Principles of Marketingby Philip Kotler, Gary Armstrong
Building meaningful customer relationships has been a top priority in today’s marketplace. Principles of Marketing will teach you core marketing concepts based on the customer-value framework, helping you design strategies perfectly tailored to your business. Applying the actions in this book will help you master the skill of delivering superior customer value and engagement while staying on top of your competitors.
Marketing and Its Process
“Today’s marketing is all about creating customer value and engagement in a fast-changing, increasingly digital and social marketplace.”
Marketing is a process of creating value for customers and establishing profitable relationships to gain value from them in return. It undergoes five steps.
First, the company needs to fully understand the marketplace and their customer’s wants, needs, and demands. These will be addressed by creating a value proposition that will be fulfilled through a market offering that delivers customer value and satisfaction, resulting in long-term customer exchange relationships.
Second, marketers need to design a customer-driven marketing strategy to engage and grow target customers. This can be done by first deciding whom the company will serve (market segmentation and targeting) and how they will best serve targeted customers (differentiation and positioning).
After designing a marketing strategy, the company now needs to build an integrated marketing program consisting of the marketing mix. This states that for a company to deliver on its value proposition, it should first create a need-satisfying product. Then, it must decide its price and the place where to make the product available to target customers. Lastly, it must promote the product by communicating its benefits to target customers.
The fourth step is the most important as it entails developing profitable relationships with customers. Here, marketers practice customer-relationship management and engagement through brand conversations, experiences, and communities. Beyond that, they also need to practice good-partner relationship management by collaborating closely with internal and external marketing partners.
Once the four steps are done, it’s now time a company reaps the rewards of its strong customer relationships by capturing value from customers. Providing outstanding customer value results in delighted customers with repeated purchases. This increases customer lifetime value and customer share. As a result, the business gains long-term customer equity.
In an ever-evolving marketing landscape, companies today need to learn how to utilize technologies best in establishing customer and partner relationships. Moreover, they must take advantage of global possibilities and operate ecologically and in a socially responsible way.
Actions to take
Marketing Strategy and Planning
“Each company must find the game plan for long-run survival and growth that makes the most sense given its specific situation, opportunities, objectives, and resources.”
Strategic planning is the process of creating and sustaining a strategic match between an organization's goals and capabilities and its evolving marketing opportunities. It is about designing a long-term survival and growth strategy.
The first step is defining a company's purpose through a mission statement. This mission should be market-driven, realistic, specific, motivating, and timely. It is then transformed into detailed supporting goals and objectives that guide the business portfolio.
A business portfolio is a collection of the company's businesses and products. It has two steps. First, the company must analyze its current business portfolio to identify which businesses should receive more or less investment. Second, it needs to design the future portfolio by developing strategies for growth and downsizing. To do this, the company may use a formal portfolio planning method or design more-customized portfolio-planning approaches specifically tailored to its needs.
Achieving the strategic objectives requires the company’s central functional departments to work together. Marketing provides a marketing concept philosophy, ideas, and strategies to help reach the unit’s objectives. To create a successful value chain, marketers need to invest in customer and partner relationship management. The value chain refers to the internal divisions that make, produce, advertise, deliver and support a firm's products.
The company also needs to collaborate with others in the value delivery network to produce consumer value. The value delivery network consists of the firm, its suppliers, distributors, and customers who work together to enhance the system's performance.
Marketing analysis, planning, implementation, and control are used to determine the company's best strategy and mix. The executive summary, present marketing situation, risks and opportunities, objectives and issues, marketing strategies, action plans, budgets, and controls comprise a marketing plan. Putting these strategies into action will make a company successful.
Marketing departments can be structured into functional, geographical, product management, or market-management organizations. Nowadays, customer relationship management is increasingly becoming the organizational focus of companies. Marketing organizations perform marketing control—both operational and strategical.
As marketing accountability has become a top concern, marketing managers need to monitor their marketing budget efficiently. Marketers are also expected to provide value by constantly improving marketing return on investment (ROI) metrics. They are increasingly adopting customer-centered marketing impact metrics that guide strategic decisions.
Actions to take
Consumer Markets and Buyer Behavior
“The aim of marketing is to engage customers and affect how they think and act. To affect the whats, whens, and hows of buyer behavior, marketers must first understand the whys.”
