Marketing Channels and Value Networks

Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions.These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). Formally, marketing channels are sets of interdependent organizations participating in the process of making a product or service available for use or consumption.They are the set of pathways a product or service follows after production, culminating in purchase and consumption by the final end user.

Some intermediaries such as wholesalers and retailers buy, take title to, and resell the merchandise; they are called merchants. Others brokers, manufacturers’ representatives, sales agents search for customers and may negotiate on the producer’s behalf but do not take title to the goods;they are called agents.Still others transportation companies,independent warehouses, banks, advertising agencies assist in the distribution process but neither take title to goods nor negotiate purchases or sales; they are called facilitators. 

Channels ofall types play an important role in the success ofa company and affect all other marketing decisions.Marketers should judge them in the context ofthe entire process by which their products are made,distributed,sold,and serviced.We consider all these issues in the following sections. 

The Importance of Channels

A marketing channel system is the particular set of marketing channels a firm employs,and decisions about it are among the most critical ones management faces. In the United States, channel members collectively have earned margins that account for 30 percent to 50 percent of the ultimate selling price. In contrast, advertising typically has accounted for less than 5 percent to 7 percent of the final price.3 Marketing channels also represent a substantial opportunity cost.One of their chief roles is to convert potential buyers into profitable customers. Marketing channels must not just serve markets,they must also make markets.

The channels chosen affect all other marketing decisions. The company’s pricing depends on whether it uses online discounters or high-quality boutiques. Its sales force and advertising decisions depend on how much training and motivation dealers need. In addition, channel decisions include relatively long-term commitments with other firms as well as a set of policies and procedures.When an automaker signs up independent dealers to sell its automobiles,it cannot buy them out the next day and replace them with company-owned outlets. But at the same time, channel choices themselves depend on the company’s marketing strategy with respect to segmentation, targeting,and positioning.Holistic marketers ensure that marketing decisions in all these different areas are made to collectively maximize value.

In managing its intermediaries,the firm must decide how much effort to devote to push versus pull marketing. A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users.A push strategy is particularly appropriate when there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood. In a pull strategythe manufacturer uses advertising,promotion,and other forms of communication to persuade consumers to demand the product from intermediaries,thus inducing the intermediaries to order it. Pull strategy is particularly appropriate when there is high brand loyalty and high involvement in the category, when consumers are able to perceive differences between brands, and when they choose the brand before they go to the store.

Top marketing companies such as Coca-Cola, Intel, and Nike skillfully employ both push and pull strategies. A push strategy is more effective when accompanied by a well-designed and well-executed pull strategy that activates consumer demand.On the other hand,without at least some consumer interest,it can be very difficult to gain much channel acceptance and support,and vice versa for that matter. 

Hybrid Channels and Multichannel Marketing 

Today’s successful companies typically employ hybrid channels and multichannel marketing,multiplying the number of“go-to-market”channels in any one market area.Hybrid channelsormultichannel marketing occurs when a single firm uses two or more marketing channels to reach customer segments. HP has used its sales force to sell to large accounts, outbound telemarketing to sell to medium-sized accounts,direct mail with an inbound number to sell to small accounts,retailers to sell to still smaller accounts,and the Internet to sell specialty items.Philips also is a multichannel marketer.

In multichannel marketing,each channel targets a different segment of buyers,or different need states for one buyer, and delivers the right products in the right places in the right way at the least cost. When this doesn’t happen, there can be channel conflict, excessive cost, or insufficient demand. Launched in 1976, Dial-a-Mattress successfully grew for three decades by selling mattresses directly over the phone and,later,the Internet.A major expansion into 50 brick-and-mortar stores in major metro areas was a failure, however. Secondary locations, chosen because management considered prime locations too expensive, could not generate enough customer traffic. The company eventually declared bankruptcy.

On the other hand, when a major catalog and Internet retailer invested significantly in brickand-mortar stores, different results emerged. Customers near the store purchased through the catalog less frequently, but their Internet purchases were unchanged. As it turned out, customers who liked to spend time browsing were happy to either use a catalog or visit the store;those channels were interchangeable.Customers who used the Internet,on the other hand,were more transaction focused and interested in efficiency,so they were less affected by the introduction of stores.Returns and exchanges at the stores were found to increase because of ease and accessibility, but extra purchases made by customers returning or exchanging at the store offset any revenue deficit. 

Companies that manage hybrid channels clearly must make sure their channels work well together and match each target customer’s preferred ways of doing business. Customers expect channel integration,which allows them to:

- Order a product online and pick it up at a convenient retail location 

- Return an online-ordered product to a nearby store of the retailer 

- Receive discounts and promotional offers based on total online and offline purchases

Delivering Value

Designing and Managing Integrated Marketing Channels.

Successful value creation needs successful value delivery.Holistic marketers are increasingly taking a value network view of their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials,components,and manufactured goods and shows how they move toward the final consumers. Companies are looking at their suppliers’ suppliers upstream and at their distributors’ customers downstream. They are looking at customer segments and considering a wide range of new and different means to sell,distribute,and service their offerings.

Marketing channels and Value Networks

Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions.These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). Formally, marketing channels are sets of interdependent organizations participating in the process of making a product or service available for use or consumption.They are the set of pathways a product or service follows after production, culminating in purchase and consumption by the final end user.

