters), 30% were opened and 8% resulted in 'clickthroughs'. Optionsfor e-mail include the following.

• Cold, rented lists – here the retailer buys an e-mail list from a provider such as Experian.
• Co-branded e-mail – for example, your bank sends you an e-mail advertising a mobile phone.
• 3rd party newsletters – the retailers advertises itself in a 3rd party's news letter.
• House list e-mails – lists built up in-house from previous customers, for example.

Viral marketing

• Viral marketing is where e-mail is used to transmit a promotional message from one person to another.
• Ideally the viral ad should be a clever idea, a game or a shocking idea that is compulsive viewing so people send it to their friends.

Evaluating online customer behaviour

Recency, frequency, monetary value analysis (RFM) is the main model used to classify online buyer behaviour.

Recency

• The time since a customer completed an action – e.g. purchase, site visit, e-mail response.
• Considered to be a good indicator of potential repeat purchases.
• Allows 'vulnerable' customers to be specifically targeted.

Frequency

• The number of times an action is completed in a specified time period – e.g. five log-ins per week.
• A related concept is latency – the average time between actions – e.g. the average time between first and second purchases.
• Together these allow the firm to put in place triggers that alert them to behaviour outside the norm. For example, a customer may be taking longer than normal between first and second purchases. This could indicate that they are currently considering a purchase prompting the firm to e-mail or phone them with relevant offers.

Monetary value

• The monetary value of purchases can be measured in many different ways such as average order value, total annual purchases, etc.
• High monetary value is usually a good indicator of customer loyalty and higher future potential purchases. Such customers could be deliberately excluded from special promotions.

RFM is also known as FRAC:

• Frequency
• Recency
• Amount = monetary value
• Category = types of product purchased – not in RFM.

Customer retention

Customer retention has two goals:

• to keep customers
• to keep customers using the online channel.

Customer satisfaction

Key to retention is understanding and delivering the drivers ofcustomer satisfaction as satisfaction drives loyalty and loyalty drivesprofitability.

The 'SERVQUAL' approach to service quality developed by Parasuraman et al focuses on the following factors.

Tangibles

• The 'tangibles' heading considers the appearance of physical facilities, equipment, personnel and communications.
• For online quality the key issue is the appearance and appeal of websites – customers will revisit websites that they find appealing.
• This can include factors such as structural and graphic design, quality of content, ease of use, speed to upload and frequency of update.

Reliability

• Reliability is the ability to provide a promised service dependably and accurately and is usually the most important of the different aspects being discussed here.
• For online service quality, reliability is mainly concerned with how easy it is to connect to the website.
• If websites are inaccessible some of the time and/or e-mails are bounced back, then customers will lose confidence in the retailer.

Responsiveness

• Responsiveness looks at the willingness of a firm to help customers and provide prompt service.
• In the context of e-business, excessive delays can cause customers to 'bail-out' of websites and/or transactions and go elsewhere.
• This could relate to how long it takes for e-mails to be answered or even how long it takes for information to be downloaded to a user's browser.

Assurance

• Assurance is the knowledge and courtesy of employees and their ability to inspire trust and confidence.
• For an online retailer, assurance looks at two issues – the quality of responses and the privacy/security of customer information.
• Quality of response includes competence, credibility and courtesy and could involve looking at whether replies to e-mails are automatic or personalised and whether questions have been answered satisfactorily.

Empathy

• Empathy considers the caring, individualised attention a firm gives its customers.
• Most people would assume that empathy can only occur through personal human contact but it can be achieved to some degree through personalising websites and e-mail.
• Key here is whether customers feel understood. For example, being recommended products that they would never dream of buying can erode empathy.

There are three stages to applying the SERVQUAL framework.

(1)Understanding customer expectations through research.

(2)Setting and communicating the service promise.

(3)Delivering the service promise to ensure that a service quality gap does not exist.

Techniques for retaining customers

Given the above consideration of service quality, firms use the following techniques to try to retain customers.

• Personalisation – delivering individualised content through web-pages or e-mail. For example, portals such as Yahoo! enable users to configure their home pages to give them the information they are most interested in.
• Mass customisation – delivering customised content to groups of users through web-pages or e-mail. For example, Amazon may recommend a particular book based on what other customers in a particular segment have been buying.
• Extranets – for example, Dell Computers uses an extranet to provide additional services to its 'Dell Premier' customers.
• Opt-in e-mail – asking customers whether they wish to receive further offers.
• Online communities – firms can set up communities where customers create the content. These could be focussed on purpose (e.g. Autotrader is for people buying/selling cars), positions (e.g. the teenage chat site Doobedo), interest (e.g. Football365) or profession. Despite the potential for criticism of a company's products on a community, firms will understand where service quality can be improved, gain a better understanding of customer needs and be in a position to answer criticism.