Consumer buyer behavior refers to how final consumers acquire products and services for personal use. Cultural, social, personal, and psychological factors significantly impact consumers’ buying behavior. Marketers find it difficult to understand how these differences affect consumers’ buying decisions.
Culture can greatly influence a consumer’s buying behavior. It refers to a set of core beliefs, perceptions, desires, and behaviors that a member of society acquires from family and other related institutions. Subcultures are a group of people with shared values and lifestyles. Many businesses tailor their marketing campaigns to the unique demands of specific cultural and subcultural groups.
A person's reference groups, such as family and friends, significantly impact product and brand choices. Similarly, personal attributes such as a buyer's age, employment, personality, lifestyle, and financial condition influence their buying decisions. Lastly, major psychological factors such as motivation, perception, learning, beliefs, and attitudes are also determinants of their buying behaviors.
Buying decision behaviors have different types. When consumers are emotionally invested in a purchase and perceive substantial distinctions between brands, they engage in complex buying behavior. Dissonance-reducing behavior occurs when customers are intensely invested yet see little difference between brands.
Habitual buying behavior happens when there is low involvement and little substantial brand difference. Consumers participate in Variety-seeking buying behavior in scenarios characterized by low involvement but considerable perceived brand variations.
The buyer goes through a five-stage decision process:
Need recognition is when the consumer identifies a problem or need.
Information search is when the consumer is compelled to seek out more information, either passively or actively. Information may come from personal, commercial, public, and experiential sources.
Alternative evaluation is when the consumer utilizes information to assess different brands in the option set.
Purchase decision is when a consumer decides which brand to purchase. Other people's attitudes and unforeseen situations can affect their final decision.
Post-purchase behavior is when the consumers take further action based on their satisfaction level after a purchase.
The buyer decision process varies for new products. A new product is an item or service that potential buyers think of as new and they need to decide whether to adopt them or not. The adoption process is where an individual journeys from first hearing about a new idea through final adoption. It has five stages–awareness, interest, evaluation, trial, and adoption. Marketers need to know how to assist consumers best to go through these stages.
Actions to take
Business Markets and Buyer Behavior
“As when selling to final buyers, firms marketing to businesses must engage business customers and build profitable relationships with them by creating superior customer value.”
Business markets refer to the organizations that acquire products and services to resell or rent to others for a profit. They have fewer but larger buyers than consumer markets.
Business demand is derived demand that is less elastic and more volatile than consumer demand. The business buying process is about deciding which goods and services to acquire, then finding, evaluating, and selecting among different suppliers and brands. Business buyers’ decisions are typically more complex and organized. Buyers and sellers are also more reliant on each other.
There are three buying situations that business buyers consider when making a decision. A straight rebuy is when the buyer reorders something without making any changes. A modified rebuy is when the buyer wishes to change product specifications, prices, terms, or suppliers. A new task is when the buyer buys a new product or service for the first time. Systems selling is purchasing a packaged solution to a problem from a single seller to avoid multiple decisions required in a complex buying situation.
The business buying process involves several participants. All persons and units included in the buying decision-making process are called the buying center. Users, influencers, buyers, and deciders are part of it.
There are eight stages in the business buying decision process:
Problem recognition is when someone in the company identifies a problem that can be solved by acquiring a product or service.
General need description is when a buyer describes the overall attributes and amount of a needed product.
Product specification is when the buying organization decides on and defines the specific technical product qualities for a needed item.
Supplier search is when the buyer finds the best sellers.
Proposal solicitation is when the buyer asks qualified suppliers to submit proposals.
Supplier selection is when the buyer evaluates proposals and chooses a supplier(s).
Order-routine specification is when the buyer places the final order with the chosen supplier(s), listing the technical requirements, quantity, projected delivery date, return and warranty policies.
Performance review is when the buyer examines the supplier's performance and decides whether to renew, modify or terminate the contract.
New task buyers usually go through these stages, while buyers making modified or straight rebuys may skip some. To manage the overall customer relationship, companies need to handle buying decisions in various stages of the process effectively.
In recent years, information and digital technology developments have given birth to “e-procurement,” enabling businesses to purchase goods and services online. The internet helps businesses find new suppliers, reduces prices and speeds up order processing and delivery. Through online tools and platforms, business marketers were able to engage, share, sell, and maintain ongoing customer relationships faster and more efficiently.
Actions to take
Customer Value-Driven Marketing Strategy
“Companies today recognize that they cannot appeal to all buyers in the marketplace—or at least not to all buyers in the same way.”