Some intermediaries such as wholesalers and retailers buy, take title to, and resell the merchandise; they are called merchants. Others brokers, manufacturers’ representatives, sales agents search for customers and may negotiate on the producer’s behalf but do not take title to the goods;they are called agents. Still others transportation companies,independent warehouses, banks, advertising agencies assist in the distribution process but neither take title to goods nor negotiate purchases or sales; they are called facilitators.

Channels ofall types play an important role in the success ofa company and affect all other marketing decisions.Marketers should judge them in the context ofthe entire process by which their products are made,distributed,sold,and serviced.We consider all these issues in the following sections.

The Importance of Channels

A marketing channel system is the particular set of marketing channels a firm employs,and decisions about it are among the most critical ones management faces. In the United States, channel members collectively have earned margins that account for 30 percent to 50 percent of the ultimate selling price. In contrast, advertising typically has accounted for less than 5 percent to 7 percent of the final price.3 Marketing channels also represent a substantial opportunity cost.One of their chief roles is to convert potential buyers into profitable customers. Marketing channels must not just serve markets,they must also make markets.

The channels chosen affect all other marketing decisions. The company’s pricing depends on whether it uses online discounters or high-quality boutiques. Its sales force and advertising decisions depend on how much training and motivation dealers need. In addition, channel decisions include relatively long-term commitments with other firms as well as a set of policies and procedures.When an automaker signs up independent dealers to sell its automobiles,it cannot buy them out the next day and replace them with company-owned outlets. But at the same time, channel choices themselves depend on the company’s marketing strategy with respect to segmentation, targeting,and positioning.Holistic marketers ensure that marketing decisions in all these different areas are made to collectively maximize value.

In managing its intermediaries,the firm must decide how much effort to devote to push versus pull marketing. A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users.A push strategy is particularly appropriate when there is low brand loyalty in a category, brand choice is made in the store, the product is an impulse item, and product benefits are well understood. In a pull strategythe manufacturer uses advertising,promotion,and other forms of communication to persuade consumers to demand the product from intermediaries,thus inducing the intermediaries to order it. Pull strategy is particularly appropriate when there is high brand loyalty and high involvement in the category, when consumers are able to perceive differences between brands, and when they choose the brand before they go to the store.

Top marketing companies such as Coca-Cola, Intel, and Nike skillfully employ both push and pull strategies. A push strategy is more effective when accompanied by a well-designed and well executed pull strategy that activates consumer demand.On the other hand,without at least some consumer interest,it can be very difficult to gain much channel acceptance and support,and vice versa for that matter.

Hybrid Channels and Multichannel Marketing.

Today’s successful companies typically employ hybrid channels and multichannel marketing, multiplying the number of go to market channels in any one market area. Hybrid channel or multichannel marketing occurs when a single firm uses two or more marketing channels to reach customer segments. HP has used its sales force to sell to large accounts, outbound telemarketing to sell to medium sized accounts, direct mail with an inbound number to sell to small accounts,retailers to sell to still smaller accounts,and the Internet to sell specialty items. Philips also is a multichannel marketer.

In multichannel marketing,each channel targets a different segment of buyers,or different need states for one buyer, and delivers the right products in the right places in the right way at the least cost. When this doesn’t happen, there can be channel conflict, excessive cost, or insufficient demand. Launched in 1976, Dial-a-Mattress successfully grew for three decades by selling mattresses directly over the phone and,later,the Internet.A major expansion into 50 brick-and-mortar stores in major metro areas was a failure, however. Secondary locations, chosen because management considered prime locations too expensive, could not generate enough customer traffic. The company eventually declared bankruptcy.

On the other hand, when a major catalog and Internet retailer invested significantly in brickand-mortar stores, different results emerged. Customers near the store purchased through the catalog less frequently, but their Internet purchases were unchanged. As it turned out, customers who liked to spend time browsing were happy to either use a catalog or visit the store;those channels were interchangeable.Customers who used the Internet,on the other hand,were more transaction focused and interested in efficiency,so they were less affected by the introduction of stores.Returns and exchanges at the stores were found to increase because of ease and accessibility, but extra purchases made by customers returning or exchanging at the store offset any revenue deficit.

Companies that manage hybrid channels clearly must make sure their channels work well together and match each target customer’s preferred ways of doing business. Customers expect channel integration, which allows them to :

-	Order a product online and pick it up at a convenient retail location.
-	Return an online ordered product to a nearby store of the retailer.
-	Receive discounts and promotional offers based on total online and offline purchases.

Here’s a company that has carefully managed its multiple channels.We discuss the topic of optimal channel integration in greater detail later.

Value Networks.

A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow of ingredients and components through the production process to their ultimate sale to customers. The company should first think of the target market, however, and then design the supply chain backward from that point.This strategy has been called demand chain planning.

A broader view sees a company at the center of a value network a system of partnerships and alliances that a firm creates to source,augment,and deliver its offerings.A value network includes a firm’s suppliers and its suppliers’suppliers,and its immediate customers and their end customers. The value network includes valued relationships with others such as university researchers and government approval agencies.