Customer extension

Customer extension has the objective of increasing the lifetime value of a customer and typically involves the following.

• 'Re-sell' similar products to previous sales.
• 'Cross sell' closely related products.
• 'Up sell' more expensive products.
• For example, having bought a book from Amazon you could be contacted with offers of other books, DVDs or DVD players.
• Reactivate customers who have not bought anything for some time.

Key to these are propensity modelling and the 'sense, respond, adjust' model.

Propensity modelling

Propensity modelling involves evaluating customer behaviour andthen making recommendations to them for future products. For example, ifyou have bought products from Amazon, then each time you log on therewill be a recommendation of other products you may be interested in.

This can involve the following.

• Create automatic product relationships – e.g. through monitoring which products are typically bought together.
• Using trigger words or phrases – e.g. 'customers who bought …also bought…'.
• Offering related products at checkout – e.g. batteries for electronic goods.

'Sense, respond, adjust'

• Sense – monitor customer activities to classify them according to value, growth, responsiveness and defection risk. RFM analysis, discussed above, would also be relevant here.
• Respond with timely, relevant communications to encourage desired behaviours.
• Adjust – monitor responses and continue with additional communications.

Historically, marketing has focused on the first two elements inthe lifecycle (selection and acquisition) at best. CRM aims to extendmarketing over all four stages and build a lasting relationship withcustomers which creates loyalty and keeps them coming back for more.

Comparison with transactional marketing

Gordon (1998) states that there are six dimensions that illustratehow relationship marketing differs from the historical definition ofmarketing. These are that:

• relationship marketing seeks to create new value for customers and then share it with these customers.
• relationship marketing recognises the key role that customers have both as purchasers and in defining the value they wish to receive.
• relationship marketing businesses are seen to design and align processes, communication, technology and people in support of customer value.
• relationship marketing represents continuous cooperative effort between buyers and sellers.
• relationship marketing recognises the value of customers' purchasing lifetimes (i.e. Customer Lifetime Value).
• relationship marketing seeks to build a chain of relationships within the organisation, to create the value customers want, and between the organisation and its main stakeholders, including suppliers, distribution channels, intermediaries and shareholders.

The growing interest in relationship marketing suggests a shift inthe nature of marketplace transactions from discrete to relationalexchanges, from exchanges between parties with no past history and nofuture to interactions between parties with a history and plans forfuture interaction.

Software solutions

Software plays a vital role in CRM. It can organise, automate andsynchronize marketing and sales actions. For example, when a customerbuys a book on Amazon's website, the software can recommend othersimilar books that the customer might be interested in based on boththis individual customers past purchases and preferences as well as datagathered on customers who have purchased this same book in the past.

Illustration 3 – Customer relationship management (CRM)

The online aspects (there are many others) of SAP's CRM module includes the following features:

E-marketing

• Supports customer loyalty processes via the Internet.
• Personalizes customers' Web experiences.
• Generates additional revenue through a website via catalogue management, content management, customer segmentation and personalization.

E-commerce

• Runs B2B and B2C selling processes on the Internet.
• Enables a full range of online selling processes, including pricing and contracts, interactive selling, web auctions, and selling via partners.
• Streamlines sales and fulfilment with end-to-end order-to-cash processes.

E-service

• Offers customers an intuitive channel to perform service tasks, from requesting a service visit to logging a complaint or registering a product.
• Enables customers to checking order status, obtain order tracking information, manage accounts and payments, and research and resolve product problems.
• Services complex products that require sophisticated maintenance.

Web channel analytics

• Gains insight into, analyzes, and acts on e-business trends.
• Measures and optimizes the success of Web shop and online content.
• Performs analysis of marketing, sales, and service from a Web perspective.
• Tracks Web behaviour to target customers and drive future marketing activities.

Customer relationship management systems (CRMs)

CRMs do what they say: they help organisations to form and maintainrelationships with customers. Customers of large organisations rarelyspeak to a specific named individual. This is especially so if theorganisation uses a call centre approach to handle customers' calls. Itis, however, important that the customer feels he or she is getting agood service, where the organisation knows about previous sales,customer preferences, previous problems and previous conversations.Typically, a CRM will show the following information on-screen toemployees dealing with customers.