Most successful companies use target marketing by identifying market segments, developing products and marketing mixes perfectly tailored to each. They also design customer-driven marketing strategies that foster lasting relationships with the right customers.
Designing a customer value-driven marketing strategy starts by first selecting which customers to serve and what value proposition to offer. It has four steps.
Market segmentation is the process of categorizing a market into segments with different demands, characteristics, and behaviors that might need separate marketing mixes or strategies. There are different ways a marketer can segment a market:
Geographic segmentation: dividing the market into geographical units such as nations, regions, states, countries, cities, or neighborhoods.
Demographic segmentation: dividing the market into demographic groups such as age, gender, income, education, etc.
Psychographic segmentation: dividing a market into groups based on social class, lifestyle, or personality attributes.
Behavioral segmentation: dividing the market based on consumers’ knowledge, attitudes, uses, or responses to a product.
After identifying the groups, market targeting is performed where the company evaluates each market segment’s attractiveness and selects additional segments to serve. The first step is to assess each segment’s size, growth characteristics, structural attractiveness, and alignment with the company’s goals and resources. It then chooses one of four marketing strategies:
Mass marketing is when the seller ignores segmentation and targets generally. They mass produce, distribute and promote the same product to all consumers.
Differentiated marketing is when a seller develops distinct offers for several segments.
Concentrated marketing (or niche marketing) involves focusing on one or a few market segments only.
Micromarketing is the act of developing products and marketing programs specifically tailored to individuals and locations.
In choosing a targeting strategy, companies need to consider their resources, product variability, product life-cycle stage, market variability, and competitive marketing strategies. Once they have chosen their strategy, they need to decide on their differentiation and positioning strategy. Differentiation entails differentiating the market offering to provide superior customer value.
Differentiation and positioning are performed in three steps. The first step is identifying possible differences that create a competitive advantage. Then, choosing what advantages to develop. The final step is designing an overall positioning strategy.
Positioning is about placing your market offering in front of your target customers. A value proposition is a full mix of benefits on which the brand is positioned. Positioning statements summarize the company and brand positioning, stating their target segment and need, the positioning concept, and specific areas of differentiation. The company needs to effectively convey and deliver its selected position to the market.
Actions to take
New Product Development and Life Cycle
“Every product seems to go through a life cycle: It is born, goes through several phases, and eventually dies as newer products come along that create new or greater value for customers.”
New products are important to a company's growth and survival as they replace aging products. New products can be gained through acquiring a firm, a patent, or a license to manufacture someone else's product. Another way would be through a company’s own new product development activities.
New product development is the creation of original products, product improvements, product modifications, and new brands through the firm's own product development initiatives. They enrich their customers’ lives with newly added solutions and options. There are eight steps in the new product development process:
Idea generation: the systematic search for new product ideas found in both internal and external sources such as customers, competitors, etc. One best way to do this is through crowdsourcing which means inviting a large group of people into the process to unleash a wave of new ideas.
Idea screening: screening new product ideas to spot good ones and discard bad ones.
Product concept development: comprehensively defining a new product idea in consumer-friendly terms. It involves concept testing where new product concepts are tested with a group of target consumers to assess its consumer appeal.
Marketing strategy development: creating an initial marketing strategy for a new product based on the product concept. It has three parts: describing the target market and value proposition, budgeting, and describing the long-term marketing mix strategy.
Business-analysis stage: reviewing a new product’s sales, costs, and profit estimates to see if they will meet the company's goals.
Product development: developing a product idea into a real product that can be sold.
Test marketing: testing the product and its marketing strategy in real market conditions in both controlled and simulated test markets.
Commercialization: officially launching the product into the market.
Beyond following the steps, companies need to manage this process holistically and systematically. A customer-centered, team-based, and systematic effort is the ultimate key to successful new product development.
Customer-centered new product development is about seeking creative ways to solve customer problems and provide more rewarding customer experiences. Team-based new product development is where various firm divisions collaborate to develop new products, overlapping steps to save time and boost efficiency. Systematic new product development is preferable over chaotic and compartmentalized development as innovation can be messy and difficult to manage.
Each product has its own life cycle where problems and opportunities arise. The product life cycle refers to the product’s sales and profitability over time. It has five stages.