A company needs to orchestrate these parties in order to deliver superior value to the target market.Oracle relies on 5.2 million developers and 400,000 discussion forum threads to advance its products.9 Apple’s Developer Connection where folks create iPhone apps and the like has 50,000 members at different levels of membership.10 Developers keep 70 percent of any revenue their products generate, and Apple gets 30 percent.

Demand chain planning yields several insights. First, the company can estimate whether more money is made upstream or downstream, in case it can integrate backward or forward. Second, the company is more aware of disturbances anywhere in the supply chain that might change costs, prices, or supplies.Third, companies can go online with their business partners to speed communications, transactions, and payments ; reduce costs ; and increase accuracy. Ford not only manages numerous supply chains but also sponsors or operates on many B2B Web sites and exchanges.

Managing a value network means making increasing investments in information technology (IT) and software. Firms have introduced supply chain management (SCM) software and invited such software firms as SAP and Oracle to design comprehensive enterprise resource planning (ERP) systems to manage cash flow, manufacturing, human resources, purchasing, and other major functions within a unified framework. They hope to break up departmental silos where each department only acts in its own self interest and carry out core business processes more seamlessly. Most,however,are still a long way from truly comprehensive ERP systems.

Marketers, for their part, have traditionally focused on the side of the value network that looks toward the customer,adopting customer relationship management (CRM) software and practices. In the future, they will increasingly participate in and influence their companies’ upstream activities and become network managers,not just product and customer managers.

The Role Of Marketing Channels

Why would a producer delegate some of the selling job to intermediaries, relinquishing control over how and to whom products are sold? Through their contacts, experience, specialization, and scale of operation, intermediaries make goods widely available and accessible to target markets, usually offering the firm more effectiveness and efficiency than it can achieve on its own.

Many producers lack the financial resources and expertise to sell directly on their own. The William Wrigley Jr. Company would not find it practical to establish small retail gum shops throughout the world or to sell gum by mail order. It is easier to work through the extensive network of privately owned distribution organizations. Even Ford would be hard pressed to replace all the tasks done by its almost 12,000 dealer outlets worldwide.

Channel Functions and Flows

A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time,place,and possession gaps that separate goods and services from those who need or want them.Members of the marketing channel perform a number of key functions.

Channel Member Functions

-	Gather information about potential and current customers,competitors,and other actors and forces in the marketing environment.
-	Develop and disseminate persuasive communications to stimulate purchasing.
-	Negotiate and reach agreements on price and other terms so that transfer of ownership or possession can be affected.
-	Place orders with manufacturers.
-	Acquire the funds to finance inventories at different levels in the marketing channel.
-	Assume risks connected with carrying out channel work.
-	Provide for the successive storage and movement of physical products.
-	Provide for buyers’ payment of their bills through banks and other financial institutions.

The question for marketers is not whether various channel functions need to be performed they must be but rather, who is to perform them. All channel functions have three things in common: They use up scarce resources; they can often be performed better through specialization; and they can be shifted among channel members. Shifting some functions to intermediaries lowers the producer’s costs and prices, but the intermediary must add a charge to cover its work. If the intermediaries are more efficient than the manufacturer, prices to consumers should be lower. If consumers perform some functions themselves, they should enjoy even lower prices. Changes in channel institutions thus largely reflect the discovery of more efficient ways to combine or separate the economic functions that provide assortments of goods to target customers.

Five Marketing Flows in the Marketing Channel for Forklift Trucks.

Shaping the Market Offerings

 Setting Product Strategy

At the heart of a great brand is a great product. Product is a key element in the market offering. To achieve market leadership, firms must offer products and services of superior quality that provide unsurpassed customer value

Ford Motor Company endured some tough times at the beginning of the 21st century. A safety controversy about its best-selling Ford Explorer and high gas prices that hurt sales of its trucks and SUVs put the company in deep financial straits. Perhaps the biggest concern was public perception that Ford products were not high quality. A new CEO, Alan Mulally, arrived in 2006 determined to set Ford on a different path. Rejecting government bailouts during the subsequent recession created some goodwill, but Mulally knew reliable, stylish, and affordable vehicles that performed well would make or break the company’s fortunes. A redesigned high-mileage Ford Fusion with innovative Sync hands-free phone-and-entertainment system and an environmentally friendly hybrid option caught customers’ attention, as did the hip, urban-looking seven-seat Ford Flex SUV with a center console mini-refrigerator.

Mulally felt it was critical to use Ford’s vast infrastructure and scale to create vehicles that, with small adjustments, could easily be sold all over the world. The result of extensive global research, the Ford Fiesta hatchback was a striking example of this world-car concept. The rear of the car resembled a popular small sport-utility, its giant headlights were typical of more expensive cars, and dashboard instruments were modeled after a cell phone keypad. The company knew it had a winner when the Fiesta won a uniformly positive response in Chinese, European, and U.S. showrooms. Ford also relied on experiential and social media in marketing. Before its U.S. launch, 150 Fiestas toured the country for test drives and 100 were given to bloggers for six months to allow them to share their experiences. Ford’s product and marketing innovations paid off. While the rest of the U.S. auto industry continued to tank, the Fiesta garnered thousands of preorders and Ford actually turned a profit in the first quarter of 2010.