• The customer's name, address, telephone number, email and, if applicable, web address.
• Current debtors ledger balance.
• If the customer is an organisation, named individuals employed by the customer with whom the organisation deals, together with their job titles and authority levels.
• Some additional information about customer's employees, for example that that person is a technical expert, or previously worked for a certain company, or does not like to be contacted before 2pm.
• Summaries of previous conversations with the customer.
• Details of previous sales to the customer – description of goods/services and value.
• Diary entries to remind the organisation to carry out agreed tasks for the customer.

It is immensely valuable to have this information available whendealing with customers, both to talk intelligently to the customer, andidentify sales opportunities that might arise during the conversation.CRM packages therefore allow organisations to have a much more informed,professional and, it is hoped, profitable relationship with customers.

Test your understanding 4

A top level football team want to introduce a credit card forsupporters. Explain how CRM software could help the business in thecustomer selection process.

8 Chapter summary

Test your understanding answers

Test your understanding 1

Test your understanding 2

The best way to consider how the company could be marketed is to examine the elements of the marketing mix:

Price

Hartley's Books are likely to use an element of perceived valuepricing. There is unlikely to be a 'going rate' for such books and otherstrategies such as penetration or skimming are unlikely to beappropriate due to the uniqueness of the product.

Books should be valued and priced based on likely demand,uniqueness/rarity and the current economic climate. This may mean thatbook prices change over time – for example, they may go down as theeconomic climate deteriorates, but they might increase as they becomeolder and rarer. Due to the likely low level of competition, thereshould be no need for discounting on the website and delivery chargescould be added to the normal price that would be charged in shops.

But pricing is unlikely to be a key element of the marketing mix.

Place

It would appear that Hartley's Books have already determined themethod in which books will be sold. They will have a physical presencethrough their six stores as well as an e-commerce website for internetsales.

Other aspects that they could consider would be some elements ofintegrated e-commerce. Perhaps if a book is purchased in a store extracontent such as author biographies, links to author websites etc. couldbe available online. There might also be a 'reserve and collect'facility on the website so that a book could be reserved online and thencollected in the store in order to speed up the delivery process andreduce the threats that might arise from the transport of some books.

Promotion

Techniques such as television or radio advertising, or salespromotion techniques are unlikely to of much use to Hartley's Books dueto the small size of the target market and the unlikelihood of regularpurchases. There may be specialist journals or magazines in which thecompany could advertise but a more important avenue that may be open tothe company is likely to be trade shows and exhibitions. There may beregular events for antiquarian book collectors or even specialistauthor events. Hartley's Books could aim to have a physical presence atsuch events displaying a range of suitable books and could even aim toprovide sponsorship and branding of such events. This would provide themwith direct access to potential customers as well as increasingawareness of the company and more 'hits' on its website.

The lack of common promotional avenues is likely to reinforce thevalue of the internet venture. Hartley's Books should look to havebanner adverts on author websites that link back to its own website andcould even attempt to provide sponsorship in forum groups that are usedby its target market. They should seek to have a high appearance rate onpopular search engines and perhaps seek endorsements from authors (ortheir site managers) on the author's own site.

Product

The company's 'product' will be the service it provides, the shopsin which sales are made and the range of books that it sells. These arethe areas that it should look to differentiate from rivals.

It could improve service by perhaps offering reading or viewingfacilities within its shops and by having knowledgeable staff who areexperienced in understanding and meeting customer needs. Shops shouldreflect the nature of the product being sold and could, for example,have antique furniture such as reading chairs and indexing so thatcustomers can find what they are looking for. The range of books shouldbe as wide as possible in order to attract as many possible buyers aspossible, and Hartley's Books could perhaps seek to offer certificatesof authenticity in order to provide reassurance to buyers.

Processes

There will need to be clear security on the website for paymentsand if the 'reserve and collect' facility is offered it should be clearand simple to use. Due to the nature of the product the key process maybe transportation and delivery as some books might be delicate andfragile in nature. This process should be may as safe and reassuring aspossible and perhaps customers could be given the option of choosing orarranging their own courier as an alternative. Worldwide delivery couldbe offered and as many different payment methods as possible should beallowed in order to maximise potential sales. Regular customers shouldbe given the ability to store their details for personal use and perhapssoftware could be used to recommend further purchases based on pastbuying behaviour.

