Marketing - Pearson

Preface 

The Twelfth Edition—Creating More 

Value for You! 

The goal of Principles of Marketing, twelfth edition, is to introduce new marketing students to 

the fascinating world of modern marketing in an innovative yet practical and enjoyable way. 

Like any good marketer, we’re out to create more value for you, our customer. We’ve poured 

over every page, table, figure, fact, and example in an effort to make this the best text from 

which to learn about and teach marketing. 

Today’s marketing is all about creating customer value and building profitable customer 

relationships. It starts with understanding consumer needs and wants, deciding which target 

markets the organization can serve best, and developing a compelling value proposition by 

which the organization can win, keep, and grow targeted consumers. If an organization does 

these things well, it will reap the rewards in terms of market share, profits, and customer equity. 

Marketing is much more than just an isolated business function—it is a philosophy that 

guides the entire organization. The marketing department cannot create customer value and 

build profitable customer relationships by itself. This is a companywide undertaking that 

involves broad decisions about who the company wants as its customers, which needs to satisfy, 

what products and services to offer, what prices to set, what communications to send, 

and what partnerships to develop. Marketing must work closely with other company departments 

and with other organizations throughout its entire value-delivery system to delight customers 

by creating superior customer value. 

Marketing: Creating Customer Value 

and Relationships 

From beginning to end, Principles of Marketing develops an innovative customer-value and 

customer-relationships framework that captures the essence of today’s marketing. 

Five Major Value Themes 

The twelfth edition builds on five major value themes: 

Marketing: Creating and Capturing Customer Value 

Understand the 

marketplace and 

customer needs 

and wants 

Research 

customers and 

the marketplace 

Manage marketing 

information and 

customer data 

Create value for customers and 

build customer relationships 

Design a 

customer-driven 

marketing 

strategy 

Select customers 

to serve: market 

segmentation and 

targeting 

Decide on a value 

proposition: 

differentiation and 

positioning 

Harness marketing 

technology 

FIGURE 1.6 An expanded model of the marketing process 

Construct an 

integrated 

marketing program 

that delivers 

superior value 

Product and 

service design: 

build strong 

brands 

Pricing: 

create real value 

Distribution: 

manage demand 

and supply chains 

Promotion: 

communicate the 

value proposition 

Manage global 

markets 

Build profitable 

relationships and 

create customer 

delight 

Customer 

relationship 

management: build 

strong relationships 

with chosen 

customers 

Partner relationship 

management: build 

strong relationships 

with marketing 

partners 

Ensure ethical and 

social responsibility 

Capture value from 

customers in return 

Capture value from 

customers to 

create profits and 

customer equity 

Create satisfied, 

loyal customers 

Capture customer 

lifetime value 

Increase share of 

market and share 

of customer 

■ Creating value for customers in order to 

capture value from customers in return. 

Today’s marketers must be good at 

creating customer value and managing 

customer relationships. They must attract 

targeted customers with strong value 

propositions. Then, they must keep and 

grow customers by delivering superior 

customer value and effectively managing 

the company-customer interface. Today’s 

outstanding marketing companies understand 

the marketplace and customer 

needs, design value-creating marketing 

strategies, develop integrated marketing 

programs that deliver customer value and 

delight, and build strong customer relationships. 

In return, they capture value 

from customers in the form of sales, profits, 

and customer loyalty. 

xxi

xxii Preface 

FIGURE 2.8 

Return on marketing 

Source: Adapted from Roland T. 

Rust, Katherine N. Lemon, and 

Valerie A. Zeithamal, “Return 

on Marketing: Using Consumer 

Equity to Focus Marketing 

Strategy,” Journal of Marketing, 

January 2004, p. 112. 

This innovative customer-value framework is introduced at the start of Chapter 1 in a 

five-step marketing process model, which details how marketing creates customer value and 

captures value in return. The framework is carefully explained in the first two chapters, providing 

students with a solid foundation. The framework is then integrated throughout the 

remainder of the text. 

■ Building and managing strong, value-creating brands. Well-positioned brands with 

strong brand equity provide the basis upon which to build customer value and profitable 

customer relationships. Today’s marketers must position their brands powerfully and 

manage them well. 

■ Managing return on marketing to recapture value. In order to capture value from customers 

in return, marketing managers must be good at measuring and managing the return on their 

marketing investments. They must ensure that their marketing dollars are being well spent. 

In the past, many marketers spent freely on 

Measuring and Managing Return 

on Marketing Investment 

Marketing investments 

Marketing returns 

Improved customer value and satisfaction 

Increased customer 

attraction 

Increased customer 

retention 

Increased customer lifetime values 

and customer equity 

Return on marketing investment 

Cost of marketing 

investment 

big, expensive marketing programs, often 

without thinking carefully about the financial 

and customer response returns on their 

spending. But all that is changing rapidly. 

Measuring and managing return on marketing 

investments has become an important 

part of strategic marketing decision making. 

■ Harnessing new marketing technologies. 

New digital and other high-tech marketing 

developments are dramatically changing 

how marketers create and communication 

customer value. Today’s marketers must 

know how to leverage new computer, 

information, communication, and distribution 

technologies to connect more effectively 

with customers and marketing partners 

in this digital age. 

■ Marketing in a socially responsible way around the globe. As technological developments 

make the world an increasingly smaller place, marketers must be good at marketing 

their brands globally and in socially responsible ways that create not just short-term value for 

individual customers but also long-term value for society as a whole. 

Important Changes and Additions 

We’ve thoroughly revised the twelfth edition of Principles of Marketing to reflect the major 

trends and forces impacting marketing in this era of customer value and relationships. Here are 

just some of the major changes you’ll find in this edition. 

■ This new edition builds on and extends the innovative customer-value framework from previous 

editions. No other marketing text presents such a clear and comprehensive customervalue 

approach. 

■ The integrated marketing communications chapters have been completely restructured to 

reflect sweeping shifts in how today’s marketers communicate value to customers. 

■ A newly revised Chapter 14—Communicating Customer Value—addresses today’s shifting 

integrated marketing communications model. It tells how marketers are now adding a 

host new-age media—everything from interactive TV and the Internet to iPods and cell 

phones to reach targeted customers with more personalized messages. 

■ Advertising and public relations are now combined in Chapter 15, which includes 

important new discussions on “Madison & Vine” (the merging of advertising and entertainment 

to break through the clutter), return on advertising, and other important topics. 

A restructured Chapter 16 now combines personal selling and sales promotion. 

■ The new Chapter 17—Direct and Online Marketing—provides focused new coverage of 

direct marketing and its fastest-growing arm, marketing on the Internet. The new chapter 

includes a section on new digital direct-marketing technologies, such as mobile 

phone marketing, podcasts and vodcasts, and interactive TV.

Appendix 2 

MARKETING BY THE NUMBERS 

■ We’ve revised the pricing discussions in Chapter 10—Pricing: Understanding and 

Capturing Customer Value. It now focuses on customer-value-based pricing—on understanding 

and capturing customer value as the basis for setting and adjusting prices. The 

revised chapter includes new discussions of “good-value” and “value-added” pricing strategies, 

dynamic pricing, and competitive pricing considerations. 

■ In line with the text’s emphasis on measuring and managing return on marketing, we’ve added 

a new Appendix 2: Marketing by the Numbers. This comprehensive 

new appendix introduces students to the marketing financial analysis that 

helps to guide, assess, and sup- 

432 Part 3 Designing a Customer-Driven Marketing Strategy and Marketing Mix 

Madison & Vine: The New Intersection 

Real Marketing of Advertising and Entertainment 

Marketing decisions are coming under increasing scrutiny, and marketing managers must be 

accountable for the financial implications of their actions. This appendix provides a basic 

Welcome to the ever-busier intersection of Madison & 

introduction to marketing financial analysis. Such analysis guides marketers in making sound 15.1 Vine, where the advertising industry meets the enter- 

marketing decisions and in assessing the outcomes of those decisions. 

tainment industry. In today’s cluttered advertising environment, 

The appendix is built around a hypothetical manufacturer of high-definition consumer Madison Avenue knows that it must find new ways to engage ad- 

electronics products—HDX-treme. This company is launching a new product, and we will weary consumers with more compelling messages. The answer? 

discuss and analyze the various decisions HDX-treme’s marketing managers must make Entertainment! And who knows more about entertainment than the 

before and after launch. 

folks at Hollywood & Vine? The term “Madison & Vine” has come to 

HDX-treme manufactures high-definition televisions for the consumer market. The com- represent the merging of advertising and entertainment. It takes one 

pany has concentrated on televisions but is now entering the accessories market. of two primary forms: advertainment or branded entertainment. 

Specifically, the company is introducing a high-definition optical disc player (DVD) using The aim of advertainment is to make ads themselves so entertain- 

the Blu-ray format. 

ing, or so useful, that people want to watch them. It’s advertising by 

The appendix is organized into three sections. The first section deals with the pricing invitation rather than by intrusion. There’s no chance that you’d 

considerations and break-even and margin analysis assessments that guide the introduction watch ads on purpose, you say? Think again. For example, the Super 

of HDX-treme’s new-product launch. The second section begins with a discussion of estimat- Bowl has become an annual advertainment showcase. Tens of miling 

market potential and company sales. It then introduces the marketing budget, as illuslions of people tune in to the Super Bowl each year, as much to watch 

trated through a pro forma profit-and-loss statement followed by the actual profit-and-loss the entertaining ads as to see the game. 

statement. Next, the section discusses marketing performance measures, with a focus on help- And rather than bemoaning TiVo and other DVR systems, many 

ing marketing managers to better defend their decisions from a financial perspective. In the advertisers are now using them as a new medium for showing useful 

final section, we analyze the financial implications of various marketing tactics, such as or entertaining ads that consumers actually volunteer to watch. For 

increasing advertising expenditures, adding sales representatives to increase distribution, example, TiVo recently launched Product Watch, a service offering 

lowering price, or extending the product line. 

special on-demand ads to subscribers from companies such as Kraft 

At the end of each section, quantitative exercises provide you with an opportunity to Foods, Ford, Lending Tree, and Pioneer Electronics. Longer than tra- 

apply the concepts you learned in that section to contexts beyond HDX-treme. 

ditional 30-second spots, these ads allow consumers to research 

products before buying them or simply to learn something new. Kraft, 

for instance, offered 20 different cooking videos creating meals using 

Pricing, Break-Even, and Margin Analysis its products. And Pioneer sponsored a four-minute video ad on the 

ins and outs of buying a plasma-screen high-definition television. 

Pricing Considerations 

Interestingly, a recent study found that DVR users aren’t necessarily 

skipping all the ads. According to the study, 55 percent of DVR 

users take their finger off the fast-forward button to watch a commer- 

Determining price is one of the most important marketing mix decisions, and marketers 

cial that is entertaining or relevant, sometimes even watching it more 

have considerable leeway when setting prices. The limiting factors are demand and costs. 

than once. “If advertising is really entertaining, you don’t zap it,” notes 

Demand factors, such as buyer perceived value, set the price ceiling. The company’s costs 

an industry observer. “You might even go out of your way to see it.” 

set the price floor. In between these two factors, marketers must consider competitors’ 

Beyond making their regular ads more entertaining, advertisers 

prices and other factors such as reseller requirements, government regulations, and com- 

are also creating new advertising forms that look less like ads and 

pany objectives. 

more like short films or shows. For example, as part of a $100 million 

Current competing high-definition DVD products in this relatively new product category 

campaign to introduce its Sunsilk line of hair care products in the Welcome to Madison & Vine. As this book cover suggests, in today’s 

were introduced in 2006 and sell at retail prices between $500 and $1,200. HDX-treme plans 

United States, Unilever is producing a series of two-minute short pro- cluttered advertising environment, Madison Avenue must find new ways 

to introduce its new product at a lower price in order to expand the market and to gain margrams 

that resemble sitcom episodes more than ads. 

to engage ad-weary consumers with more compelling messages. The 

ket share rapidly. We first consider HDX-treme’s pricing decision from a cost perspective. 

answer? Entertainment! 

Then, we consider consumer value, the competitive environment, and reseller requirements. The series, titled “Sunsilk Presents Max and Katie,” will run on 

the TBS cable network. The miniepisodes present a humorous 

Fixed costs 

Costs that do not vary with 

production or sales level. 

Determining Costs 

Recall from Chapter 10 that there are different types of costs. Fixed costs do not vary with production 

or sales level and include costs such as rent, interest, depreciation, and clerical and 

management salaries. Regardless of the level of output, the company must pay these costs. 

Whereas total fixed costs remain constant as output increases, the fixed cost per unit (or average 

fixed cost) will decrease as output increases because the total fixed costs are spread across 

look at the hectic life of a 20-something woman—not coincidentally, 

the Sunsilk target audience. In all, Unilever will produce 

85 miniepisodes of “Max and Katie,” with 65 intended 

for TBS and the rest to be available online, on cell phones, 

through e-mail, and at displays in stores. The woman at whom 

Sunsilk will be aimed “has grown up being marketed to her 

whole life,” says a Unilever marketing manager. “She’s open to 

advertising, if it’s entertaining to her.” 

Similarly, Procter & Gamble produced a series of 90-second advertising 

sitcoms called “At the Poocherellas,” shown on Nick at Night, 

featuring a family of dogs and promoting its Febreze brand. Each 

miniepisode includes the expected commercial break, which lasts 

A-11 

Execution style 

The approach, style, tone, 

words, and format used for 

executing an advertising 

message. 

MESSAGE EXECUTION The advertiser now must turn the big idea into an actual ad execution 

that will capture the target market’s attention and interest. The creative team must find the 

best approach, style, tone, words, and format for executing the message. Any message can be 

presented in different execution styles, such as the following: 

■ Slice of life: This style shows one or more “typical” people using the product in a normal setting. 

For example, two mothers at a picnic discuss the nutritional benefits of Jif peanut butter. 

port marketing decisions in this 

age of marketing accountability. 

The Return on Marketing section 

in Chapter 2 has also been 

revised, and we’ve added return 

on advertising and return on selling 

discussions in later chapters. 

■ Chapter 9 contains a new section 

on managing new-product 

development, covering new 

■ 

customer-driven, team-based, 

holistic new-product development 

approaches. 

Chapter 5 (Consumer Behavior) 

provides a new discussion on 

“online social networks” that 

tells how marketers are tapping 

digital online networks such as 

YouTube, MySpace, and others 

to build stronger relationships 

between 

customers. 

their brands and 

The twelfth edition also includes new and expanded material on a wide range of other 

topics, including managing customer relationships and CRM, brand strategy and positioning, 

SWOT analysis, data mining and data networks, ethnographic consumer research, marketing 

and diversity, generational marketing, buzz marketing, services marketing, supplier satisfaction 

and partnering, environmental sustainability, cause-related marketing, socially responsible 

marketing, global marketing strategies, and much, much more. 

Countless new examples have been added within the running text. All tables, examples, 

and references throughout the text have been thoroughly updated. The twelfth edition of 

Principles of Marketing contains mostly new photos and advertisements that illustrate key 

points and make the text more effective and appealing. All new or revised company cases and 

many new video cases help to bring the real world directly into the classroom. The text even 

has a new look, with freshly designed figures. We don’t think you’ll find a fresher, more current, 

or more approachable text anywhere. 