The cycle starts with the product development stage, where a firm develops a new product idea. The introduction stage is characterized by sluggish sales growth as the product is introduced. If successful, the product enters a growth stage, resulting in increased sales and profits. It then goes to a maturity stage where the product's sales growth slows down, and profits stabilize. Lastly, it enters the decline stage where sales and profits decline. In this stage, the firm needs to identify the decrease and decide whether to keep, harvest, or drop the product. A company’s marketing strategies vary depending on the stages.
Marketing new products require considering two major issues. The first is social responsibility which includes acquiring and dropping products following the law and policies. The second is determining how much marketers should standardize or adjust their offers for global markets.
Actions to take
“If effective product development, promotion, and distribution sow the seeds of business success, effective pricing is the harvest.”
Price is the amount of money charged for a product or service. It is the only marketing element that generates revenue. It also plays a key role in building customer value and relationships. Setting the right price is one of the core challenges marketers face.
There are three major pricing strategies a company can use:
- Customer value-based pricing: sets prices based on buyers' perceptions of value. It has two types. Good-value pricing means offering a reasonable price for a product’s quality. Value-added pricing means charging higher prices for value-added features and services to differentiate a company’s offers.
- Cost-based pricing is a price-driven strategy that sets prices based on a product’s production, distribution, and sales cost, plus a reasonable return on effort and risk rate.
- Competition-based pricing: sets prices based on competitors’ strategies, costs, prices, and market offers.
Both internal and external factors influence pricing decisions. Internal factors include the company’s full marketing strategy, goals, marketing mix, and organizational considerations. As price is only one element of a firm’s marketing mix, it needs to be coordinated with product design, distribution, and promotion decisions to efficiently form marketing programs. The firm also needs to assign who will responsibly set prices.
Other external pricing factors include the market’s nature, demand, and environmental factors such as the economy, reseller demands, and government acts. Economic conditions can greatly affect pricing decisions. After the Great Recession, consumers were more price-conscious, and they have remained so after the economy has recovered. Marketers have responded by focusing more on value-for-money pricing. Regardless of the economic situation, companies need to provide superior value at any cost.
Actions to take
“As such, a firm’s success depends not only on how well it performs but also on how well its entire marketing channel competes with competitors’ channels.”
Creating customer engagement and value requires a company to collaborate with its value delivery network. This network comprises the firm, suppliers, distributors, and customers who work together to improve the system's performance in delivering superior customer value.
In bringing products to the market, producers use intermediaries by forging a marketing channel. This is a set of interconnected organizations involved in making a product or service available to consumers or business users. These channels are responsible for distributing information, creating effective communications, making contacts, negotiating prices, etc. Other functions provide physical distribution, financing, and risk-taking to complete transactions. For a channel to be successful, each member should work well and cooperate with other members to satisfy the target market.
There are three major trends that affect channel cooperation, conflict, and competition. These are the growth of vertical, horizontal, and multichannel marketing.
A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers, each in a separate business that seeks to maximize its own profits, even at the expense of the overall system's profits. On the other hand, a vertical marketing system is a distribution channel where producers, wholesalers, and retailers work together as a unified system.
A horizontal marketing system is a distribution channel where two or more companies join forces to pursue a new marketing opportunity. A multi-channel distribution system is when a company sets up various marketing channels to reach multiple customer segments. This is more beneficial in complex markets but also entails risks.
Marketing channel design is about designing effective marketing channels by analyzing customer needs, setting channel goals and constraints, identifying channel alternatives, and carefully evaluating them. When identifying major channel alternatives, the company should look at marketing intermediaries' types, numbers, and responsibilities. Each channel alternative needs to be evaluated using economic, control, and adaptive criteria.
Marketing channel management includes selecting, managing, motivating, and evaluating a channel member’s performance over time. This will help build long-term partnerships with other channel members.
Marketing logistics (or physical distribution) is the planning, implementing, and regulating the physical flow of resources, products, and information from origin to consumption to satisfy client needs profitably. It is composed of both outbound (from company to customer) inbound distribution (within the channel) and reverse distribution (moving returned products). The four major logistics functions are warehousing, inventory management, transportation, and logistics information management.
The integrated supply chain management concept emphasizes that teamwork and cooperation inside the company and other related organizations will maximize system performance. Companies can create cross-functional logistics teams, which means a unified system. They also need to improve their logistic partnerships. Nowadays, some companies use third-party logistics (3PL) providers to outsource logistic functions cost-effectively.