Product Characteristics and Classifications 

Many people think a product is tangible, but a product is anything that can be offered to a market to satisfy a want or need, including physical goods, services, experiences, events, persons, places, properties, organizations, information, and ideas.

Product Levels: The Customer-Value Hierarchy In planning its market offering, the marketer needs to address five product levels Each level adds more customer value, and the five constitute a customer-value hierarchy

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The fundamental level is the core benefit: the service or benefit the customer is really buying. A hotel guest is buying rest and sleep. The purchaser of a drill is buying holes.Marketers must see themselves as benefit providers.

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At the second level, the marketer must turn the core benefit into a basic product. Thus a hotel room includes a bed, bathroom, towels, desk, dresser, and closet

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At the third level, the marketer prepares an expected product, a set of attributes and conditions buyers normally expect when they purchase this product. Hotel guests minimally expect a clean bed, fresh towels, working lamps, and a relative degree of quiet

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At the fourth level, the marketer prepares an augmented product that exceeds customer expectations. In developed countries, brand positioning and competition take place at this level. In developing and emerging markets such as India and Brazil, however, competition takes place mostly at the expected product level.

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At the fifth level stands the potential product, which encompasses all the possible augmentations and transformations the product or offering might undergo in the future. Here is where companies search for new ways to satisfy customers and distinguish their offering.

Competitive Dynamics

To be a long-term market leader is the goal of any marketer. Today’s challenging marketing circumstances, however, often dictate that companies reformulate their marketing strategies and offerings several times. Economic conditions change, competitors launch new assaults, and buyer interest and requirements evolve. Different market positions can suggest different market strategies.

Former University of Maryland football player Kevin Plank was dissatisfied in his playing days with cotton T-shirts that retained water and became heavy during practice. So with $500 and several yards of coat lining, he worked with a local tailor to create seven prototypes of snug-fitting T-shirts that absorbed perspiration and kept athletes dry. Under Armour was born and quickly became a favorite at high schools, colleges, and universities. Intense, in-your-face advertising featuring NFL player “Big E” Eric Ogbogu grunting and screaming, “We must protect this house,” sent a loud message to target teens and young adult males that a new brand of athletic clothing and gear had arrived. With a focus on performance and authenticity, Under Armour later introduced football cleats to cover players literally from head to foot. The introduction of a full line of running shoes in 2009, however, put them squarely into competition with formidable opponents Nike and adidas. The launch also reflected an attempt to move away some from team sports to attract individual consumers and, in particular, reach a new demographic—women. An ad campaign themed “Athletes Run” introduced the technologically advanced, high-end Apparition and Revenant running shoes showing many accomplished athletes who were not well-known as runners running in the shoes. The next new product initiative under consideration—basketball shoes—would capitalize on one of their athletic endorsers, up-and-coming NBA player Brandon Jennings, but would also represent an even more full-on, direct assault of some of Nike’s and adidas’s market turf.

This chapter examines the role competition plays and how marketers can best manage their brands depending on their market position and stage of the product life cycle. Competition grows more intense every year—from global competitors eager to grow sales in new markets, from online competitors seeking costefficient ways to expand distribution, from private-label and store brands providing low-price alternatives, and from brand extensions by mega-brands moving into new categories. For these reasons and more, product and brand fortunes change over time, and marketers must respond accordingly.

Competitive Strategies for Market Leaders

Suppose a market is occupied by the firms shown in Hypothetical Market Structure. Forty percent is in the hands of a market leader; another 30 percent belongs to a market challenger; and 20 percent is claimed by a market follower willing to maintain its share and not rock the boat. Market nichers, serving small segments larger firms don’t reach, hold the remaining 10 percent.

Hypothetical Market Structure

A market leader has the largest market share and usually leads in price changes, new-product introductions, distribution coverage, and promotional intensity. Some historical market leaders are Microsoft (computer software), Gatorade (sports drinks), Best Buy (retail electronics),McDonald’s (fast food), Blue Cross Blue Shield (health insurance), and Visa (credit cards).

Xerox Xerox has had to become more than just a copier company. Now the blue-chip icon with the name that became a verb sports the broadest array of imaging products in the world and dominates the market for high-end printing systems. And it’s making a huge product line transition as it moves from the old light lens technology to digital systems. Xerox is preparing for a world in which most pages are printed in color (which, not incidentally, generates five times the revenue of black-and-white). Besides revamping its machines, Xerox is beefing up sales by providing annuity-like products and services that are ordered again and again: document management, ink, and toners. It has even introduced the managed print-services business to help companies actually eliminate desktop printers and let employees share multifunction devices that copy, print, and fax. Once slow to respond to the emergence of Canon and the small-copier market, Xerox is doing everything it can to stay ahead of the game.

In many industries, a discount competitor has undercut the leader’s prices.“Marketing Insight : When Your Competitor Delivers More for Less” describes how leaders can respond to an aggressive competitive price discounter.

When Your Competitor Delivers More for Less

Companies offering the powerful combination of low prices and high quality are capturing the hearts and wallets of consumers all over the world. In the United States, more than half the population now shops weekly at mass merchants such as Walmart and Target. In the United Kingdom, premium retailers such as Boots and Sainsbury are scrambling to meet intensifying price—and quality—competition from ASDA and Tesco.