Real Value through Real Marketing 

Preface xxiii 

Principles of Marketing features in-depth, real-world examples and stories that show concepts in 

action and reveal the drama of modern marketing. In the twelfth edition, every chapter-opening 

vignette and Real Marketing highlight has been updated or replaced to provide fresh and relevant 

insights into real marketing practices. Learn how: 

■ NASCAR creates avidly loyal fans by selling not just stock car racing but a high-octane, 

totally involving experience 

■ Best Buy builds the right relationships with the right customers by going out of its way to 

attract and keep profitable “angel” customers while exorcizing unprofitable “demons” 

■ Nike’s “Just do it!” marketing strategy has matured as this venerable market leader has moved 

from maverick to mainstream

xxiv Preface 

chapter 

7 

Previewing the Concepts 

So far, you’ve learned what marketing is 

and about the importance of understanding 

consumers and the marketplace environment. 

With that as background, you’re 

now ready to delve deeper into marketing 

strategy and tactics. This chapter looks 

further into key customer-driven marketing 

strategy decisions—how to divide up 

markets into meaningful customer groups 

(segmentation), choose which customer 

groups to serve (targeting), create market 

offerings that best serve target customers 

(differentiation), and position the offerings 

in the minds of consumers (positioning). 

Customer-Driven 

Marketing Strategy 

Creating Value 

for Target Customers 

L 

■ Harrah’s, the world’s largest casino operator, maintains a vast customer database and uses 

CRM to manage day-to-day customer relationships and build customer loyalty 

■ Dunkin’ Donuts targets the “Dunkin’ Tribe”—not the Starbucks snob but the average Joe 

Part 3: Designing a Customer-Driven Marketing 

Strategy and Integrated Marketing Mix 

ast year, Dunkin’ Donuts paid dozens of faithful customers in Phoenix, 

Chicago, and Charlotte, North Carolina, $100 a week to buy coffee at 

Starbucks instead. At the same time, the no-frills coffee chain paid Starbucks 

customers to make the opposite switch. When it later debriefed the two groups, Dunkin’ 

says it found them so polarized that company researchers dubbed them “tribes”— 

each of whom loathed the very things that made the other tribe loyal to their coffee 

shop. Dunkin’ fans viewed Starbucks as pretentious and trendy, whereas Starbucks loyalists 

saw Dunkin’ as plain and unoriginal. “I don’t get it,” one Dunkin’ regular told 

researchers after visiting Starbucks. “If I want to sit on a couch, I stay at home.” 

William Rosenberg opened the first Dunkin’ Donuts in Quincy, Massachusetts, in 

1950. Residents flocked to his store each morning for the coffee and fresh doughnuts. 

Rosenberg started franchising the Dunkin’ Donuts name, and the chain grew 

rapidly throughout the Midwest and Southeast. By the early 1990s, however, 

Dunkin’ was losing breakfast sales to morning sandwiches at McDonald’s and 

Then, the chapters that follow explore 

the tactical marketing tools—the Real FourMarketing 

Burger King. Starbucks Staples: and other high-end Positioning cafes began Made sprouting up, bringing more 

competition. Sales slid as the company clung to its strategy of selling sugary dough- 

Ps—by which marketers bring these strategies 

to life. 

These days, nuts by Staples the dozen. really is riding the easy button. But 

As an opening example of7.2 only five years In the ago, mid-1990s, things weren’t however, so easy Dunkin’ for the office- shifted its focus from doughnuts to coffee in 

segmentasupply 

superstore—or the for hope its customers. that promoting The ratio a more of customer frequently comconsumed 

item would drive store traffic. 

tion, targeting, differentiation, plaints and posi- to compliments was running an abysmal eight to one at 

The coffee push worked—coffee now makes up 62 percent of sales. And Dunkin’s 

tioning at work, let’s look at Staples Dunkin’ stores. The company’s slogan—“Yeah, we’ve got that”—had 

sales are growing at a double-digit clip, with profits up 35 percent over the past two 

Donuts. Dunkin’, a largely Eastern become U.S. laughable. Customers griped that items were often out of 

years. Based on this recent success, Dunkin’ now has ambitious plans to expand 

coffee chain, has ambitiousstock plans and said to the sales staff was unhelpful to boot. 

After weeks of into focus a groups national and coffee interviews, powerhouse, Shira Goodman, on a par with Starbucks, the nation’s largest cof- 

expand into a national powerhouse, on a 

Staples’ executive VP fee for chain. marketing, Over the had next a revelation. three years, “Customers Dunkin’ plans to remake its nearly 5,000 U.S. 

par with Starbucks. But Dunkin’ wanted isan no easier shopping experience,” she says. That simple reve- 

stores and to grow to triple that number in less than 15 years. 

Starbucks. In fact, it doesn’t want lation tohas be. resulted It in one of the most successful marketing cam- 

But Dunkin’ is not Starbucks. In fact, it doesn’t want to be. To succeed, it must 

targets a very different kind of paigns customer in recent history, built around the now-familiar “Staples: That 

was easy” tagline. But have Staples’ its own positioning clear vision turnaround of just took which a lot customers more it wants to serve (what segments 

with a very different value proposition. 

than simply bombarding and targeting) customers and with how a new (what slogan. positioning Before it or value proposition). Dunkin’ and 

Grab yourself some coffee and read could on. promise customers a simplified shopping experience, Staples 

Starbucks target very different customers, who want very different things from their 

had to actually deliver one. First, it had to live the slogan. 

When it launched 

favorite 

in 1986, 

coffee 

Staples 

shop. 

all 

Starbucks 

but invented 

is strongly 

the office- 

positioned as a sort of high-brow “third 

supply superstore. place”—outside Targeting small and the medium-size home and businesses, office—featuring it couches, eclectic music, wireless 

aimed to sell everything Internet for the access, office under and one art-splashed roof. But by walls. the mid- Dunkin’ has a decidedly more low-brow, 

1990s, the marketplace “everyman” was crowded kind of with positioning. retailers such as Office 

Depot, not to mention Target, Wal-Mart, and a slew of other online 

With its makeover, Dunkin’ plans to move upscale—a bit but not too far—to 

and offline sellers. Partly as a result of that competition, Staples’ 

same-store sales fell rebrand for the first itself time as in a quick 2001. but appealing alternative to specialty coffee shops and fast- 

Customer research food chains. conducted A prototype by Goodman Dunkin’ and store her in team Euclid, Ohio, outside Cleveland, features 

revealed that although shoppers expected Staples and its competitors 

to have everything in stock, they placed little importance on 

price. Instead, customers overwhelmingly requested a simple, 

182 

straightforward shopping experience. “They wanted knowledgeable 

and helpful associates and hassle-free shopping,” Goodman says. 

The “Staples: That was easy” tagline was the simple—yet inspired— 

outgrowth of that realization. 

The slogan, however, was kept under wraps until the company 

could give its stores a major makeover. Staples removed from its inventory 

some 800 superfluous items, such as Britney Spears backpacks, 

that had little use in the corporate world. Office chairs, which had been 

displayed in the rafters, were moved to the floor so customers could try The “Staples: That was easy” marketing campaign has played a major 

them out. Staples also added larger signs and retrained sales associ- role in repositioning Staples. But marketing promises count for little if 

ates to walk shoppers to the correct aisle. Because customers revealed not backed by the reality of the customer experience. 

that the availability of ink was one of their biggest concerns, the company 

introduced an in-stock guarantee on printer cartridges. Even The Easy Button soon birthed a string of humorous and popular 

communications were simplified—a four-paragraph letter sent to television commercials, which premiered in January 2005 and also 

prospective customers was cut to two sentences. 

aired during the Super Bowl a month later. In one spot, called “The 

Only when all of the customer-experience pieces were in place did Wall,” an emperor uses the button to erect a giant barrier as maraud- 

Staples begin communicating its new positioning to customers. It ers approach; another shows an office worker causing printer car- 

took about a year to get the stores up to snuff, Goodman says, but tridges to rain down from above. Online, Staples created a download- 

“once we felt that the experience was significantly easier, we able Easy Button toolbar, which took shoppers directly from their 

changed the tagline.” 

desktops to Staples.com, and billboards reminded commuters that 

For starters, the company hired a new ad agency, McCann- an Easy Button would be helpful in snarled traffic. 

Erickson Worldwide, which had also created MasterCard’s nine-year- As a result of the advertising onslaught, customers began asking 

old “Priceless” campaign. A group of McCann copywriters and art about buying real Easy Buttons, so Staples again took the cue. It 

directors held a marathon brainstorming session to find ways to illus- began selling $5 three-inch red plastic buttons that when pushed say 

trate the concept of “easy.” As the creative session dragged on, the “That was easy.” Staples promised to donate $1 million in button 

group’s creative director mentioned how nice it would be if she could profits to charity each year, and by mid-2006, it had sold its millionth 

just push a button to come up with a great ad, so they could go to button. By selling the Easy Button as a sort of modern-day stress ball, 

lunch. The Easy Button was born. “It took an amorphous concept Staples has turned its customers into advertisers. Homegrown 

and made it tangible,” Goodman says. 

movies starring the button have appeared on video-sharing site 

(continues) 

rounded granite-style coffee bars, where workers make espresso drinks face-to-face 

with customers. Open-air pastry cases brim with yogurt parfaits and fresh fruit, and 

a carefully orchestrated pop-music soundtrack is piped throughout. 

Yet Dunkin’ built itself on serving simple fare to working-class customers. Inching 

upscale without alienating that base will prove tricky. There will be no couches in the 

new stores. And Dunkin’ renamed a new hot sandwich a “stuffed melt” after customers 

complained that calling it a “panini” was too fancy. “We’re walking that [fine] 

line,” says Regina Lewis, the chain’s vice president of consumer insights. “The thing 

about the Dunkin’ tribe is, they see through the hype.” 

Dunkin’s research showed that although loyal Dunkin’ customers want nicer 

stores, they were bewildered and turned off by the atmosphere at Starbucks. They 

groused that crowds of laptop users made it difficult to find a seat. They didn’t like 

Starbucks’ “tall,” “grande,” and “venti” lingo for small, medium, and large coffees. 

And they couldn’t understand why anyone would pay as much as $4 for a cup of 

coffee. “It was almost as though they were a group of Martians talking about a group 

of Earthlings,” says an executive from Dunkin’s ad agency. One customer told 

researchers that lingering in a Starbucks felt like “celebrating Christmas with people 

you don’t know.” The Starbucks customers that Dunkin’ paid to switch were equally 

uneasy in Dunkin’ shops. “The Starbucks people couldn’t bear that they weren’t 

special anymore,” says the ad executive. 

Valuable Learning Aids 

Objectives 

After studying this chapter, you should 

be able to 

1. define the four major steps in designing a 

customer-driven market strategy: market 

segmentation, market targeting, 

differentiation, and positioning 

2. list and discuss the major bases for 

segmenting consumer and business markets 

3. explain how companies identify attractive 

market segments and choose a market 

targeting strategy 

4. discuss how companies position their 

products for maximum competitive 

advantage in the marketplace 

■ Tiny nicher Bike Friday creates 

customer evangelists— 

delighted customers who 

can’t wait to tell others 

about the company 

■ Apple Computer founder 

■ 

Steve Jobs used dazzling customer- 

driven innovation to 

first start the company and 

then to remake it again 20 

years later 

Staples held back its nowfamiliar 

“Staples: That was 

easy” repositioning campaign 

for more than a year. 

First, it had to live the slogan. 

■ Ryanair—Europe’s original, 

largest, and most profitable 

low-fares airline—appears 

to have found a radical new 

pricing solution: Fly free! 

■ The NBA has become one of today’s hottest global brands, jamming 

down one international slam dunk after another 

■ Dove—with its Campaign for Real Beauty campaign featuring 

candid and confident images of real women of all types—is 

on a bold mission to create a broader and healthier view of 

beauty 

These and countless other examples and illustrations throughout 

each chapter reinforce key concepts and bring marketing to life. 

A wealth of chapter-opening, within-chapter, and end-of-chapter learning devices help students 

to learn, link, and apply major concepts: 

■ Previewing the Concepts. A section at the beginning of each chapter briefly previews 

chapter concepts, links them with previous chapter concepts, outlines chapter learning 

objectives, and introduces the chapter-opening vignette. 

■ Chapter-opening marketing stories. Each chapter begins with an engaging, deeply developed 

marketing story that introduces the chapter material and sparks student interest. 

■ Real Marketing highlights. Each chapter contains two highlight features that provide an 

in-depth look at real marketing practices of large and small companies. 

■ Reviewing the Concepts. A summary at the end of each chapter reviews major chapter 

concepts and chapter objectives. 

■ Reviewing the Key Terms. Key terms are highlighted within the text, clearly defined 

in the margins of the pages in which they first appear, and listed at the end of each 

chapter. 

■ Discussing the Concepts and Applying the Concepts. Each chapter contains a set of discussion 

questions and application exercises covering major chapter concepts. 

■ Focus on Technology. Application exercises at the end of each chapter provide discussion 

on important and emerging marketing technologies in this digital age. 

■ Focus on Ethics. Situation descriptions and questions highlight important issues in marketing 

ethics at the end of each chapter. 

183

Company Case Saturn: An Image Makeover 

Things are about to change at Saturn. The General Motors From the beginning, Saturn set out to break through the 

brand had only three iterations of the same compact car for GM bureaucracy and become “A different kind of car. A dif- 

the entire decade of the 1990s. But Saturn will soon introferent kind of company.” As the single-most defining charduce 

an all-new lineup of vehicles that includes a midacteristic of the new company, Saturn proclaimed that its 

sized sport sedan, an eight-passenger crossover vehicle, a sole focus would be people: customers, employees, and 

two-seat roadster, a new compact, and a hybrid SUV. communities. Saturn put significant resources into cus- 

Having anticipated the brand’s renaissance for years, Saturn tomer research and product development. The first Saturn 

executives, employees, and customers are beside themg 

cars were g made “from gscratch,” 

without any allegiance to 

selves with glee. 

the GM parts bin or suppliers. The goal was to produce not 

But with all this change, industry observers are wonder- only a high-quality vehicle, but one known for safety and 

ing whether Saturn will be able to maintain the very charac- innovative features that would “wow” the customer. 

teristics that have distinguished the Video brand since Case its incep- Harley-Davidson 

Saturn’s focus on employees began with an unprecetion. 