Actions to take
Integrated Marketing Communications Strategy
“Modern marketing calls for more than just creating customer value by developing a good product, pricing it attractively, and making it available to target customers. Companies also must clearly and persuasively engage current and prospective consumers and communicate that value to them."
The promotion mix (marketing communications mix) is the exact combination of promotion tools used to persuade customers and build relationships. It includes the following tools:
- Advertising: any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor.
- Public relations: develops positive relationships with the company’s multiple publics.
- Personal selling: a personal presentation made by a company's sales force to generate sales and build customer relationships.
- Sales promotion: give short-term incentives to stimulate the purchase or sale of a product or service.
- Direct and digital marketing: cultivate customer relationships and directly engage with them.
Rapid technological communications advancements have significantly affected marketing communications. A wide range of specialized and highly targeted media and content is now available to advertisers to reach smaller client segments with more tailored, interactive messaging. To reach their different audiences, they risk creating a communications mishmash for customers.
Integrated marketing communications (IMC) are needed to create a clear, consistent, and engaging message about a company and its products. It identifies and connects all customer-company touchpoints. The company determines the responsibilities and extent of promotional tools and marketing material usage based on an overall IMC strategy. It organizes promotional efforts and main campaign scheduling.
Understanding the communication process is important to develop marketing communications. A message is sent from a sender to a receiver via media, but it can be disrupted by noise or discrepancies in encoding/decoding.
To develop marketing communications, the communicator needs to define their target audience first. Then they need to identify their communication goals and the desired response (awareness, knowledge, like, preference, conviction, or purchase). After this, they need to design a message with effective content and structure. They also need to choose channels of communication, both personal and nonpersonal. Lastly, they need to gather feedback to gauge the market’s awareness and satisfaction with the product.
There are different approaches a company can use in setting a promotion budget. It can be through spending what the company can afford, using a percentage of sales, basing it on competitors’ expenditures, or analysis and cost of the communication goals and activities. They then need to divide their budget among different promotional tools.
Companies can use a push or pull promotional strategy or a mix of both. A push strategy uses sales force and trade promotion to push a product through channels. Products are promoted to channel members, who in turn promote them to target consumers. A pull strategy involves investing a significant amount of money in consumer advertising and promotion to persuade final customers to purchase a certain product, generating a demand vacuum that "pulls" a product through the channel.
Many legal and ethical considerations accompany marketing communications. Companies need to be honest and offer mutually beneficial agreements when communicating with consumers and resellers. Furthermore, they also need to avoid misleading or fraudulent advertising and adhere to fair competition laws.
Actions to take
Creating Competitive Advantage
“Good marketing companies win, keep and grow customer needs, designing customer-driven marketing strategies, constructing value-delivering marketing programs, engaging customers, and building customer and marketing partner relationships.”
A competitive advantage is a benefit acquired by providing consumers with more value than competitors. Competitive marketing strategies provide a company with a competitive edge over competitors. Competitive analysis is the process of identifying main competitors (through industry-based and market-based analysis), their objectives, strategies, strengths and weaknesses, and reaction patterns. It also includes choosing which competitors to attack or avoid.
Once competitors are chosen, a company then needs to design a competitive strategy tailored to their company. This strategy often passes through three stages:
- Entrepreneurial marketing: most companies are established by individuals without an explicit strategy.
- Formulated marketing: companies adopt more formulated marketing when small companies become more successful.
- Intrepreneurial marketing: large companies need to re-establish their entrepreneurial spirit after getting stuck in formulated marketing.
Choosing the best competitive marketing strategy depends on the company's industry, market leader, challenger, follower, or nicher.
The market leader designs strategies for market growth, protection, and market share expansion. A market challenger is a firm that actively seeks to increase its market share by targeting the industry's leader, competitors, or smaller enterprises in their industry.
A market follower is a runner-up business that decides not to rock the boat, generally out of fear of losing more than it gains. They need to develop a strategy and utilize their skills to obtain market growth. A market nicher is a smaller firm unlikely to attract larger enterprises. They often specialize in some end-use, customer size category, geographic area, or service.
Companies can also focus too much on their competitors. A competitor-centered company bases its decisions on competitors’ actions and reactions. On the other hand, a customer-centered company focuses on customer development in developing marketing strategies and providing higher value to its target customers. Finally, a market-centered company balances its attention to both customers and competitors in designing its marketing strategies. It is the one practicing a proper market orientation.