These and similar value players, such as Aldi, Dell, E*TRADE Financial, JetBlue Airways, Ryanair, and Southwest Airlines, are transforming the way consumers of nearly every age and income level purchase groceries, apparel, airline tickets, financial services, and computers. Traditional players are right to feel threatened. Upstart firms often rely on serving one or a few consumer segments, providing better delivery or just one additional benefit, and matching low prices with highly efficient operations to keep costs down. They have changed consumer expectations about the trade-off between quality and price.

To compete, mainstream companies need to infuse their timeless strategies like cost control and product differentiation with greater intensity and focus, and then execute them flawlessly.

Differentiation, for example, becomes less about the abstract goal of rising above competitive clutter and more about identifying openings left by the value players’ business models. Effective pricing means waging a transaction-by-transaction perception battle for consumers predisposed to believe value-oriented competitors are always cheaper

Competitive outcomes will be determined, as always, on the ground—in product aisles, merchandising displays, reconfigured processes, and pricing stickers. Traditional players can’t afford to drop a stitch. The new competitive environment places a new premium on—and adds new twists to—the old imperatives of differentiation and execution

Differentiation 

Marketers need to protect areas where their business models give other companies room to maneuver. Instead of trying to compete with Walmart and other value retailers on price, for example, Walgreens emphasizes convenience. It has expanded rapidly to make its stores ubiquitous, mostly on corners with easy parking, and overhauled store layouts to speed consumers in and out, placing key categories such as convenience foods and one-hour photo services near the front. To simplify prescription orders, the company has installed a telephone and online ordering system and drive-through windows at most freestanding stores. These steps helped it increase its revenue from $15 billion in 1998 to over $59 billion in 2008, making it the largest U.S. drugstore chain.

Execution

Kmart’s disastrous experience trying to compete head-on with Walmart on price highlights the difficulty of challenging value leaders on their own terms. To compete effectively, firms may instead need to downplay or even abandon some market segments. To compete with Ryanair and easyJet, British Airways has put more emphasis on its long-haul routes, where value-based players are not active, and less on the short-haul routes where they thrive

Major airlines have also introduced their own low-cost carriers. But Continental’s Lite, KLM’s Buzz, SAS’s Snowflake, and United’s Shuttle have all been unsuccessful. One school of thought is that companies should set up low-cost operations only if: (1) their existing businesses will become more competitive as a result and (2) the new business will derive some advantages it would not have gained if independent. Low-cost operations set up by HSBC, ING, Merrill Lynch, and Royal Bank of Scotland—First Direct, ING Direct, ML Direct, and Direct Line Insurance, respectively—succeed in part thanks to synergies between the old and new lines of business. The low-cost operation must be designed and launched as a moneymaker in its own right, not just as a defensive play.

Sources : Adapted from Nirmalya Kumar, “Strategies to Fight Low-Cost Rivals,” Harvard Business Review, December 2006, pp. 104–12; Robert J. Frank, Jeffrey P. George, and Laxman Narasimhan, “When Your Competitor Delivers More for Less,” McKinsey Quarterly (Winter 2004): 48–59. See also Jan-Benedict E. M. Steenkamp and Nirmalya Kumar, “Don’t Be Undersold,” Harvard Business Review, December 2009.

Crafting the Brand Positioning

No company can win if its products and services resemble every other product and offering. As part of the strategic brand management process, each offering must represent the right kinds of things in the minds of the target market. Although successfully positioning a new product in a well-established market may seem difficult, Method Products shows that it is not impossible.

Named the seventh fastest-growing company in the United States by Inc. magazine back in 2006, Method Products is the brainchild of former high school buddies Eric Ryan and Adam Lowry. The company started with the realization that although cleaning and household products is a huge category, taking up an entire supermarket aisle or more, it was an incredibly boring one. Ryan and Lowry designed a sleek, uncluttered dish soap container that also had a functional advantage—the bottle, shaped like a chess piece, was built to let soap flow out the bottom, so users would never have to turn it upside down. This signature product, with its pleasant fragrance, was designed by award-winning industrial designer Karim Rashid. “The cleaning product industry is very backwards, and many of the products have a 1950s language,” Rashid said, “They are cluttered with graphics, too much information, and complicated ugly forms.

By creating a line of nontoxic, biodegradable household cleaning products with bright colors and sleek designs totally unique to the category, Method has crossed the line of $100 million in revenues with a phenomenal growth rate. Its big break came with the placement of its product in Target, known for partnering with well-known designers to produce stand-out products at affordable prices. Because of a limited advertising budget, the company believes its atractive packaging and innovative products must work harder to express the brand positioning. The challenge for Method now, however, is to differentiate beyond design to avoid copycats eroding the company’s cachet. The company is capitalizing on growing interest in green products by emphasizing its nontoxic, nonpolluting ingredients.

As the success of Method products demonstrates, a company can reap the benefits of carving out a unique position in the marketplace. Creating a compelling, well-differentiated brand position requires a keen understanding of consumer needs and wants, company capabilities, and competitive actions. It also requires disciplined but creative thinking. In this chapter, we outline a process by which marketers can uncover the most powerful brand positioning.

Developing and Establishing a Brand Positioning

All marketing strategy is built on segmentation, targeting, and positioning (STP). A company discovers different needs and groups in the marketplace, targets those it can satisfy in a superior way, and then positions its offerings so the target market recognizes the company’s distinctive offerings and images.