Given that Saturn established itself based on a very dented contract with United Auto Workers (UAW). The con- 

Few brands engender such intense loyalty as that found in the hearts of 

narrow line of compact vehicles, many believe that the tract was so simple, it fit in a shirt Harley’s pocket. Web It established site, customers pro- can book a trip to Milwaukee to visit the 

Harley-Davidson owners. Why? Because the company’s marketers spend 

move from targeting one segment of customers to targeting gressive work rules, with special Harley factory emphasis in the company’s given tohometown 

or turn a Las Vegas vacation 

a great deal of time thinking about customers. They want to know who 

multiple segments will be challenging. Will a newly posi- benefits, work teams, and the concept into “an of authentic empowerment. Harley-Davidson At adventure.” 

their customers are, how they think and feel, and why they buy a Harley. 

tioned Saturn still meet the needs of one of the most loyal the retail end, Saturn selected dealers After viewing based the on video carefully featuring Harley-Davidson, answer the follow- 

That attention to detail has helped build Harley-Davidson into a $5 billion 

cadres of customers in the automotive world? 

crafted criteria. It paid service personnel ing questions and about sales marketing associ- strategy. 

company with more than 900,000 Harley Owners Group (HOG) members 

ates a salary rather than commission. 1. List This several would products help that creare 

included in Harley-Davidson’s busi- 

and 1,200 dealerships worldwide. 

A NEW KIND OF CAR COMPANY 

ate an environment that would reverse ness portfolio. the common Analyze cus- the portfolio using the Boston Consulting 

Harley sells much more than motorcycles. The company sells a feel- 

In 1980, GM recognized its inferiority to the Japanese big tomer perception of the dealer as a nemesis. Group growth-share matrix. 

ing of independence, individualism, and freedom. To support that 

three (Honda, Toyota, and Datsun) with respect to compact Finally, in addition to customer and employee relations, 

lifestyle, Harley-Davidson offers clothes and accessories both for riders 2. Which strategies in the product/market expansion grid is Harleyvehicles. 

The Japanese had a lower cost structure, yet built Saturn focused on social responsibility. Human resources 

and those who simply like to associate with the brand. Harley further Davidson using to grow sales and profits? 

better cars. In an effort to offer a more competitive economy policies gave equal opportunities to women, ethnic minori- 

extends the brand experience by offering travel adventures. Through 3. List some of the members of Harley’s value-delivery network. 

car, GM actually turned to the enemy. It entered into a joint ties, and people with disabilities. Saturn designed environ- 

venture with Toyota to build small cars. Soon, a Toyota mentally responsible manufacturing processes, even going 

plant in Northern Focus California on Technology 

was turning out Corollas on beyond legal requirements. The company also gave heavy 

one assembly line while making very similar Chevy Novas philanthropic support to various causes. All of these actions 

on a Television second. is Meanwhile, hitting the small in a screen—the long-term mobile effort phones to make that better more than earned 1. Saturn Explain a why number younger of Gen awards Yers might recognizing be more likely its environ- to adapt new 

small 80 cars, percent GM gave of adults the green now carry. light to Networks Group 99, are a now secretive producing mentally mobile and socially phone technologies responsible as actions. compared to other demographic 

task “mobisodes,” force that two-minute resulted episodes in formation produced of exclusively the Saturn for mobile groups. 

Corporation phones. Services in 1985. such as Verizon’s Vcast let you watch TV or stream con- 

(case continues) 

2. What other macroenvironmental and microenvironmental forces 

tent for a monthly fee. Who will subscribe to this? Certainly the younger might affect the growth of mobile TV? 

segment of the Generation Y demographic—the growing 57 percent of 

3. How can other marketers use mobile marketing to communicate 

U.S. teens, ages 13 to 17 years, who now own mobile phones. Although 

with and promote to consumers? 

this is below the percentage of all adults owning mobile phones, this 

group displays the most intense connectivity to their phones and the most 

interest in new features. 

Focus on Ethics 

In February, 2005, R.J. Reynolds began a promotion that included direct- public advocacy groups, and the alcohol distillers themselves. The attormail 

pieces to young adults on their birthdays. The campaign, entitled ney generals and advocacy groups said the promotion endorsed heavy 

“Drinks on Us,” included a birthday greeting as well as a set of drink drinking. The distillers were angry because their brands were used with- 

coasters that included recipes for many drinks. The drink recipes, which out permission. In addition, the distillers argued that the promotion vio- 

were for mixed drinks of high alcohol content, included many distiller lates the alcohol industry advertising code, which prohibits marketing that 

brands such as Jack Daniels, Southern Comfort, and Finlandia Vodka. encourages excessive drinking. 

With the recipe on one side of the coaster, the flip side included a tag line 1. What prominent environmental forces come into play in this situation? 

such as “Go ’til Daybreak, and Make Sure You’re Sittin.” Shortly after its 

2. Is this promotion wrong? Should R.J. Reynolds stop the promotion? 

release, the promotion came under attack from several attorney generals, 

■ Company Cases. All new or revised company cases for class or written 

discussion are provided at the end of each chapter. These cases 

challenge students to apply marketing principles to real companies in 

real situations. 

■ Video Shorts. Short vignettes and discussion questions appear 

at the end of every chapter, to be used with the set of 4- to 7minute 

videos that accompany this edition. 

■ Marketing Plan appendix. Appendix 1 contains a sample marketing 

plan that helps students to apply important marketing 

planning concepts. 

■ Marketing by the Numbers appendix. A new Appendix 2 introduces students 

to the marketing financial analysis that helps to guide, assess, and 

support marketing decisions. 

More than ever before, the twelfth edition of Principles of Marketing creates 

value for you—it gives you all you need to know about marketing in 

an effective and enjoyable totallearning package! 

A Valuable Supplements Package 

A successful marketing course requires more than a well-written book. Today’s classroom 

requires a dedicated teacher and a fully integrated teaching system. A total package of teaching 

and learning supplements extends this edition’s emphasis on creating value for both the 

student and instructor. The following aids support Principles of Marketing. 

Supplements for Instructors 

The following supplements are available to adopting instructors. 

Instructor’s Manual with Video Case Notes (ISBN: 0-13-239003-5) 

The instructor’s handbook for this text provides suggestions for using features and elements of 

the text. This Instructor’s Manual includes a chapter overview, objectives, a detailed lecture 

outline (incorporating key terms, text art, chapter objectives, and references to various pedagogical 

elements), and support for end-of-chapter material. Also included within each chapter 

is a section that offers barriers to effective learning, student projects/assignments, as well 

as an outside example, all of which provide a springboard for innovative learning experiences 

in the classroom. Video Case Notes, offering a brief summary of each segment, along with 

answers to the case questions in the text, as well as teaching ideas on how to present the material 

in class are also offered in the Instructor’s Manual. 

Visit the Instructor’s Resource Center Online (www.prenhall.com/irc) for these addtional 

elements: 

■ “Professors on the Go!” serves to bring key material upfront in the manual, where an 

instructor who is short on time can take a quick look and find key points and assignments 

to incorporate into the lecture, without having to page through all the material provided 

for each chapter. 

■ Annotated Instructor’s Notes, which serve as a quick reference for the entire supplements 

package. Suggestions for using materials from the Instructor’s Manual, PowerPoint slides, 

Test Item File, Video Library, and online material are offered for each section within every 

chapter. 

■ More Quantitative Exercises, based on the concepts covered in Appendix 2: Marketing by 

the Numbers. An additional set of exercises are offered here, not found in the textbook. 

Suggested answers are provided as well. 

Test Item File (ISBN: 0-13-239004-3) 

Preface xxv 

Featuring more than 3,000 questions, 175 questions per chapter, this Test Item File has been 

written specifically for the twelfth edition. Each chapter consists of multiple-choice, true/false,

chapter 


478 

17 

In the previous three chapters, you 

learned about communicating customer 

value through integrated marketing communication 

(IMC) and about four specific 

elements of the marketing communications 

mix—advertising, publicity, personal 

selling, and sales promotion. In this 

chapter, we’ll look at the final IMC element, 

direct marketing, and at its fastestgrowing 

form, online marketing. Actually, 

direct marketing can be viewed as more 

than just a communications tool. In many 

ways it constitutes an overall marketing 

approach—a blend of communication and 

distribution channels all rolled into one. 

As you read on, remember that although 

this chapter examines direct marketing as 

a separate tool, it must be carefully integrated 

with other elements of the promotion 

mix. 

To set the stage, let’s first look at Dell, 

the world’s largest direct marketer of 

computer systems and the number-one PC 

maker worldwide. Ask anyone at Dell and 

they’ll tell you that the company owes its 

incredible success to what it calls the Dell 

Direct Model, a model that starts with 

direct customer relationships and ends 

with the Dell customer experience. Says 

one analyst, “There’s no better way to 

make, sell, and deliver PCs than the way 

Dell does it, and nobody executes [the 

direct] model better than Dell.” 

Direct and Online 

Marketing 

Building Direct Customer 

Relationships 

When 19-year-old Michael Dell began selling personal computers out of 

his college dorm room in 1984, competitors and industry insiders 

scoffed at the concept of direct computer marketing. Yet young Michael 

proved the skeptics wrong—way wrong. In little more than two decades, he has 

turned his dorm-room mail-order business into the burgeoning, $56 billion Dell 

computer empire. 

Dell is now the world’s largest direct marketer of computer systems and the 

number-one PC maker worldwide. In the United States, Dell is number-one in desktop 

PC sales, number-one in laptops, number-one in servers, and number-two (and 

gaining) in printers. In fact, Dell flat out dominates the U.S. PC market, with a 

33.5 percent market share, compared with number-two HP’s 19.4 percent and 

number-three Gateway’s 6.1 percent. Dell has produced a ten-year average annual 

return to investors of 39 percent, best among all Fortune 100 companies. Investors 

have enjoyed explosive share gains of more than 28,000 percent since Dell went 

public fewer than 20 years ago. 

What’s the secret to Dell’s stunning success? Anyone at Dell can tell you without 

hesitation: It’s the company’s radically different business model—the direct model. 

“We have a tremendously clear business model,” says Michael Dell, the company’s 

41-year-old founder and chairman. “There’s no confusion about what the value 

proposition is, what the company offers, and why it’s great for customers.” An industry 

analyst agrees: “There’s no better way to make, sell, and deliver PCs than the way 

Dell does it, and nobody executes [the direct] model better than Dell.” 

Dell’s direct-marketing approach delivers greater customer value through an 

unbeatable combination of product customization, low prices, fast delivery, and 

award-winning customer service. A customer can talk by phone with a Dell representative 

at 1-800-Buy-Dell or log onto www.dell.com on Monday morning; order a 

fully customized, state-of-the-art PC to suit his or her special needs; and have the 

machine delivered to his or her doorstep or desktop by Wednesday—all at a price 

that’s well below competitors’ prices for a comparably performing PC. Dell backs its 

products with high-quality service and support. As a result, Dell consistently ranks 

among the industry leaders in product reliability and service, and its customers are 

routinely among the industry’s most satisfied. 

Dell customers get exactly the machines they need. Michael Dell’s initial idea was 

to serve individual buyers by letting them customize machines with the special features 

they wanted at low prices. However, this one-to-one approach also appeals 

strongly to corporate buyers, because Dell can so easily preconfigure each computer

to precise requirements. Dell routinely preloads machines with a company’s own 

software and even undertakes tedious tasks such as pasting inventory tags onto 

each machine so that computers can be delivered directly to a given employee’s 

desk. As a result, more than 85 percent of Dell’s sales come from business, government, 

and educational buyers. 

The direct model results in more efficient selling and lower costs, which translate 

into lower prices for customers. “Nobody, but nobody, makes [and markets] 

computer hardware more efficiently than Dell,” says another analyst. “No unnecessary 

costs: This is an all-but-sacred mandate of the famous Dell direct business 

model.” Because Dell builds machines to order, it carries barely any inventory— 

less than three days’ worth by some accounts. Dealing one-to-one with customers 

helps the company react immediately to shifts in demand, so Dell doesn’t get stuck 

with PCs no one wants. Finally, by selling directly, Dell has no dealers to pay. As a 

result, on average, Dell’s costs are 12 percent lower than those of its leading PC 

competitor. 

Dell knows that time is money, and the company is obsessed with “speed.” 

According to one account, Dell squeezes “time out of every step in the process— 

from the moment an order is taken to collecting the cash. [By selling direct, manufacturing 

to order, and] tapping credit cards and electronic payment, Dell converts 

the average sale to cash in less than 24 hours.” By contrast, competitors selling 

through dealers might take 35 days or longer. 

Objectives 


be able to 

1. define direct marketing and discuss its 

benefits to customers and companies 

2. identify and discuss the major forms of 

direct marketing 

3. explain how companies have responded to 

the Internet and other powerful new 

technologies with online marketing 

strategies 

4. discuss how companies go about conducting 

online marketing to profitably deliver more 

value to customers 

5. overview the public policy and ethical issues 

presented by direct marketing 

479

480 Part 3 Designing a Customer-Driven Marketing Strategy and Integrated Marketing Mix 

Direct marketing 

Direct connections with 

carefully targeted individual 

consumers to both obtain an 

immediate response and 

cultivate lasting customer 

relationships. 

Such blazing speed results in more satisfied customers and still lower costs. For example, customers 

are often delighted to find their new computers arriving within as few as 36 hours of placing an order. 

And because Dell doesn’t order parts until an order is booked, it can take advantage of ever-falling component 

costs. On average, its parts are 60 days newer than those in competing machines, and, hence, 

60 days farther down the price curve. This gives Dell a 6 percent profit advantage from parts costs alone. 

As you might imagine, competitors are no longer scoffing at Michael Dell’s vision of the future. In 

fact, competing and noncompeting companies alike are studying the Dell direct model closely. 

“Somehow Dell has been able to take flexibility and speed and build it into their DNA. It’s almost like 

drinking water,” says the CEO of another Fortune 500 company, who visited recently to absorb some 

of the Dell magic to apply to his own company. “I’m trying to drink as much water here as I can.” 

Still, as Dell grows larger and as the once-torrid growth in the sales of PCs slows, the Dell direct 

model is facing challenges. After years of rocketing revenue and profit numbers, Dell’s recent growth 

has slowed. Although Dell still dominates in selling PCs, servers, and peripherals to business markets, 

it appears to be stumbling in its attempts to sell an expanding assortment of high-tech consumer electronics 

products to final buyers. Some analysts suggest that Dell’s vaunted direct model may not work 

as well for selling LCD TVs, handhelds, MP3 players, digital cameras, and other personal digital 

devices—products that consumers want to see and experience first-hand before buying. In fact, Dell 

plans to add retail stores to help bolster the consumer side of its business. 

Slowing growth has led some analysts to ask, “Is the much-feared Dell Way running out of gas?” No 

way, says Dell. There’s no question, the company admits, that Dell isn’t the high-flying growth company 

it once was—you can’t expect a $56-billion-a-year giant to grow like a full-throttle start-up. But 

Dell continues to dominate its PC markets, and other companies would kill for Dell’s “disappointing” 

growth numbers—sales last year grew 13.6 percent, and profits were up 17.4 percent. “We still have 

an outrageous track record,” says Dell CEO Kevin Rollins. “Our [direct] model still works very well,” 

Michael Dell agrees. “We wouldn’t trade ours for anyone else’s!” he says. “In the past ten years our 

sales are up about 15 times, earnings and the stock price are up about 20 times. Not too shabby!” 