People

The nature of the product undoubtedly will mean that buyers arelikely to have questions when they find a book that they are interestedin. It will therefore be vital that the internet site is back up withknowledgeable service staff who can answer questions on the book inquestion. Given the likely low numbers of sales (particularly in theearly days of the site) these calls could be directed to shop floorstaff, perhaps with one member of staff at each store allocated each dayto answer such calls. These staff may have to work more flexible timesin order to meet the times of highest demand on the internet site duringthe day.

This may mean that more staff need to be recruited into stores.Also, as the internet site grows, some staff could be dedicated fulltime to such queries.

This facility needs to be support with email support as somecustomers may be shopping at times when stores are closed. But mostbuyers may be happy to await for a call back facility as speed ofdelivery is unlikely to be a critical success factor in the industry.

Physical evidence

The website should be easy to navigate and well presented. One ofthe key elements will be to have a search facility so that buyers canfind particular books that they may be interested in. There should alsobe a 'request' option where, if Hartley's Books do not have a copy of aparticular book, a potential buyer can express and interest and be keptinformed if Hartley's Books manage to source a copy.

Another aspect that may be offered could be a buying facility.Hartley's Books will not have suppliers like other bookshops. They willrely on sourcing books from individuals and estates. The internet mightprovide an excellent opportunity to source rare books which can be soldon at a profit through either shops or the website.

Test your understanding 3

(1)  The most appropriate strategy for this product would be price skimming.The product should start with a high price and this price should begradually reduced as new rivals enter the market and the technologymatures. There is no need for repeat business or loyalty as consumersare only likely to buy one product and may not replace this for a numberof years. These are the typical market conditions for price skimming.

(2)This product is going to need totwo things from its customers in order to be successful – an initialinterest and awareness, and then longer-term repeat business. These aretypical conditions for price penetration. The magazine should start with an initial low price (possibly even as a 'loss leader')in order to establish an initial reader base. Then as further issuesare released these could be increased to the normal issue price (when anew pricing strategy such as perceived value pricing might be more appropriate).

(3)The most appropriate pricing strategy here would be captive product pricing. The initial album should be sold at a low price (again, a loss leaderstrategy might be appropriate). Once children have the album they willdemand the sticky pictures ('stickers') to fill the album. Thesestickers could be sold at higher prices with margins that will more thancompensate for any loss incurred in the initial sale of the album.

(4)The production cost of the productwill be largely irrelevant (although, obviously, the selling price mustat least cover this cost). As a high-end manufacturer the company willhave an image and reputation to project and protect. They are likely touse perceived value pricing and play on consumers perceptions oftheir products. Consumers will expect the price to be high to reflectperceptions on the quality of materials and the production methods used.The product is likely to be sold at 3 or 4 times its production cost.

(5)  The most appropriate strategy in this scenario is likely to be to use going rate pricing.If James charges too high a price then customers (who are likely toprice conscious) will choose James' rivals. If James charges a pricebelow that of rivals then rivals are likely to match this price to thedetriment of all plumbers in the area. In this scenario of almostperfect competition, it is likely that there will be one market priceand James and his rivals will have to use other elements of themarketing mix to acquire customers.

(6)This scenario is one where price discriminationcould be used. For example, the airline could discriminate on the basisof the timing of the booking. Those people who book their flights earlycould pay low prices, but those who pay later could pay progressivelyhigher prices as the departure date of the flight approaches. Forexample, if a flight is booked with only one days notice, then the buyeris likely to be putting a high perceived value on the flight. Thisshould be reflected by having a high price for the flight.

(7)Tender processes usually involve an element of cost based pricing. Because this contract might lead to further work in the future the builder might even forego any margin and quote at the relevant cost(this concept is explored in the next section) of the job to ensure anincremental break even position. The builder might consider a lossleader approach to the project but this has a number of difficulties –if no further tenders are won then the builder is left to carry theloss, and if further work is won it may be harder to justifysignificantly higher prices in the future.

Test your understanding 4

The CRM software is likely to hold a lot of data on supporters(customers) that could be used in the customer selection process, suchas:

• Customer address and zip/post code. This might allow the company to target supporters who live in wealthy areas.
• Payment method used. Customers who have previously used a credit card as a payment method may be more likely to sign up for a new credit card.
• Missed payments. Customers who have perhaps missed payments on past transactions may be in financial difficulty and be actively seeking out credit methods.
• Items purchased. Customers who have spent large sums in the past (for example, for season tickets) might be more inclined to use credit cards.
• Age. Due to legal rules, credit cards may only be targeted at customers of a particular age.
• Contact details. If email addresses are held then these provide a route to electronic marketing.

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