Positioning is the act of designing a company’s offering and image to occupy a distinctive place in the minds of the target market. The goal is to locate the brand in the minds of consumers to maximize the potential benefit to the firm. A good brand positioning helps guide marketing strategy by clarifying the brand’s essence, identifying the goals it helps the consumer achieve, and showing how it does so in a unique way. Everyone in the organization should understand the brand positioning and use it as context for making decisions.

Entertainment Weekly When publisher Scott Donaton took over Entertainment Weekly, he repositioned the magazine away from celebrity lifestyles to focus more directly on entertainment itself and what actually appeared on the screen, page, or CD. This updated positioning became a filter that guided the content and marketing of the magazine: “Every event, sales program, marketing initiative gets poured through that filter—the goal being to keep and enhance the things that are true to who you are; kill the things that aren’t, necessarily; and create great new things that are even better expressions of who you are.” Out was the glitzy annual Oscar party at Elaine’s restaurant in New York City; in its place was a week-long Academy Awards program at ArcLight Theater in Hollywood showcasing all the best-pictures nominees and featuring a panel discussion with nominated screenwriters.

A good positioning has a “foot in the present” and a “foot in the future.” It needs to be somewhat aspirational so the brand has room to grow and improve. Positioning on the basis of the current state of the market is not forward-looking enough, but, at the same time, the positioning cannot be so removed from reality that it is essentially unobtainable. The real trick in positioning is to strike just the right balance between what the brand is and what it could be.

The result of positioning is the successful creation of a customer-focused value proposition, a cogent reason why the target market should buy the product. shows how three companies—Perdue, Volvo, and Domino’s—have defined their value proposition through the years given their target customers, benefits, and prices

Positioning requires that marketers define and communicate similarities and differences between their brand and its competitors. Specifically, deciding on a positioning requires: (1) determining a frame of reference by identifying the target market and relevant competition, (2) identifying the optimal points of parity and points of difference brand associations given that frame of reference, and (3) creating a brand mantra to summarize the positioning and essence of the brand.

Determining a Competitive Frame of Reference

The competitive frame of reference defines which other brands a brand competes with and therefore which brands should be the focus of competitive analysis. Decisions about the competitive frame of reference are closely linked to target market decisions. Deciding to target a certain type of nconsumer can define the nature of competition, because certain firms have decided to target that segment in the past (or plan to do so in the future), or because consumers in that segment may already look to certain products or brands in their purchase decisions.

Identifying Competitors a good starting point in defining a competitive frame of reference for brand positioning is to determine category membership—the products or sets of products with which a brand competes and which function as close substitutes. It would seem a simple task for a company to identify its competitors. PepsiCo knows Coca-Cola’s Dasani is a major bottled-water competitor for its Aquafina brand; Citigroup knows Bank of America is a major banking competitor; and Petsmart.com knows a major online retail competitor for pet food and supplies is Petco.com.

The range of a company’s actual and potential competitors, however, can be much broader than the obvious. For a brand with explicit growth intentions to enter new markets, a broader or maybe even more aspirational competitive frame may be necessary to reflect possible future competitors. And a company is more likely to be hurt by emerging competitors or new technologies than by current competitors.

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After having spent billions of dollars building their networks, cell phone carriers AT&T, Verizon Wireless, and Sprint face the threat of new competition emerging as a result of a number of changes in the marketplace: Skype and the growth of Wi-Fi hotspots, municipal Wi-Fi networks built by cities, dual mode phones that can easily switch networks, and the opening up of the old analog 700 MHz frequency used for UHF broadcasts

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The energy-bar market created by PowerBar ultimately fragmented into a variety of subcategories, including those directed at specific segments (such as Luna bars for women) and some possessing specific attributes (such as the protein-laden Balance and the calorie-control bar Pria). Each represented a subcategory for which the original PowerBar was potentially not as relevant

Firms should identify their competitive frame in the most advantageous way possible. In the United Kingdom, for example, the Automobile Association positioned itself as the fourth “emergency service”—along with police, fire, and ambulance—to convey greater credibility and urgency. Consider the competitive frame adopted by Bertolli.

 

Bertolli Unilever’s Bertolli, a line of frozen Italian food, experienced a steady 10 percent growth in sales through the recent economic recession, in part due to its clever positioning as “restaurant quality Italian food that you can eat at home.” Targeting men and women with “discerning palates,” Bertolli has aggressively innovated with a stream of high-quality new dishes to keep target customers interested. In its marketing for the brand, Bertolli deliberately chooses to go to places “appropriate for a fine dining brand but not a frozen food brand.” Advertising “Spend a Night In with Bertolli,” the brand has advertised during the Emmys and Golden Globes award show telecasts and hosted celebrity chef dinners in Manhattan.

We can examine competition from both an industry and a market point of view. An industry is a group of firms offering a product or class of products that are close substitutes for one another. Marketers classify industries according to number of sellers; degree of product differentiation; presence or absence of entry, mobility, and exit barriers; cost structure; degree of vertical integration; and degree of globalization.