It’s hard to argue with success, and Michael Dell has been very successful. By following his 

hunches, at the tender age of 41 he has built one of the world’s hottest companies. In the process, 

he’s become one of the world’s richest men, amassing a personal fortune of more than $17 billion. 1 

Many of the marketing and promotion tools that we’ve examined in previous chapters were 

developed in the context of mass marketing: targeting broad markets with standardized messages 

and offers distributed through intermediaries. Today, however, with the trend toward 

more narrowly targeted marketing, many companies are adopting direct marketing, either as a 

primary marketing approach or as a supplement to other approaches. In this section, we 

explore the exploding world of direct marketing. 

Direct marketing consists of direct connections with carefully targeted individual consumers 

to both obtain an immediate response and cultivate lasting customer relationships. 

Direct marketers communicate directly with customers, often on a one-to-one, interactive 

basis. Using detailed databases, they tailor their marketing offers and communications to the 

needs of narrowly defined segments or even individual buyers. 

Beyond brand and relationship building, direct marketers usually seek a direct, immediate, 

and measurable consumer response. For example, as we learned in the chapter-opening 

story, Dell interacts directly with customers, by telephone or through its Web site, to design 

built-to-order systems that meet customers’ individual needs. Buyers order directly from Dell, 

and Dell quickly and efficiently delivers the new computers to their homes or offices. 

The New Direct-Marketing Model 

Early direct marketers—catalog companies, direct mailers, and telemarketers—gathered customer 

names and sold goods mainly by mail and telephone. Today, however, fired by rapid 

advances in database technologies and new marketing media—especially the Internet—direct

■ The new direct marketing 

model: Companies such as 

GEICO have built their entire 

approach to the marketplace 

around direct marketing: just 

visit geico.com or call 1-800- 

947-auto. 

Chapter 17 Direct and Online Marketing: Building Direct Customer Relationships 481 

marketing has undergone a dramatic transformation. According to the head of the Direct 

Marketing Association, “In recent years, the dramatic growth of the Internet and the increasing 

sophistication of database technologies have [created] an extraordinary expansion of 

direct marketing and a seismic shift in what it is, how it’s used, and who uses it.” 2 

In previous chapters, we’ve discussed direct marketing as direct distribution—as marketing 

channels that contain no intermediaries. We also include direct marketing as one element 

of the promotion mix—as an approach for communicating directly with consumers. In actuality, 

direct marketing is both these things. 

Most companies still use direct marketing as a supplementary channel or medium for 

marketing their goods and messages. Thus, Lexus markets mostly through mass-media advertising 

and its high-quality dealer network but also supplements these channels with direct 

marketing. Its direct marketing includes promotional CDs and other materials mailed directly 

to prospective buyers and a Web page (www.lexus.com) that provides consumers with information 

about various models, competitive comparisons, financing, and dealer locations. 

Similarly, most department stores sell the majority of their merchandise off their store shelves 

but also sell through direct mail and online catalogs. 

However, for many companies today, direct marketing is more than just a supplementary 

channel or medium. For these companies, direct marketing—especially in its most recent 

transformation, online marketing—constitutes a complete model for doing business. More 

than just another marketing channel or advertising medium, this new direct model is rapidly 

changing the way companies think about building relationships with customers. 

Rather than using direct marketing and the Internet only as supplemental approaches, 

firms employing the direct model use it as the only approach. Companies such as Dell, 

Amazon.com, eBay, and GEICO have built their entire approach to the marketplace around 

direct marketing. 

Growth and Benefits of Direct Marketing 

Direct marketing has become the fastest-growing form of marketing. According to the Direct 

Marketing Association, U.S. companies spent $161 billion on direct marketing last year, 

accounting for whopping 48 percent of total U.S. advertising expenditures. These expenditures 

generated an estimated $1.85 trillion in direct marketing sales, or about 7 percent of 

total sales in the U.S. economy. And direct marketing-driven sales are growing rapidly. The 

DMA estimates that direct marketing sales will grow 6.4 percent annually through 2009, compared 

with a projected 4.8 percent annual growth for total U.S. sales. 3


Direct marketing continues to become more Web oriented, and Internet marketing is 

claiming a fast-growing share of direct marketing spending and sales. The Internet now 

accounts for only about 16 percent of direct marketing-driven sales. However, the DMA predicts 

that over the next five years Internet marketing expenditures will grow at a blistering 

18 percent a year, three times faster than expenditures in other direct marketing media. 

Internet-driven sales will grow by 12.6 percent. 

Whether employed as a complete business model or as a supplement to a broader integrated 

marketing mix, direct marketing brings many benefits to both buyers and sellers. 

Benefits to Buyers 

For buyers, direct marketing is convenient, easy, and private. Direct marketers never close 

their doors, and customers don’t have to battle traffic, find parking spaces, and trek through 

stores to find products. From the comfort of their homes or offices, they can browse catalogs 

or company Web sites at any time of the day or night. Business buyers can learn about products 

and services without tying up time with salespeople. 

Direct marketing gives buyers ready access to a wealth of products. For example, unrestrained 

by physical boundaries, direct marketers can offer an almost unlimited selection to 

consumers almost anywhere in the world. For example, by making computers to order and 

selling directly, Dell can offer buyers thousands of self-designed PC configurations, many 

times the number offered by competitors who sell preconfigured PCs through retail stores. And 

just compare the huge selections offered by many Web merchants to the more meager assortments 

of their brick-and-mortar counterparts. For instance, log onto Bulbs.com, “the Web’s 

no. 1 light bulb superstore,” and you’ll have instant access to every imaginable kind of light 

bulb or lamp—incandescent bulbs, fluorescent bulbs, projection bulbs, surgical bulbs, automotive 

bulbs—you name it. No physical store could offer handy access to such a vast selection. 

Direct marketing channels also give buyers access to a wealth of comparative information 

about companies, products, and competitors. Good catalogs or Web sites often provide more 

information in more useful forms than even the most helpful retail salesperson can. For example, 

the Amazon.com site offers more information than most of us can digest, ranging from 

top-10 product lists, extensive product descriptions, and expert and user product reviews to 

recommendations based on customers’ previous purchases. And Sears catalogs offer a treasure 

trove of information about the store’s merchandise and services. In fact, you probably 

wouldn’t think it strange to see a Sears salesperson referring to a catalog in the store while trying 

to advise a customer on a specific product or offer. 

Finally, direct marketing is interactive and immediate—buyers can interact with sellers 

by phone or on the seller’s Web site to create exactly the configuration of information, products, 

or services they desire, and then order them on the spot. Moreover, direct marketing 

gives consumers a greater measure of control. Consumers decide which catalogs they will 

browse and which Web sites they will visit. 

Benefits to Sellers 

For sellers, direct marketing is a powerful tool for building customer relationships. Using 

database marketing, today’s marketers can target small groups or individual consumers and 

promote their offers through personalized communications. Because of the one-to-one nature 

of direct marketing, companies can interact with customers by phone or online, learn more 

about their needs, and tailor products and services to specific customer tastes. In turn, customers 

can ask questions and volunteer feedback. 

Direct marketing also offers sellers a low-cost, efficient, speedy alternative for reaching 

their markets. Direct marketing has grown rapidly in business-to-business marketing, partly in 

response to the ever-increasing costs of marketing through the sales force. When personal sales 

calls cost an average of more than $400 per contact, they should be made only when necessary 

and to high-potential customers and prospects. Lower-cost-per-contact media—such as telemarketing, 

direct mail, and company Web sites—often prove more cost effective. Similarly, 

online direct marketing results in lower costs, improved efficiencies, and speedier handling of 

channel and logistics functions, such as order processing, inventory handling, and delivery. 

Direct marketers such as Amazon.com or Dell also avoid the expense of maintaining a store 

and the related costs of rent, insurance, and utilities, passing the savings along to customers. 

Direct marketing can also offer greater flexibility. It allows marketers to make ongoing 

adjustments to its prices and programs, or to make immediate and timely announcements and


offers. For example, Southwest Airlines’ DING! application takes advantage of the flexibility 

and immediacy of the Web to share low-fare offers directly with customers: 4 

■ Southwest Airlines “DING!” application takes advantage of flexibility and 

immediacy of the Web to share low-fare offers directly with customers. 

Customer database 

An organized collection of 

comprehensive data about 

individual customers or 

prospects, including 

geographic, demographic, 

psychographic, and 

behavioral data. 

When Jim Jacobs hears a “ding” coming from his desktop computer, he thinks about 

discount air fares like the $122 ticket he recently bought for a flight from Tampa to 

Baltimore on Southwest Airlines. 

Several times a day, Southwest sends 

Jacobs and hundreds of thousands of 

other computer users discounts through 

an application called DING! “If I move 

quickly,” says Jacobs, a corporate 

telecommunications salesman who lives 

in Tampa, “I can usually save a lot of 

money.” The fare to Baltimore underbid 

the airline’s own Web site by $36, he 

says. DING! lets Southwest bypass the 

reservations system and pass bargain 

fares directly to interested customers. 

Eventually, DING! may even allow 

Southwest to customize fare offers based 

on each customer’s unique characteristics 

and travel preferences. For now, 

DING! gets a Southwest icon on the customer’s 

desktop and lets the airline build 

relationships with customers by helping 

them to save money. Following its DING! 

launch in early 2005, Southwest experienced 

its two biggest online sales days 

ever. In the first 13 months, two million 

customers downloaded DING! and the 

program produced more than $80 million 

worth of fares. 

Finally, direct marketing gives sellers access to buyers that they could not reach through 

other channels. Smaller firms can mail catalogs to customers outside their local markets and 

post 1-800 telephone numbers to handle orders and inquiries. Internet marketing is a truly 

global medium that allows buyers and sellers to click from one country to another in seconds. 

A Web surfer from Paris or Istanbul can access an online L.L. Bean catalog as easily as someone 

living in Freeport, Maine, the direct retailer’s hometown. Even small marketers find that 

they have ready access to global markets. 

Customer Databases and Direct Marketing 

Effective direct marketing begins with a good customer database. A customer database is an 

organized collection of comprehensive data about individual customers or prospects, including 

geographic, demographic, psychographic, and behavioral data. A good customer database 

can be a potent relationship-building tool. The database gives companies “a snapshot of how 

customers look and behave.” Says one expert, “A company is no better than what it knows 

[about its customers].” 5 

Many companies confuse a customer database with a customer mailing list. A customer 

mailing list is simply a set of names, addresses, and telephone numbers. A customer database 

contains much more information. In consumer marketing, the customer database might contain 

a customer’s demographics (age, income, family members, birthdays), psychographics 

(activities, interests, and opinions), and buying behavior (buying preferences and the recency, 

frequency, and monetary value—RFM—of past purchases). In business-to-business marketing, 

the customer profile might contain the products and services the customer has bought; 

past volumes and prices; key contacts (and their ages, birthdays, hobbies, and favorite foods); 

competing suppliers; status of current contracts; estimated customer spending for the next 

few years; and assessments of competitive strengths and weaknesses in selling and servicing 

the account.


Direct-mail marketing 

Direct marketing by sending 

an offer, announcement, 

reminder, or other item to a 

person at a particular 

address. 

Some of these databases are huge. For example, casino operator Harrah’s Entertainment 

has built a customer database containing 30 terabytes worth of customer information, roughly 

three times the number of printed characters in the Library of Congress. Internet portal Yahoo! 

records every click made by every visitor, adding some 400 billion bytes of data per day to its 

database—the equivalent of 800,000 books. And Wal-Mart captures data on every item, for 

every customer, for every store, every day. Its database contains more than 570 terabytes of 

data—that’s 570 trillion bytes, far greater than the storage horsepower of 100,000 personal 

computers. 6 

Companies use their databases in many ways. They use databases to locate good potential 

customers and to generate sales leads. They can mine their databases to learn about customers 

in detail, and then fine-tune their market offerings and communications to the special preferences 

and behaviors of target segments or individuals. In all, a company’s database can be an 

important tool for building stronger long-term customer relationships. For example, financial 

services provider USAA uses its database to find ways to serve the long-term needs of customers, 

regardless of immediate sales impact, creating an incredibly loyal customer base: 

USAA provides financial services to U.S. military personnel and their families, 

largely through direct marketing via the telephone and Internet. It maintains a customer 

database built from customer purchasing histories and from information collected 

directly from customers. To keep the database fresh, the organization regularly 

surveys its more than 5.6 million customers worldwide to learn such things as 

whether they have children (and if so, how old they are), if they have moved recently, 

and when they plan to retire. USAA uses the database to tailor direct marketing 

offers to the specific needs of individual customers. For example, for customers looking 

toward retirement, it sends information on estate planning. If the family has 

college-age children, USAA sends those children information on how to manage 

their credit cards. If the family has younger children, it sends booklets on things such 

as financing a child’s education. One delighted reporter, a USAA customer, recounts 

how USAA even helped him teach his 16-year-old-daughter to drive. Just before her 

birthday, but before she received her driver’s license, USAA mailed a “package of 

materials, backed by research, to help me teach my daughter how to drive, help her 

practice, and help us find ways to agree on what constitutes safe driving later on, 

when she gets her license.” What’s more, marvels the reporter, “USAA didn’t try to 

sell me a thing. My take-away: that USAA is investing in me for the long term, that it 

defines profitability not just by what it sells today.” Through such skillful use of its 

database, USAA serves each customer uniquely, resulting in high levels of customer 

loyalty and sales growth. The average customer household owns almost five USAA 

products, and the $12 billion company retains 97 percent of its customers. 7 

Like many other marketing tools, database marketing requires a special investment. 

Companies must invest in computer hardware, database software, analytical programs, communication 

links, and skilled personnel. The database system must be user-friendly and 

available to various marketing groups, including those in product and brand management, 

new-product development, advertising and promotion, direct mail, telemarketing, Web marketing, 

field sales, order fulfillment, and customer service. However, a well-managed database 

should lead to sales and customer-relationship gains that will more than cover its costs. 

Forms of Direct Marketing 

The major forms of direct marketing—as shown in Figure 17.1—include personal selling, 

direct-mail marketing, catalog marketing, telephone marketing, direct-response television 

marketing, kiosk marketing, new digital direct marketing technologies, and online marketing. 

We examined personal selling in depth in Chapter 16. Here, we examine the other 

direct-marketing forms. 

Direct-Mail Marketing 

Direct-mail marketing involves sending an offer, announcement, reminder, or other item to a 

person at a particular address. Using highly selective mailing lists, direct marketers send out

Catalog marketing 

Direct marketing through 

print, video, or electronic 

catalogs that are mailed to 

select customers, made 

available in stores, or 

presented online. 


FIGURE 17.1 

Forms of direct marketing 

New digital 

technologies 

Online 

marketing 

Kiosk 

marketing 

Face-to-face 

selling 

Customers and 

prospects 

Direct-response 

television 

marketing 

Direct-mail 

marketing 

Telemarketing 

Catalog 

marketing 

millions of mail pieces each year—letters, catalogues, ads, brochures, samples, CDs and 

DVDs, and other “salespeople with wings.” Direct mail is by far the largest direct marketing 

medium. The DMA reports that direct mail (including both catalog and non-catalog mail) 

drives fully one-third of all U.S. direct marketing sales. 8 

Direct mail is well suited to direct, one-to-one communication. It permits high targetmarket 

selectivity, can be personalized, is flexible, and allows easy measurement of results. 

Although direct mail costs more than mass media such as television or magazines per thousand 

people reached, the people it reaches are much better prospects. Direct mail has proved 

successful in promoting all kinds of products, from books, music, DVDs, and magazine 

subscriptions to insurance, gift items, clothing, gourmet foods, and industrial products. 

Charities also use direct mail heavily to raise billions of dollars each year. 

The direct-mail industry constantly seeks new methods and approaches. For example, 

CDs and DVDs are now among the fastest-growing direct-mail media. One study showed that 

including a CD or DVD in a marketing offer generates responses between 50 to 600 percent 

greater than traditional direct mail. 9 New forms of delivery have also become popular, such as 

fax mail, voice mail, and e-mail. Fax mail and voice mail are subject to the same do-not-call 

restrictions as telemarketing, so their use has been limited in recent years. However, e-mail is 

booming as a direct marketing tool. Today’s e-mail messages have moved far beyond the drab 

text-only messages of old. The new breed of e-mail ad uses animation, interactive links, 

streaming video, and personalized audio messages to reach out and grab attention. 

E-mail and other new forms deliver direct mail at incredible speeds compared to the post 

office’s “snail mail” pace. Yet, much like mail delivered through traditional channels, they 

may be resented as “junk mail” or SPAM if sent to people who have no interest in them. For 

this reason, smart marketers are targeting their direct mail carefully so as not waste their 

money and recipients’ time. They are designing permission-based programs, sending e-mail 

ads only to those who want to receive them. We will discuss e-mail marketing in more detail 

later in the chapter. 

Catalog Marketing 

Advances in technology, along with the move toward personalized, one-to-one marketing 

have resulted in exciting changes in catalog marketing. Catalog Age magazine used to define 

a catalog as “a printed, bound piece of at least eight pages, selling multiple products, and


■ More and more catalogs are 

going digital. For example, 

click on the Shop by Catalog 

link at www.llbean.com and 

you can flip through the latest 

L.L. Bean catalog page by page 

online. 

offering a direct ordering mechanism.” Today, only a few years later, this definition is sadly 

out of date. 

With the stampede to the Internet, more and more catalogs are going digital. A variety of 

Web-only catalogers have emerged, and most print catalogers have added Web-based catalogs 

to their marketing mixes. For example, click on the Shop by Catalog link at www.llbean.com 

and you can flip through the latest L.L. Bean catalog page by page online. One study found 

that consumers now make 36 percent of their catalog purchases online. 

However, although the Internet has provided a new avenue for catalog sales, all you have 

to do is to check your mailbox to know that printed catalogs remain the primary medium. 

Research shows that print catalogs generate many of those online orders. Customers who 

receive print catalogs are more likely to buy online, and they spend 16 percent more than customers 

who did not receive catalogs. 10 

Catalog marketing has grown explosively during the past 25 years. Annual catalog sales 

amounted to about $133 billion last year and are expected to grow to top $158 billion by 2009. 11 

Some large general-merchandise retailers—such as J.C. Penney and Spiegel—sell a full line of 

merchandise through catalogs. In recent years, these giants have been challenged by thousands 

of specialty catalogs that serve highly specialized market niches. According to one study, some 

10,000 companies now produce 14,000 unique catalog titles in the United States. 12 

Consumers can buy just about anything from a catalog. Sharper Image catalogs hawk 

everything from $300 robot vacuum cleaners to $4,500 see-through kayaks. Each year Lillian 

Vernon sends out 22 editions of its 6 catalogs with total circulation of 101 million copies to its 

20-million-person database, selling more than 6,000 different items, ranging from shoes to 

decorative lawn birds and monogrammed oven mitts. 13 Specialty department stores, such 

as Neiman Marcus, Bloomingdale’s, and Saks Fifth Avenue, use catalogs to cultivate uppermiddle-class 

markets for high-priced, often exotic, merchandise. 

Catalogs can be an effective sales and relationship builder. A recent study conducted by 

Frank About Women, a marketing-to-women communications company, found that a majority 

of women who receive catalogs are actively engaged with them. 

Eighty-nine percent of the participants revealed that they do more than just browse 

through the catalogs they receive in the mail. They circle or “tab” the items that they 

want, fold over the corners of pages, and tear pages out. Some 69 percent save their 

catalogs to look through again. More than just a buying tool, many women view catalogs 

as a source of entertainment and inspiration. Women claim to love perusing 

catalogs almost like reading a woman’s magazine, looking for ideas for everything

Telephone marketing 

Using the telephone to sell 

directly to customers. 


from decorating, to fashion, to that extra special gift. More than one-third of women 

surveyed greet their catalogs with enthusiasm, stating they are the first things they 

look at when they get their mail. Seventy-five percent of women find catalog browsing 

really enjoyable, fun, and relaxing, with 74 percent agreeing that they get excited 

when a new catalog arrives. 14 

Web-based catalogs present a number of benefits versus printed catalogs. They save on 

production, printing, and mailing costs. Whereas print-catalog space is limited, online catalogs 

can offer an almost unlimited amount of merchandise. Web catalogs also allow real-time 

merchandising: Products and features can be added or removed as needed, and prices can be 

adjusted instantly to match demand. Finally, online catalogs can be spiced up with interactive 

entertainment and promotional features, such as games, contests, and daily specials. 

Along with the benefits, however, Web-based catalogs also present challenges. Whereas a 

print catalog is intrusive and creates its own attention, Web catalogs are passive and must be 

marketed. Attracting new customers is much more difficult for a Web catalog than for a print 

catalog. Thus, even catalogers who are sold on the Web are not likely to abandon their print 

catalogs. 

Telephone Marketing 

Telephone marketing involves using the telephone to sell directly to consumers and business 

customers. Telephone marketing now accounts for 22 percent of all direct marketingdriven 

sales. We’re all familiar with telephone marketing directed toward consumers, but 

business-to-business marketers also use telephone marketing extensively, accounting for 

more than 55 percent of all telephone marketing sales. 

Marketers use outbound telephone marketing to sell directly to consumers and businesses. 

Inbound toll-free 800 numbers are used to receive orders from television and print 

ads, direct mail, or catalogs. The use of 800 numbers has taken off in recent years as more and 

more companies have begun using them, and as current users have added new features such 

as toll-free fax numbers. To accommodate this 

rapid growth, new toll-free area codes, such as 

888, 877, and 866, have been added. 

Properly designed and targeted telemarketing 

provides many benefits, including purchasing 

convenience and increased product and service 

information. However, the explosion in 

unsolicited outbound telephone marketing over 

the years annoyed many consumers, who 

objected to the almost daily “junk phone calls” 

that pull them away from the dinner table or fill 

the answering machine. 

In 2003, U.S. lawmakers responded with a 

National Do-Not-Call Registry, managed by the 

Federal Trade Commission. The legislation 

bans most telemarketing calls to registered 

phone numbers (although people can still 

receive calls from nonprofit groups, politicians, 

and companies with which they have recently 

done business). Delighted consumers have 

responded enthusiastically. To date, they have 

registered more than 110 million phone numbers 

at www.donotcall.com or by calling 888- 

382-1222. Businesses that break do-not-call 

laws can be fined up to $11,000 per violation. 

As a result, reports an FTC spokesperson, the 

program “has been exceptionally successful.” 15 

Do-not-call legislation has hurt the telemarketing 

industry, but not all that much. Two 

■ Marketers use inbound toll-free 800 numbers to receive orders from television 

and print ads, direct mail, or catalogs. Here, the Carolina Cookie Company urges, 

“Don’t wait another day. Call now to place an order or request a catalog.” 

major forms of telemarketing—inbound consumer 

telemarketing and outbound business-tobusiness 

telemarketing—remain strong and 

growing. Telemarketing also remains a major


Direct-response television 

marketing 

Direct marketing via 

television, including directresponse 

television 

advertising (or infomercials) 

and home shopping 

channels. 

fundraising tool for nonprofits groups. However, many telemarketers are shifting to alternative 

methods for capturing new customers and sales, from direct mail, direct-response TV, 

and live-chat Web technology to sweepstakes that prompt customers to call in. 

For example, ServiceMaster’s TruGreen lawn-care service used to generate about 90 percent 

of its sales through telemarketing. It now uses more direct mail, as well have having 

employees go door-to-door in neighborhoods where it already has customers. The new 

approach appears to be working even better than the old cold-calling one. The company’s sales 

were up last year, and less than 50 percent of sales came from telemarketing. “We were nervous, 

but were thrilled with what we’ve accomplished,” says ServiceMaster’s chief 

executive. 16 

In fact, do-not-call appears to be helping most direct marketers more than it’s hurting 

them. Many of these marketers are shifting their call-center activity from making cold calls on 

often resentful customers to managing existing customer relationships. They are developing 

“opt-in” calling systems, in which they provide useful information and offers to customers 

who have invited the company to contact them by phone or e-mail. These “sales tactics have 

[produced] results as good—or even better—than telemarketing,” declares one analyst. “The 

opt-in model is proving [more] valuable for marketers [than] the old invasive one.” 17 

Direct-Response Television Marketing 

Direct-response television marketing takes one of two major forms. The first is directresponse 

television advertising (DRTV). Direct marketers air television spots, often 60 or 120 

seconds long, which persuasively describe a product and give customers a toll-free number or 

Web site for ordering. Television viewers also often encounter full 30-minute or longer advertising 

programs, or infomercials, for a single product. 

Some successful direct-response ads run for years and become classics. For example, 

Dial Media’s ads for Ginsu knives ran for seven years and sold almost three million sets of 

knives, worth more than $40 million in sales; its Armourcote cookware ads generated more 

than twice that much. Bowflex has grossed more than $1.3 billion in infomercial sales. And 

over the past 40 years, infomercial czar Ron Popeil’s company, Ronco, has sold billions of 

dollars worth of TV-marketed gadgets, including the original Veg-O-Matic, the Pocket 

Fisherman, Mr. Microphone, “Hair in a Can,” the Giant Food Dehydrator and Beef Jerky 

Machine, and the Showtime Rotisserie & BBQ. 18 

For years, infomercials have been associated with somewhat questionable pitches for 

juicers and other kitchen gadgets, get-rich-quick schemes, and nifty ways to stay in shape 

without working very hard at it. In recent years, however, a number of large companies— 

from Procter & Gamble, Dell, Sears, Disney, Bose, and Revlon to IBM, GM, Land Rover, 

Anheuser-Busch, and even AARP and the U.S. Navy—have begun using infomercials to sell 

their wares, refer customers to retailers, send out product information, recruit members, or 

attract buyers to their Web sites (see Real Marketing 17.1). For example, P&G has used DRTV 

to market more than a dozen brands, including Dryel, Mr. Clean, CoverGirl, Iams pet food, 

and Old Spice. An estimated 20 percent of all new infomercials now come to you courtesy of 

Fortune 1000 companies. 19 

Direct-response TV commercials are usually cheaper to make and the media purchase is 

less costly. Moreover, unlike most media campaigns, direct-response ads always include a 

1-800 number or Web address, making it easier for marketers to track the impact of their 

pitches. For these reasons, DRTV is growing more quickly than traditional broadcast and 

cable advertising. Some DRTV experts even predict that in five or ten years, as marketers seek 

greater returns on their advertising investments, all television advertising will be some form 

of direct-response advertising. “In a business environment where marketers are obsessed with 

return on investment,” notes one such expert, “direct response is tailor-made—[marketers 

can] track phone calls and Web-site hits generated by the ads. [They can] use DRTV to build 

brand awareness while simultaneously generating leads and sales.” 20 

Home shopping channels, another form of direct-response television marketing, are television 

programs or entire channels dedicated to selling goods and services. Some home shopping 

channels, such as the Quality Value Channel (QVC), Home Shopping Network (HSN), 

and ShopNBC, broadcast 24 hours a day. Program hosts chat with viewers by phone and offer 

products ranging from jewelry, lamps, collectible dolls, and clothing to power tools and consumer 

electronics. Viewers call a toll-free number or go online to order goods. With widespread 

distribution on cable and satellite television, the top three shopping networks combined 

now reach 248 million homes worldwide.

Real Marketing 

17.1 

It’s late at night and you can’t get to sleep. So you 

grab the TV remote, surf channels, and chance upon 

a fast-talking announcer, breathlessly pitching some new must-have 

kitchen gadget. A grinning blonde coannouncer fawns over the gadget’s 

every feature, and the studio audience roars its approval. After 

putting the gadget through its paces, the announcer asks, “How 

much would you expect to pay? Three hundred dollars? Two hundred? 

Well, think again! This amazing gadget can be yours for just 

four easy payments of $19.95, plus shipping and handling!” 

“Oooooh!” the audience screams. “But wait! There’s more,” declares 

the announcer. “If you act now, you will also receive an additional 

gadget, absolutely free. That’s two for the price of one.” With operators 

standing by, you don’t have a minute to lose. 

Sound familiar? We’ve all seen countless infomercials like this, 

hawking everything from kitchen gadgets, cleaning compounds, and 

fitness solutions to psychic advice and get-rich-quick schemes. 

Traditionally, such pitches have had a kind of fly-by-night feel about 

them. And in the cold light of day, such a purchase may not seem 

like such a good deal after all. Such is the reputation of directresponse 

TV advertising. Yet, behind the hype is a powerful approach 

to marketing that is becoming more mainstream every day. 

Ron Popeil pioneered direct-response product sales. Whether you 

realize it or not, you’ve probably been exposed to dozens of Popeil’s 

inventions over the years, and his direct-marketing model has 

become the standard for the infomercial industry. His company, 

Ronco, has brought us such classics as the Veg-o-Matic, the Electric 

Food Dehydrator, the Showtime Rotisserie Oven, the GLH Formula 

Hair System, the Automatic 5-Minute Pasta and Sausage Maker, the 

Popeil Pocket Fisherman, the Inside the Egg Shell Electric Egg 

Scrambler, and the Dial-O-Matic Food Slicer. 

The use of infomercials has grown explosively in recent years. 

Why? Because they can produce spectacular results. Although only 

one in 60 infomercials turns a profit, “successful pitches can generate 

annual sales of as much as $50 million,” notes one analyst. 

“And breakout hits become gold mines: Ron Popeil has sold $1 billion 

worth of Ronco rotisserie ovens, and the Tae-Bo Workout 

infomercial. . . netted $300 million in its first year. Other benefits 

include viewer recall that can be three times higher than for traditional 

30-second spots and phenomenal brand awareness: Ninetytwo 

percent of consumers have heard of the Nautilus Bowflex home 

fitness system—about the same number of folks that recognize the 

Nike brand.” Says the head of an infomercial advertising agency, 

“It’s the power of the half-hour.” 

Moreover, the retail store revenue from a successful infomercial 

can be many times the actual infomercial sales. For example, more 

than 85 percent of George Foreman’s Mean Lean Grilling Machine 

sales came from retail locations. Mass retailers have embraced such 

direct-response staples as Foreman’s grill, OxiClean, and Orange Glo. 