Using the market approach, we define competitors as companies that satisfy the same customer need. For example, a customer who buys a word-processing package really wants “writing ability”—a need that can also be satisfied by pencils, pens, or, in the past, typewriters. Marketers must overcome “marketing myopia” and stop defining competition in traditional category and industry terms. Coca-Cola, focused on its soft drink business, missed seeing the market for coffee bars and fresh-fruit-juice bars that eventually impinged on its soft-drink business.

The market concept of competition reveals a broader set of actual and potential competitors than competition defined in just product category terms. Jeffrey F. Rayport and Bernard J. Jaworski suggest profiling a company’s direct and indirect competitors by mapping the buyer’s steps in obtaining and using the product. This type of analysis highlights both the opportunities and the challenges a company faces. “Marketing Insight: High Growth through Value Innovation” describes how firms can tap into new markets while minimizing competition from others.

Creating Brand Equity

One of the most valuable intangible assets of a firm is its brands, and it is incumbent on marketing to properly manage their value. Building a strong brand is both an art and a science. It requires careful planning, a deep long-term commitment, and creatively designed and executed marketing. A strong brand commands intense consumer loyalty—at its heart is a great product or service.

While attending yoga classes, Canadian entrepreneur Chip Wilson decided the cotton polyester blends most fellow students wore were too uncomfortable. After designing a well-fitting, sweat-resistant black garment to sell, he also decided to open a yoga studio, and lulu lemon was born. The company has taken a grassroots approach to growth that creates a strong emotional connection with its customers. Before it opens a store in a new city, lululemon first identifies influential yoga instructors or other fitness teachers. In exchange for a year’s worth of clothing, these yogi serve as “ambassadors,” hosting students at lululemon-sponsored classes and product sales events. They also provide product design advice to the company. The cult-like devotion of lululemon’s customers is evident in their willingness to pay $ 92 for a pair of workout pants that might cost only $ 60 to $ 70 from Nike or Under Armour. lululemon can sell as much as $ 1,800 worth of product per square feet in its approximately 100 stores, three times what established retailers Abercrombie & Fitch and J.Crew sell. After coping with some inventory challenges, the company is looking to expand beyond yoga-inspired athletic apparel and accessories into similar products in other sports such as running, swimming, and biking.

Marketers of successful 21st-century brandsmust excel at the strategic brand management process. Strategic brand management combines the design and implementation of marketing activities and programs to build, measure, and manage brands to maximize their value. The strategic brand management process has four main steps:
-	Identifying and establishing brand positioning
-	Planning and implementing brand marketing
-	Measuring and interpreting brand performance
-	Growing and sustaining brand value deals with brand positioning.

What Is Brand Equity?

Perhaps the most distinctive skill of professional marketers is their ability to create, maintain, enhance, and protect brands. Established brands such as Mercedes, Sony, and Nike have commanded a price premium and elicited deep customer loyalty through the years. Newer  brands such as POM Wonderful, SanDisk, and Zappos have captured the imagination of consumers and the interest of the financial community alike.

The American Marketing Association defines a brand as “a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors.” A brand is thus a product or service whose dimensions differentiate it in some way from other products or services designed to satisfy the same need. These differences may be functional, rational, or tangible—related to product performance of the brand. They may also be more symbolic, emotional, or intangible—related to what the brand represents or means in a more abstract sense.

Branding has been around for centuries as a means to distinguish the goods of one producer from those of another.3 The earliest signs of branding in Europe were the medieval guilds’ requirement that craftspeople put trademarks on their products to protect themselves and their customers against inferior quality. In the fine arts, branding began with artists signing their works. Brands today play a number of important roles that improve consumers’ lives and enhance the financial value of firms.

The Role of Brands

Brands identify the source or maker of a product and allow consumers—either individuals or organizations—to assign responsibility for its performance to a particular manufacturer or distributor. Consumers may evaluate the identical product differently depending on how it is branded. They learn about brands through past experiences with the product and its marketing program, finding out which brands satisfy their needs and which do not. As consumers’ lives become more complicated, rushed, and time-starved, a brand’s ability to simplify decision making and reduce risk becomes invaluable

Brands also perform valuable functions for firms.5 First, they simplify product handling or tracing. Brands help to organize inventory and accounting records. A brand also offers the firm legal protection for unique features or aspects of the product. The brand name can be protected through registered trademarks ; manufacturing processes can be protected through patents; and packaging can be protected through copyrights and proprietary designs. These intellectual property rights ensure that the firm can safely invest in the brand and reap the benefits of a valuable asset.

A credible brand signals a certain level of quality so that satisfied buyers can easily choose the product again.7 Brand loyalty provides predictability and security of demand for the firm, and it creates barriers to entry that make it difficult for other firms to enter the market. Loyalty also can translate into customer willingness to pay a higher price—often 20 percent to 25 percent more than competing brands.8 Although competitors may duplicate manufacturing processes and product designs, they cannot easily match lasting impressions left in the minds of individuals and organizations by years of product experience and marketing activity. In this sense, branding can be a powerful means to secure a competitive advantage. Sometimes marketers don’t see the real importance of brand loyalty until they change a crucial element of the brand, as the now-classic tale of New Coke illustrates.