Some, such as drug-chain heavyweight Walgreens, devote entire 

front-of-store sections to such goods. Whereas it used to take years to 

get retail distribution for “As seen on TV” products, many now make 

it to store shelves within a month of going on television. 

Such infomercial success hasn’t gone unnoticed among the big 

hitters in corporate America. Direct-response television marketing is 

rapidly becoming a mainstay weapon in the marketing arsenals of 

even the most reputable companies. Marketing heavyweights such 

as Dell, Procter & Gamble, Disney, Time-Life, General Motors, Apple, 


Infomercials: But Wait, There’s More! 

Ronco and Ron Popeil, with his Veg-o-Matics, food dehydrators, and 

electric egg scramblers, paved the way for a host of mainstream 

marketers who now use direct-response ads. 

Motorola, and Sears now use direct-response TV to peddle specific 

products and promotions and to draw new customers into their other 

direct-to-consumer channels. For example, Procter & Gamble used a 

series of infomercials to help propel the Swiffer WetJet past rival 

Clorox’s ReadyMop when other marketing efforts alone failed to do 

the trick. And P&G launched its Swiffer Dusters product with a campaign 

that included direct-response ads and a tie-in to the DVD 

release of the Jennifer Lopez film Maid in Manhattan. Consumers 

contacting the 1-800 number got coupons for both the new Swiffer 

Duster and the DVD. 

Today’s infomercials have evolved with the times—most now 

include highly professional pitches and Web sites to go along with the 

ever-present toll-free phone number. They also employ a new breed 

of spokesperson. Once a refuge for Hollywood has-beens such as 

Suzanne Somers, who squeezed away on her thigh master to blearyeyed 

insomniacs, infomercials now are now enlisting A-list celebrities. 

One of the nation’s largest infomercial companies, Gunthy- 

Renker, pays top dollar for a stable of stars to pitch its Proactiv acne 

treatment. It paid Sean (P. Diddy) Combs $3 million for a four-hour 

shoot. In four months, the Combs Proactiv infomercial ran an average 

of more than 10 times on each of 1,400 local TV stations. Other 

Proactiv ads have featured Jessica Simpson (paid $2.5 million), 

Vanessa Williams ($2.5 million), Alicia Keys ($3 million), and Britney 

Spears ($1 million). In all, the ads produced some $650 million in 

Proactiv sales last year. 

Interest in direct-response has now expanded beyond the usual 

fitness, personal-care, and home-care fare. For instance, submarine- 

(continues)


(continued) 

sandwich giant Quiznos has turned to late-night infomercials to sell 

franchises. Trailing only Subway and Starbucks in the number of 

franchises opened annually, Quiznos created a successful 30-minute 

spot in which current franchise owners discussed the benefits of 

owning a Quiznos restaurant and encouraged interested people to 

attend informational meetings at local hotels. Ice cream chain Carvel 

also uses infomercials to reach potential franchisees. The results are 

measurable: “We can push a button to see what commercial ran, 

how many responses it got, how much revenue it generated if it was 

selling something, and what the net [return on investment] was,” 

says an executive of the direct-response firm that created the campaign. 

The results are also impressive: “We got easily four times the 

normal response than with standard media,” says a Carvel marketer. 

So, direct-response TV ads are no longer just the province of Ron 

Popeil and his Veg-o-Matics, food dehydrators, and electric egg 

scramblers. Although Popeil and his imitators paved the way, their 

success now has mainstream marketers tuning in to direct-response 

Despite their lowbrow images, home shopping channels have evolved into highly sophisticated, 

very successful marketing operations. Consider QVC: 

Wired magazine once described QVC as a place appealing to “trailer-park housewives 

frantically phoning for another ceramic clown.” But look past QVC’s reputation and 

you’ll find it is one of the world’s most successful and innovative retailers. Last year, 

the company rang up $5.7 billion in sales and $760 million in operating profit, making 

it nearly as big and roughly twice as profitable as Amazon.com. Although QVC sells 

no advertising, it’s the third-largest U.S. broadcaster in terms of revenue (behind NBC 

and ABC), and its sales and profits are larger than those of all other TV-based retailers 

combined. Remarkably, thanks to shrewd coordination with TV programming that 

drives buyers online, the company’s Web site, QVC.com, is now the nation’s sixth-largest 

general merchandise Internet retailer. Moreover, QVC isn’t just a place where littleknown 

marketers hawk trinkets and trash at bare-bones prices. Prominent manufacturers 

such as Estee Lauder, Nextel, and 

Tourneau now sell through QVC. The 

network’s $80 million single-day sales 

record happened on Dec. 2, 2001, when 

Dell sold $65 million worth of PCs in 24 

hours. (One month later, Michael Dell 

went on QVC, doing $48,000 in sales 

every minute he chatted on air.) Even 

high-fashion designers such as John 

Bartlett and Marc Bauer now sell lines 

on QVC. 

QVC has honed the art and science 

of TV retailing. Its producers react in 

real time, adjusting offers, camera 

angles, lighting, and dialogue to maximize 

sales and profits. QVC has 

become the gold standard of “retailtainment”—the 

blending of retailing 

■ QVC is more than just a place where little-known sellers hawk trinkets and trash 

at bare-bones prices. Behind the cameras, it’s a sophisticated marketer with sales 

and profits larger than all other TV-based retailers combined. 

ads. In fact, last year marketers spent $21.5 billion on directresponse 

television advertising, reaping more than $150 billion in 

revenues in return. What does the future hold for the direct-response 

TV industry? Wait, there’s more! 

Sources: Thomas Mucha, “Stronger Sales in Just 28 Minutes,” Business 

2.0, June 2005, pp. 56–60; Jack Neff, “Direct Response Getting 

Respect,” Advertising Age, January 20, 2003, p. 4; Kristi Arellano, 

“Quiznos’ Success Not without Problems,” Knight Ridder Tribune 

Business News, June 19, 2005, p. 1; Peter Latterman, “So Long 

Suzanne Somers,” Forbes, July 4, 2005, p. 60; Victor Grillo, Jr., “Calling 

All Brands,” Mediaweek, July 11, 2005, p. 14; Gregg Cebrzynski, 

“Carvel Joins ‘Slicers and Dicers’ with Direct-Response Ads,” Nation’s 

Restaurant News, February 13, 2006, p. 14; Jack Neff, “What Procter & 

Gamble Learned from Veg-O-Matic,” Advertising Age, April 10, 2006, 

pp. 1, 65; and Direct Marketing Association, “The DMA 2006 Statistical 

Fact Book,” June 2006, pp. 249–250. 

and entertainment. QVC folks call it 

the “backyard fence” sell—the feeling 

that the merchants are neighbors visiting 

from next door. But according to


QVC’s president for U.S. commerce, “we aren’t really in the business of selling.” 

Instead, QVC uses products to build relationships with customers. 21 

Kiosk Marketing 

As consumers become more and more comfortable with computer and digital technologies, 

many companies are placing information and ordering machines—called kiosks (in contrast 

to vending machines, which dispense actual products)—in stores, airports, and other locations. 

Kiosks are popping up everywhere these days, from self-service hotel and airline 

check-in devices to in-store ordering kiosks that let you order merchandise not carried in 

the store. 

In-store Kodak, Fuji, and HP kiosks let customers transfer pictures from memory sticks, 

mobile phones, and other digital storage devices, edit them, and make high-quality color 

prints. Kiosks in Hilton hotel lobbies let guests view their reservations, get room keys, view 

prearrival messages, check in and out, and even change seat assignments and print boarding 

passes for flights on any of 18 airlines. Outdoor equipment retailer REI has at least four Webenabled 

kiosks in each of its 63 stores that provide customers with product information and 

let them place orders online. Kiosks in Target stores link to articles from Consumer Reports 

magazine, and Mazda dealers let customers use kiosks to research car and truck values 

through Kelly Blue Book. 22 

Business marketers also use kiosks. For example, Dow Plastics places kiosks at trade 

shows to collect sales leads and to provide information on its 700 products. The kiosk system 

reads customer data from encoded registration badges and produces technical data sheets that 

can be printed at the kiosk or faxed or mailed to the customer. The system has resulted in a 

400 percent increase in qualified sales leads. 23 

New Digital Direct Marketing Technologies 

Today, thanks to a wealth of new digital technologies, direct marketers can reach and interact 

with consumers just about anywhere, at anytime, about almost anything. Here, we look into 

several exciting new digital direct marketing technologies: mobile phone marketing, podcasts 

and vodcasts, and interactive TV (ITV). 

Mobile Phone Marketing 

With almost 200 million Americans now subscribing to wireless services, many marketers 

view mobile phones as the next big direct marketing medium. According to one expert, “the 

cell phone, which makes on-the-go conversing so convenient, is morphing into a content 

device, a kind of digital Swiss Army knife with the capability of filling its owner’s every spare 

minute with games, music, live and on-demand TV, Web browsing, and, oh yes, advertising.” 

24 A recent survey found that 89 percent of major brands will be marketed via mobile 

phones by 2008. More than half of those brands will likely spend up to 25 percent of their 

marketing budgets on mobile phone marketing. 25 

Marketers of all kinds are now integrating mobile phones into their direct marketing. 

Cell phone promotions include everything from ring-tone give-aways, mobile games, and adsupported 

content to text-in contests and sweepstakes. For example, McDonald’s recently put 

a promotion code on 20 million Big Mac packages in a joint sweepstakes contest with the 

House of Blues, urging participants to enter to win prizes and to text in from concerts. Some 

40 percent of contest entries came via text messaging, resulting in a 3 percent sales gain for 

McDonald’s. More importantly, 24 percent of those entering via cell phones opted in to 

receive future promotions and messages. 26 

Perhaps nowhere is mobile phone marketing more advanced that in Japan. Here’s a 

glimpse of what the future might hold for cell phone marketing in the United States and other 

countries. 

In Japan, life revolves around cell phones, and marketers know it. Take Nami, a 37year-old 

graphic designer in Tokyo who regularly uses her phone to send and receive 

e-mails on the go. Her 11-year-old daughter enjoys downloading wallpaper and animated 

trailers featuring Disney characters, and Nami’s boyfriend relies on his 

phone’s global positioning system to navigate Tokyo’s labyrinthine of streets. The 

family can also use cell phones to buy a can of Coke from high-tech vending


machines, receive e-coupons from 

neighborhood stores, and even have 

their fortunes told. Digital coupons are 

taking off, as are GPS-based promotions 

used by retailers to target people 

near their stores. Mobile-ad spending 

in Japan is expected to hit $680 million 

by 2009, up from just $158 million 

last year. 

Japanese direct marketers are experimenting 

with new ways to use the 

mobile devices for brand building. 

Nestlé, for example, is trying out a new 

technology called Quick Response 

(QR) codes, which can be scanned like 

digital bar codes. QR codes on print 

and outdoor ads can be read by cell 

phone cameras, which redirect the 

user’s phone to a designated mobile 

URL site. Nestlé used QR codes in a 

campaign to launch a canned drink 

called Nescafé Shake. It promoted 

Shake with two 15-minute short films 

that humorously communicated a 

sense of fun around the act of “shaking” with a story about a slacker kid who winds 

up with a dog’s wagging tail on his behind. A QR code on promotional materials led 

cell phone users to a mobile site where they could download the film as well as its 

original music as songs or ring tones. In the first three weeks after Nestlé’s “Nonta’s 

Tail” film debuted, 120,000 people visited the mobile site and another 550,000 

watched the film on the Internet. 27 

■ Mobile phone marketing: To launch its Nescafé Shake canned drink in Japan, 

Nestlé used Quick Response codes, which can be scanned like UPC codes by a cell 

phone, to direct consumers to marketing pitches for the new product. 

Podcasts and Vodcasts 

Podcasting and vodcasting are the latest on-the-go, on-demand technologies. The name 

podcast derives from Apple’s now-everywhere iPod. With podcasting, consumers can download 

audio files (podcasts) or video files (vodcasts) via the Internet to an iPod or other handheld 

device and then listen to or view them whenever and wherever they wish. They can 

search for podcast topics through sites such as iTunes or through podcast networks such as 

PodTrac, Podbridge, or PodShow. These days, you can download podcasts or vodcasts on an 

exploding array of topics, everything from your favorite National Public Radio show, a recent 

sit-com episode, or current sports features to the latest music video or Go-Daddy commercial. 

One recent study predicts that the U.S. podcast audience will reach 50 million by 2010, 

up from 5 million in 2005. More than 20 percent of today’s podcast listeners make more 

than $100,000 a year. 28 As a result, this new medium is drawing much attention from marketers. 

Many are now integrating podcasts and vodcasts into their direct marketing programs 

in the form of ad-supported podcasts, downloadable ads and informational features, 

and other promotions. 

For example, Volvo sponsors podcasts on Autoblog and Absolut vodka buys ads on 

PodShow programs. Kraft Foods offers up hundreds of recipes using the iPod’s text function 

and Nestlé Purina publishes podcasts on animal training and behavioral issues. The Walt 

Disney World Resort offers weekly podcasts on a mix of topics, including behind-the-scenes 

tours, interviews, upcoming events, and news about new attractions. 29 

Honda recently offered a vodcast as part of a new ad campaign for its Honda Civic. The 

vodcast consists of a two-minute, “This is what a Honda feels like” ad, in which human 

voices replicate the sounds that passengers hear in a Honda Civic. The vodcast also includes 

behind-the-scenes footage of the making of the ad. According to a Honda marketing executive, 

this dynamic new medium “is enabling people to experience what a Honda feels like from 

one of their most personal and closest touch points—their iPod.” 30 

Interactive TV (ITV) 

Interactive TV (ITV) lets viewers interact with television programming and advertising using 

their remote controls. In the past, ITV has been slow to catch on. However, satellite broad-

Online marketing 

Company efforts to market 

products and services and 

build customer relationships 

over the Internet. 

Internet 

A vast public web of 

computer networks that 

connects users of all types all 

around the world to each 

other and to an amazingly 

large “information repository.” 


casting systems such as DirecTV and Echostar are now offering ITV capabilities, and the technology 

appears poised to take off as a direct marketing medium. 

Interactive TV gives marketers an opportunity to reach targeted audiences in an interactive, 

more involving way. For example, BMW recently ran interactive ads on Echostar that 

allowed viewers to request catalogs and several screens worth of other information using their 

remotes. The number of requests exceeded BMW’s expectations tenfold. Similarly, Sony uses 

ITV to interact with TiVo users: 31 

Sony is running ads for its Bravia flat-panel TVs that let viewers, if they have TiVo, 

choose among different endings, whether they’re watching live TV or a recorded 

program. Five seconds into the commercial, two on-screen choices appear—one 

aimed at men and one at women. A menu of “male” endings revolves around picture 

quality and size, and the “female” options focus on the TV’s aesthetics. Sony hopes 

that the interactive and entertaining ad will keep viewers involved. It’s even hoping 

that by offering 12 possible endings for its ad, viewers will be curious enough to 

watch them all. “If you provide viewers with a worthwhile experience, they’ll 

absolutely stay engaged,” says an executive from the ad agency that created the 

Bravia campaign. 

More broadly, TiVo plans to roll out what may sound like the ultimate in gall: 

ads on demand. It’s not so crazy. Consumers about to spend big money on cars, 

travel, new kitchens, and the like have shown plenty of interest in watching video 

about the stuff they plan to buy. TiVo wants to offer that content more conveniently 

and on viewers’ terms. TiVo’s budding broadband link to the Net, which, among 

other things, connects a viewer’s TiVo screen with their Yahoo! homepage, is seen 

as just the beginning of full-blown convergence between interactive TV and the 

Internet. 

Mobile phone marketing, podcasts and vodcasts, and interactive TV offer exciting direct 

marketing opportunities. But marketers must be careful to use these new direct marketing 

approaches wisely. As with other direct marketing forms, marketers who use them risk backlash 

from consumers who may resent such marketing as an invasion of their privacy. 

Marketers must target their direct marketing offers carefully, bringing real value to customers 

rather than making unwanted intrusions into their lives. 

Online Marketing 

As noted earlier, online marketing is the fastest-growing form of direct marketing. Recent 

technological advances have created a digital age. Widespread use of the Internet and other 

powerful new technologies are having a dramatic impact on both buyers and the marketers 

who serve them. In this section, we examine how marketing strategy and practice are changing 

to take advantage of today’s Internet technologies. 

Marketing and the Internet 

Much of the world’s business today is carried out over digital networks that connect people 

and companies. The Internet, a vast public web of computer networks, connects users of all 

types all around the world to each other and to an amazingly large information repository. 

Internet usage continues to grow steadily. Last year, Internet household penetration in the 

United States reached 64 percent, with more than 205 million people now using the Internet 

at home or at work. The average U.S. Internet user spends some 31 hours a month surfing the 

Web at home, plus another 78 hours a month at work. Worldwide, some 470 million people 

now have Internet access. 32 

The Internet has given marketers a whole new way to create value for customers and 

build customer relationships. The Web has fundamentally changed customers’ notions of 

convenience, speed, price, product information, and service. The amazing success of early 

click-only companies—the so-called dot-coms such as Amazon.com, eBay, Expedia, and hundreds 

of others—caused existing brick-and-mortar manufacturers and retailers to reexamine 

how they served their markets. Now, almost all of these traditional companies have set up 

their own online sales and communications channels, becoming click-and-mortar competitors. 

It’s hard to find a company today that doesn’t have a substantial Web presence.


Business-to-consumer 

(B2C) online marketing 

Selling goods and services 

online to final consumers. 

FIGURE 17.2 

Online domains 

Initiated by 

business 

Initiated by 

consumer 

Online Marketing Domains 

The four major online marketing domains are shown in Figure 17.2. They include B2C (business 

to consumer), B2B (business to business), C2C (consumer to consumer), and C2B (consumer 

to business). 

Business to Consumer (B2C) 

The popular press has paid the most attention to business-to-consumer (B2C) online 

marketing—selling goods and services online to final consumers. Today’s consumers can buy 

almost anything online—from clothing, kitchen gadgets, and airline tickets to computers and 

cars. Online consumer buying continues to grow at a healthy rate. Some 65 percent of American 

online users now use the Internet to shop. Last year, U.S. consumers spent an estimated $95 billion 

online, and consumer Internet spending is expected to reach $144 billion by 2010. 33 

Perhaps more importantly, the Internet now influences 27 percent of total retail sales— 

sales transacted online plus those carried out offline but encouraged by online research. By 

2010, the Internet will influence a staggering 50 percent of total retail sales. 34 Thus, smart 

marketers are employing integrated multichannel strategies that use the Web to drive sales to 

other marketing channels. 

As more and more people find their way onto the Web, the population of online consumers 

is becoming more mainstream and diverse. The Web now offers marketers a palette of 

different kinds of consumers seeking different kinds of online experiences. However, Internet 

consumers still differ from traditional offline consumers in their approaches to buying and in 

their responses to marketing. In the Internet exchange process, customer initiate and control 

the contact. Traditional marketing targets a somewhat passive audience. In contrast, online 

marketing targets people who actively select which Web sites they will visit and what marketing 

information they will receive about which products and under what conditions. Thus, 

the new world of online marketing requires new marketing approaches. 

People now go online to order a wide range 

of goods—clothing from Gap or L.L. Bean, 

books or electronics from Amazon.com, furniture 

from Ethan Allen, major appliances from 

Sears, flowers from Calyx & Corolla, or even 

home mortgages from Quicken Loans. 35 

■ B2C Web sites: People now go online to order a wide range of goods and 

services, even home mortgages. 

Targeted to 

consumers 

B2C 

(business to consumer) 

C2C 

(consumer to consumer) 

Targeted to 

businesses 

B2B 

(business to business) 

C2B 

(consumer to business) 

At Quicken Loans (www.quickenloans. 

com), prospective borrowers receive a 

high-tech, high-touch, one-stop mortgage 

shopping experience. At the site, 

customers can research a wide variety 

of home-financing and refinancing options, 

apply for a mortgage, and receive 

quick loan approval—all without leaving 

the comfort and security of their 

homes. The site provides useful interactive 

tools that help borrowers decide 

how much house they can afford, 

whether to rent or buy, whether to refinance 

a current mortgage, the economics 

of fixing up their current homes 

rather than moving, and much more. 

Customers can receive advice by phone 

or by chatting online with one of 2,700

Business-to-business (B2B) 

online marketing 

Using B2B Web sites, e-mail, 

online product catalogs, 

online trading networks, and 

other online resources to 

reach new business 

customers, serve current 

customers more effectively, 

and obtain buying efficiencies 

and better prices. 

Consumer-to-consumer 

(C2C) online marketing 

Online exchanges of goods 

and information between final 

consumers. 


mortgage experts and sign up for later e-mail rate updates. Quicken Loans closed more 

than $12 billion in mortgage loans last year. 

Business to Business (B2B) 

Although the popular press has given the most attention to B2C Web sites, business-tobusiness 

(B2B) online marketing is also flourishing. B2B marketers use B2B Web sites, 

e-mail, online product catalogs, online trading networks, and other online resources to 

reach new business customers, serve current customers more effectively, and obtain buying 

efficiencies and better prices. 

Most major B2B marketers now offer product information, customer purchasing, and customer 

support services online. For example, corporate buyers can visit Sun Microsystems’ 

Web site (www.sun.com), select detailed descriptions of Sun’s products and solutions, 

request sales and service information, and interact with staff members. Some major companies 

conduct almost all of their business on the Web. Networking equipment and software 

maker Cisco Systems takes more than 80 percent of its orders over the Internet. 

Beyond simply selling their products and services online, companies can use the Internet 

to build stronger relationships with important business customers. For example, Dell has set 

up customized Web sites for more than 113,000 business and institutional customers worldwide. 

These individualized Premier Dell.com sites help business customers to more efficiently 

manage all phases of their Dell computer buying and ownership. Each customer’s 

Premier Dell.com Web site can include a customized online computer store, purchasing and 

asset management reports and tools, system-specific technical information, links to useful 

information throughout Dell’s extensive Web site, and more. The site makes all the information 

a customer needs in order to do business with Dell available in one place, 24 hours a day, 

7 days a week. 36 

Consumer to Consumer (C2C) 

Much consumer-to-consumer (C2C) online marketing and communication occurs on the Web 

between interested parties over a wide range of products and subjects. In some cases, the 

Internet provides an excellent means by which consumers can buy or exchange goods or 

information directly with one another. For example, eBay, Amazon.com Auctions, 

Overstock.com, and other auction sites offer popular marketspaces for displaying and selling 

almost anything, from art and antiques, coins and stamps, and jewelry to computers and consumer 

electronics. 

EBay’s C2C online trading community of more than 181 million registered users worldwide 

(greater than the combined populations of France, Spain, and Britain!) transacted some 

$40 billion in trades last year. On any given day, the company’s Web site lists more than 

16 million items up for auction in more than 45,000 categories. Such C2C sites give people 

access to much larger audiences than the local flea market or newspaper classifieds (which, 

by the way, are now also going online). Interestingly, based on its huge success in the C2C 

market, eBay has now attracted a large number of B2C sellers, ranging from small businesses 

peddling their regular wares to large businesses liquidating excess inventory at auction. 37 

In other cases, C2C involves interchanges of information through Internet forums that 

appeal to specific special-interest groups. Such activities may be organized for commercial or 

noncommercial purposes. An example is Web logs, or blogs, online journals where people 

post their thoughts, usually on a narrowly defined topic. Blogs can be about anything, from 

politics or baseball to haiku, car repair, or the latest television series. Today’s blogosphere 

consists of more than 10 million blogs, with 40,000 new ones popping up every day. About 

16 percent of all American adults now read blogs, and 1 in every 17 Americans has created a 

blog of his or her own. 38 

Many marketers are now tapping into blogs as a medium for reaching carefully targeted 

consumers. One way is to advertise on an existing blog or to influence content there. For 

example, before GE announced a major energy-efficient technology initiative last year, GE 

executives met with major environmental bloggers to build support. Microsoft reaches out to 

bloggers to promote its Xbox game systems and other new products. And in an effort to 

improve its often-battered image, Wal-Mart now works directly with bloggers, feeding them 

nuggets of positive news, suggesting topics for posting, and even inviting them to visit company 

headquarters. “Bloggers who agreed to receive the e-mail messages said they were eager 

to hear Wal-Mart’s side of the story, which they. . . felt had been drowned out by critics,” say 

an analyst. The bloggers also “were tantalized by the promise of exclusive news that might 

attract more visitors to their Web sites.” 39


Consumer-to-business 

(C2B) online marketing 

Online exchanges in which 

consumers search out sellers, 

learn about their offers, and 

initiate purchases, sometimes 

even driving transaction terms. 

Other companies set up their own blogs. For example, Coca-Cola set up a blog to add an 

online community element to its sponsorship of the 2006 Winter Olympics. It enlisted a halfdozen 

college students from around the world to blog about their trips to the games. Coke 

paid to fly and accommodate students from China, Germany, Italy, Canada, and Australia, 

each of whom agreed to post conversations about the positive side of the games. Similarly, 

before the games began, VisaUSA launched a site where it urged Olympic hopefuls to blog 

about the games. The blog site allowed for posting photos and comments, podcasting, and 

video blogging. 40 

As a marketing tool, blogs offer some advantages. They can offer a fresh, original, personal, 

and cheap way to reach today’s fragmented audiences. However, the blogosphere is 

cluttered and difficult to control. “Blogs may help companies bond with consumers in exciting 

new ways, but they won’t help them control the relationship,” says a blog expert. Such 

Web journals remain largely a C2C medium. “That isn’t to suggest companies can’t influence 

the relationship or leverage blogs to engage in a meaningful relationship,” says the expert, 

“but the consumer will remain in control.” 41 

In all, C2C means that online buyers don’t just consume product information—increasingly, 

they create it. They join Internet interest groups to share information, with the result that “word 

of Web” is joining “word of mouth” as an important buying influence. 

Consumer to Business (C2B) 

The final online marketing domain is consumer-to-business (C2B) online marketing. Thanks 

to the Internet, today’s consumers are finding it easier to communicate with companies. Most 

companies now invite prospects and customers to send in suggestions and questions via company 

Web sites. Beyond this, rather than waiting for an invitation, consumers can search out 

sellers on the Web, learn about their offers, initiate purchases, and give feedback. Using the 

Web, consumers can even drive transactions with businesses, rather than the other way 

around. For example, using Priceline.com, would-be buyers can bid for airline tickets, hotel 

rooms, rental cars, cruises, and vacation packages, 

leaving the sellers to decide whether to 

accept their offers. 

Consumers can also use Web sites such as 

PlanetFeedback.com to ask questions, offer suggestions, 

lodge complaints, or deliver compliments 

to companies. The site provides letter 

templates for consumers to use based on their 

moods and reasons for contacting the company. 

The site then forwards the letters to the customer 

service manager at each company and 

helps to obtain a response. “About 80 percent of 

the companies respond to complaints, some 

within an hour,” says a PlanetFeedback.com 

spokesperson. 42 

■ C2B e-commerce: Consumers can use Web sites such as PlanetFeedback.com to 

ask questions, offer suggestions, lodge complaints, or deliver compliments to 

companies. 

Types of Online Marketers 

Companies of all types are now marketing 

online. In this section, we first discuss the different 

types of online marketers shown in 

Figure 17.3. Then, we examine how companies 

go about conducting online marketing. 

Click-Only versus Click-and- 

Mortar Marketers 

The Internet gave birth to a new species of 

marketers—the click-only dot-coms—which 

operate only online without any brick-and-mortar 

market presence. In addition, most traditional 

brick-and-mortar companies have now added 

online marketing operations, transforming themselves 

into click-and-mortar competitors.

FIGURE 17.3 

Types of online marketers 

Click-only companies 

The so-called dot-coms, 

which operate only online 

without any brick-and-mortar 

market presence. 

Click-and-mortar 

companies 

Traditional brick-and-mortar 

companies that have added 

online marketing to their 

operations. 


Seller 

Seller 

Seller 

Click-Only Companies 

Brick-and-mortar 

store channels 

Brick-and-mortar (brick-only) marketers 


channels 

Click-only marketers 

Brick-and-mortar 

store channels 


channels 

Click-and-mortar marketers 

Consumers 

Consumers 

Consumers 

Click-only companies come in many shapes and sizes. They include e-tailers, dot-coms that 

sell products and services directly to final buyers via the Internet. Examples include 

Amazon.com, Expedia, and Wine.com. The click-only group also includes search engines and 

portals, such as Yahoo!, Google, and MSN, which began as search engines and later added services 

such as news, weather, stock reports, entertainment, and storefronts, hoping to become 

the first port of entry to the Internet. Shopping or price comparison sites, such as 

Froogle.com, Yahoo! Shopping, and Bizrate.com, give instant product and price comparisons 

from thousands of vendors. 

Internets service providers (ISPs) such as AOL and Earthlink are click-only companies 

that provide Internet and e-mail connections for a fee. Transaction sites, such as eBay, take 

commissions for transactions conducted on their sites. Finally, various content sites, such as 

New York Times on the Web (www.nytimes.com), ESPN.com, and Encyclopaedia Britannica 

Online, provide financial, news, research, and other information. 

The hype surrounding such click-only Web businesses reached astronomical levels during 

the “dot-com gold rush” of the late 1990s, when avid investors drove dot-com stock prices 

to dizzying heights. However, the investing frenzy collapsed in the year 2000, and many highflying, 

overvalued dot-coms came crashing back to Earth. Even some of the strongest and most 

attractive e-tailers—eToys.com, Pets.com, Furniture.com, Garden.com—filed for bankruptcy. 

Now on firmer footing, many click-only dot-coms are surviving and even prospering in 

today’s marketspace. 

Click-and-Mortar Companies 

As the Internet grew, established brick-and-mortar companies realized that, to compete effectively 

with online competitors, they had to go online themselves. Thus, many one-time brickand-mortar 

companies are now prospering as click-and-mortar companies. For example, Office 

Depot’s more than 1,000 office-supply superstores rack up annual sales of $13.5 billion in more 

than 23 countries. But you might be surprised to learn that Office Depot’s fastest recent growth 

has come not from its traditional “brick-and-mortar” channels, but from the Internet. 