Coca - Cola Battered by a nationwide series of taste-test challenges from the sweeter - tasting Pepsi - Cola, Coca-Cola decided in 1985 to replace its old formula with a sweeter variation, dubbed New Coke. Coca-Cola spent $4 million on market research. Blind taste tests showed that Coke drinkers preferred the new, sweeter formula, but the launch of New Coke provoked a national uproar. Market researchers had measured the taste but failed to measure the emotional attachment consumers had to Coca-Cola. There were angry letters, formal protests, and even lawsuit threats to force the retention of “The Real Thing.” Ten weeks later, the company withdrew New Coke and reintroduced its century-old formula as “Classic Coke,” a move that ironically might have given the old formula even stronger status in the marketplace.

For better or worse, branding effects are pervasive. One research study that provoked much debate about the effects of marketing on children showed that preschoolers felt identical McDonald’s food items— even carrots, milk, and apple juice—tasted better when wrapped in McDonald’s familiar packaging than in unmarked wrappers.

To firms, brands represent enormously valuable pieces of legal property that can influence consumer behavior, be bought and sold, and provide their owner the security of sustained future revenues. Companies have paid dearly for brands in mergers or acquisitions, often justifying the price premium on the basis of the extra profits expected and the difficulty and expense of creating similar brands from scratch. Wall Street believes strong brands result in better earnings and profit performance for firms, which, in turn, create greater value for shareholders

The Scope of Branding

How do you “brand” a product? Although firms provide the impetus to brand creation through marketing programs and other activities, ultimately a brand resides in the minds of consumers. It is a perceptual entity rooted in reality but reflecting the perceptions and idiosyncrasies of consumers.

Branding is endowing products and services with the power of a brand. It’s all about creating differences between products. Marketers need to teach consumers “who” the product is—by giving it a name and other brand elements to identify it—as well as what the product does and why consumers should care. Branding creates mental structures that help consumers organize their knowledge about products and services in a way that clarifies their decision making and, in the process, provides value to the firm

For branding strategies to be successful and brand value to be created, consumers must be convinced there are meaningful differences among brands in the product or service category. Brand differences often relate to attributes or benefits of the product itself. Gillette, Merck, and 3M have led their product categories for decades, due in part to continual innovation. Other brands create competitive advantages through nonproduct-related means.Gucci, Chanel, and Louis Vuitton have become category leaders by understanding consumer motivations and desires and creating relevant and appealing images around their products.

Marketers can apply branding virtually anywhere a consumer has a choice. It’s possible to brand a physical good (Ford Flex automobile, or Lipitor cholesterol medication), a service (Singapore Airlines or Blue Cross and Blue Shield medical insurance), a store (Nordstrom or Foot Locker), a person (actress Angelina Jolie or tennis player Roger Federer), a place (the city of Sydney or country of Spain), an organization (U2 or American Automobile Association), or an idea (abortion rights or free trade).

Shaun White Action sports legend Shaun White survived three open-heart surgeries before he was a year old, and later survived midair collisions and dramatic falls in competition on his way to becoming a champion skateboarder and an Olympic gold medalist in snowboarding. The two-sport legend was signed by gear and apparel maker Burton when he was only 7 years old. His likeability, authenticity, and shrewd business insights have made him one of the most influential endorsers in the $150 billion youth market. Burton’s White Collection of high-priced technical winter outerwear is one of the company’s hottest sellers; HP has used White to market its laptops and flat-panel TV’s (which also showcase his Shaun White Snowboarding video game created by Ubisoft); a White-designed signature goggle has become Oakley’s biggest seller; Target’s Shaun White 4 Target collection focuses on street wear and skateboarding for a mass market; and long-time sponsor Red Bull even filmed White’s snowboarding trip to Japan and released the video on MTV and as a retail DVD.

An action-sports hero, Shaun White is one of the most successful product endorsers for the lucrative youth market, and a brand in his own right.

Defining Brand Equity

Brand equity is the added value endowed on products and services. It may be reflected in the way consumers think, feel, and act with respect to the brand, as well as in the prices, market share, and profitability the brand commands.

Marketers and researchers use various perspectives to study brand equity.15 Customer-based approaches view it from the perspective of the consumer — either an individual or an organization — and recognize that the power of a brand lies in what customers have seen, read, heard, learned, thought, and felt about the brand over time.

To reinforce its luxury image, Louis Vuitton uses iconic celebrities such as legendary Rolling Stones rocker Keith Richards in print and outdoor advertising.

Customer-based brand equity is thus the differential effect brand knowledge has on consumer response to the marketing of that brand. A brand has positive customer-based brand equity when consumers react more favorably to a product and the way it is marketed when the brand is identified, than when it is not identified. A brand has negative customer-based brand equity if consumers react less favorably to marketing activity for the brand under the same circumstances. There are three key ingredients of customer-based brand equity.
1.	Brand equity arises from differences in consumer response. If no differences occur, the brandname product is essentially a commodity, and competition will probably be based on price
2.	Differences in response are a result of consumers’ brand knowledge, all the thoughts, feelings, images, experiences, and beliefs associated with the brand. Brands must create strong, favorable, and unique brand associations with customers, as have Toyota (reliability), Hallmark (caring), and Amazon.com (convenience).
3.	Brand equity is reflected in perceptions, preferences, and behavior related to all aspects of the marketing of a brand. Stronger brands lead to greater revenue.