Office Depot’s online sales have soared in recent years, now accounting for 27 percent 

of total sales. Selling on the Web lets Office Depot build deeper, more personalized relationships 

with customers large and small. “Contract customers”—the 80,000 or so 

larger businesses that have negotiated relationships with Office Depot—enjoy customized 

online ordering that includes company-specific product lists and pricing. For


example, GE or Procter & Gamble can 

create lists of approved office products 

at discount prices, and then let company 

departments or even individuals 

do their own purchasing. This reduces 

ordering costs, cuts through the red 

tape, and speeds up the ordering 

process for customers. At the same 

time, it encourages companies to use 

Office Depot as a sole source for office 

supplies. Even the smallest companies 

find 24-hour-a-day online ordering 

easier and more efficient. More importantly, 

Office Depot’s Web operations 

don’t steal from store sales. Instead, 

the OfficeDepot.com site actually 

builds store traffic by helping customers 

find a local store and check 

stock. In return, the local store promotes 

the Web site through in-store 

kiosks. If customers don’t find what 

they need on the shelves, they can 

quickly order it via the Web from the 

kiosk. Thus, Office Depot now offers a full range of contact points and delivery modes— 

online, by phone or fax, and in the store. No click-only or brick-only seller can match 

the call, click, or visit convenience and support afforded by Office Depot’s click-andmortar 

model. 43 

■ Click-and-mortar marketing: No click-only or brick-only seller can match the call, 

click, or visit convenience and support afforded by Office Depot’s “4 easy ways to shop.” 

FIGURE 17.4 

Setting up for online 

marketing 

Many click-and-mortar companies are now having more online success than their clickonly 

competitors. In fact, in a recent ranking of the top 50 online retail sites, only 15 were 

click-only retailers, whereas the others were multichannel retailers. 44 What gives the clickand-mortar 

companies an advantage? Established companies such as Best Buy, Blockbuster, 

Fidelity, and Office Depot have known and trusted brand names and greater financial 

resources. They have large customer bases, deeper industry knowledge and experience, and 

good relationships with key suppliers. 

By combining online marketing and established brick-and-mortar operations, the clickand-mortar 

retailers can also offer customers more options. For example, consumers can 

choose the convenience and assortment of 24-hour-a-day online shopping, the more personal 

and hands-on experience of in-store shopping, or both. Customers can buy merchandise 

online, and then easily return unwanted goods to a nearby store. For example, those wanting 

to do business with Fidelity Investments can call a Fidelity agent on the phone, go online to 

the company’s Web site, or visit the local Fidelity branch office. This lets Fidelity issue a powerful 

invitation in its advertising: “Call, click, or visit Fidelity Investments.” 

Setting Up an Online Marketing Presence 

Clearly, all companies need to consider moving online. Companies can conduct online marketing 

in any of the four ways shown in Figure 17.4: creating a Web site, placing ads and promotions 

online, setting up or participating in Web communities, or using e-mail. 

Creating Web 

communities 

Creating a 

Web site 

Conducting 

online 

marketing 

Placing ads or 

promotions online 

Using e-mail

Corporate Web site 

A Web site designed to build 

customer goodwill and to 

supplement other sales 

channels, rather than to sell 

the company’s products 

directly. 

Marketing Web site 

A Web site that engages 

consumers in interactions 

that will move them closer to 

a direct purchase or other 

marketing outcome. 


Creating a Web Site 

For most companies, the first step in conducting online marketing is to create a Web site. 

However, beyond simply creating a Web site, marketers must design an attractive site and find 

ways to get consumers to visit the site, stay around, and come back often. 

TYPES OF WEB SITES Web sites vary greatly in purpose and content. The most basic type is a 

corporate Web site. These sites are designed to build customer goodwill and to supplement 

other sales channels, rather than to sell the company’s products directly. They typically offer 

a rich variety of information and other features in an effort to answer customer questions, 

build closer customer relationships, and generate excitement about the company. For example, 

although you can buy ice cream and other items at the gift shop at Ben & Jerry’s Web site 

(benjerry.com), the site’s primary purpose is to enhance customer relationships. At the site, 

you can learn all about Ben & Jerry’s company philosophy, products, and locations. Or you 

can visit the Fun Stuff area and send a free e-card to a friend, subscribe to the Chunk Mail 

newsletter, or while away time playing Scooper Challenge or Virtual Checkers. 

Other companies create a marketing Web site. These sites engage consumers in an interaction 

that will move them closer to a direct purchase or other marketing outcome. For example, 

visitors to SonyStyle.com can search through dozens of categories of Sony products, learn more 

about specific items, and read expert product reviews. They can check out the latest hot deals, 

place orders online, and pay by credit card, all with a few mouse clicks. 

MINI USA operates a marketing Web site at www.miniusa.com. Once a potential customer 

clicks in, the carmaker wastes no time trying to turn the inquiry into a sale, and then into a longterm 

relationship. The site offers a garage full of useful information and interactive selling features, 

including detailed and fun descriptions of current MINI models, tools for designing your 

very own MINI, information on dealer locations and services, and even tools for tracking your 

new MINI from factory to delivery. 

■ The MINI marketing Web site does more than just provide information or sell 

cars; it keeps customers engaged, from designing their very own MINI to tracking it 

from factory to delivery. 

Before Angela DiFabio bought her 

MINI Cooper last September, she spent 

untold hours on the company’s Web 

site, playing with dozens of possibilities 

before coming up with the perfect 

combination: a chili-pepper-red exterior, 

white racing stripes on the hood, 

and a “custom rally badge bar” on the 

grill. When DiFabio placed her order 

with her dealer, the same build-yourown 

tool—and all the price and product 

details it provided—left her feeling 

like she was getting a fair deal. “He 

even used the site to order my car,” she 

says. While she waited for her MINI to 

arrive, DiFabio logged on to MINI’s 

Web site every day, this time using its 

“Where’s My Baby?” tracking tool to 

follow her car, like an expensive FedEx 

package, from the factory in Britain to 

its delivery. The Web site does more 

than just provide information or sell 

products or services. It makes an 

impact on the customer experience: It’s 

fun, it’s individual, it makes users feel 

like part of the clan. 45 

DESIGNING EFFECTIVE WEB SITES Creating a Web site is one thing; getting people to visit the 

site is another. To attract visitors, companies aggressively promote their Web sites in offline 

print and broadcast advertising and through ads and links on other sites. But today’s Web 

users are quick to abandon any Web site that doesn’t measure up. The key is to create enough 

value and excitement to get consumers who come to the site to stick around and come back 

again. This means that companies must constantly update their sites to keep them current, 

fresh, and useful.


For some types of products, attracting visitors is easy. Consumers buying new cars, 

computers, or financial services will be open to information and marketing initiatives from 

sellers. Marketers of lower-involvement products, however, may face a difficult challenge 

in attracting Web site visitors. If you’re in the market for a computer and you see a banner 

ad that says, “The top ten PCs under $800,” you’ll likely click on the banner. But what kind 

of ad would get you to visit a site like dentalfloss.com? 

A key challenge is designing a Web site that is attractive on first view and interesting 

enough to encourage repeat visits. Many marketers create colorful, graphically sophisticated 

Web sites that combine text, sound, and animation to capture and hold attention (for 

examples, see www.looneytunes.com or www.nike.com). To attract new visitors and to 

encourage revisits, suggests one expert, online marketers should pay close attention to the 

seven Cs of effective Web site design: 46 

■ Context: the site’s layout and design 

■ Content: the text, pictures, sound, and video that the Web site contains 

■ Community: the ways that the site enables user-to-user communication 

■ Customization: the site’s ability to tailor itself to different users or to allow users to personalize 

the site 

■ Communication: the ways the site enables site-to-user, user-to-site, or two-way communication 

■ Connection: the degree that the site is linked 

to other sites 

■ Commerce: the site’s capabilities to enable 

commercial transactions 

■ Effective Web sites: Applying the 7Cs of effective Web site design, is this a good 

site (see www.altoids.com)? 

Online advertising 

Advertising that appears while 

consumers are surfing the 

Web, including display ads 

(banners, interstitials, popups), 

search-related ads, 

online classifieds, and other 

forms. 

Placing Ads and Promotions Online 

And to keep customers coming back to the site, 

companies need to embrace yet another “C”— 

constant change. 

At the very least, a Web site should be easy 

to use, professional looking, and physically 

attractive. Ultimately, however, Web sites must 

also be useful. When it comes to Web surfing and 

shopping, most people prefer substance over 

style and function over flash. Thus, effective Web 

sites contain deep and useful information, interactive 

tools that help buyers find and evaluate 

products of interest, links to other related sites, 

changing promotional offers, and entertaining 

features that lend relevant excitement. 

As consumers spend more and more time on the Internet, many companies are shifting more 

of their marketing dollars to online advertising to build their brands or to attract visitors to 

their Web sites. Online advertising is becoming a major medium. Last year, U.S. companies 

spent more than $12.5 billion on online advertising, up 30 percent over the previous year. 

Online ad spending will jump to more than $22 billion by 2009, representing about 11 percent 

of all direct marketing ad spending and rivaling the amounts spent on cable/satellite TV 

and radio. 47 Here, we discuss forms of online advertising and promotion and their future. 

FORMS OF ONLINE ADVERTISING The major forms of online advertising include display ads, 

search-related ads, and online classifieds. Online display ads might appear anywhere on an 

Internet user’s screen. The most common form is banners, banner-shaped ads found at the 

top, bottom, left, right, or center of a Web page. For instance, a Web surfer looking up airline 

schedules or fares might encounter a flashing banner that screams, “Rent a car from Alamo 

and get up to two days free!” Clicking on the ad takes consumers to the Alamo Web site, 

where they can redeem the promotion. 

Interstitials are online display ads that appear between screen changes on a Web site, 

especially while a new screen is loading. For example, visit www.marketwatch.com and 

you’ll probably see a 10-second ad for Visa, Verizon, or another sponsor before the homepage 

loads. Pop-ups are online ads that appear suddenly in a new window in front of the window 

being viewed. Such ads can multiply out of control, creating a major annoyance. As a result,


Internet services and Web browser providers have developed applications that let users block 

most pop-ups. But not to worry. Many advertisers have now developed pop-unders, new windows 

that evade pop-up blockers by appearing behind the page you’re viewing. 

With the increase in broadband Internet access in American homes, many companies are 

developing exciting new rich media display ads, which incorporate animation, video, sound, 

and interactivity. Rich media ads attract and hold consumer attention better than traditional 

banner ads. They employ techniques such as float, fly, and snapback—animations that jump 

out and sail over the Web page before retreating to their original space. But many rich media 

ads do more than create a little bit of jumping animation. For example, to attract would-be 

commodity traders to its Web site, the Chicago Board of Trade runs a small rich media banner 

ad that explodes into a small site when the user’s mouse rolls over it. The mouse-over site features 

free streaming quotes, sample research, and a virtual trading account, all of which 

would never fit into a traditional static ad. 48 

Another hot growth area for online advertising is search-related ads (or contextual advertising), 

in which text-based ads and links appear alongside search engine results on sites such 

as Google and Yahoo!. For example, search Google for “HDTV” and you’ll see inconspicuous 

ads for ten or more advertisers, ranging from Circuit City, Best Buy, and Amazon.com to Dish 

Network and Nextag.com. Nearly all of Google’s $6.1 billion in revenues come from ad sales. 

An advertiser buys search terms from the search site and pays only if consumers click through 

to its site. Search-related ads account for some 41 percent of all online advertising expenditures, 

more than any other category of online advertising. 49 

Search ads can be an effective way to link consumers to other forms of online promotion. For 

example, Honda used key word searches to lure Web surfers to a site promoting its Element truck: 

The current Element campaign features the vehicle “talking” to sundry animals—a 

platypus, a possum, a burro, and a crab—in cartoony spots. Honda bought those keyword 

terms and uses search ads as invitations to “see the platypus in its Element.” 

That link leads consumers to elementandfriends.com, 

which features 

Element ads and a related game. 

Honda also bought variants of “funny 

video” and “funny commercials,” 

search terms that have demographic 

profiles compatible with likely 

Element buyers. In many cases, the 

search terms cost just 10 cents or 15 

cents per click and drew about 40 percent 

of the Element’s Web site traffic. 

“It seemed a little quirky, but the more 

you thought about it, the more it 

seemed to resonate well with the campaign,” 

says Honda’s senior manager 

of marketing. For its Ridgeline truck, 

which was advertised during the 

Super Bowl, Honda bought a “few 

thousand” search terms somehow 

■ Search-related ads account for some 41 percent of all online advertising 

expenditures: Honda used key word searches to lure Web surfers to a site promoting 

its Element truck. The site features the vehicle “talking” to sundry animals—a 

platypus, a possum, a burro, and a crab—in cartoony spots. 

related to the Super Bowl (as in “Super 

Bowl ad”). Those terms generated 

more than 3.5 million online impressions 

from just Yahoo! and Google on 

the day after the Super Bowl alone. 50 

OTHER FORMS OF ONLINE PROMOTION Other forms of online promotions include content 

sponsorships, alliances and affiliate programs, and viral advertising. 

Using content sponsorships, companies gain name exposure on the Internet by sponsoring 

special content on various Web sites, such as news or financial information or special-interest 

topics. For example, Scotts, the lawn-and-garden products company, sponsors the Local 

Forecast section on WeatherChannel.com; and David Sunflower Seeds sponsors the ESPN 

Fantasy Baseball site at ESPN.com. Sponsorships are best placed in carefully targeted sites 

where they can offer relevant information or service to the audience. 

Internet companies can also develop alliances and affiliate programs, in which they work 

with other companies, online and offline, to “promote each other.” Amazon.com has more than


Viral marketing 

The Internet version of wordof-mouth 

marketing—Web 

sites, e-mail messages, or 

other marketing events that 

are so infectious that 

customers will want to pass 

them along to friends. 

Web communities 

Web sites upon which 

members can congregate 

online and exchange views on 

issues of common interest. 

■ Viral marketing: Burger King’s 

colossally successful Subservient 

Chicken site gets consumers interacting 

with the brand and buzzing about its 

edgy new positioning. 

900,000 affiliates who post Amazon.com banners on their Web sites. And Yahoo!, whose ad revenue 

makes up 84 percent of its total worldwide revenue, has become a fertile ground for 

alliances with movie studios and TV production companies: 

In one episode of The Apprentice, teams created and marketed a new flavor of 

Ciao Bella Ice Cream. Although Ciao Bella had previously sold its ice creams in 

only 18 stores in the New York and San Francisco, Yahoo! convinced the manufacturer 

to place the new product in 760 stores around the country. An endof-episode 

promotion urged viewers to visit Yahoo!’s local online search 

engine to look for the store nearest them. The product sold out by 5 P.M. the 

next day. And thanks to Yahoo!’s registration database, it was able to provide 

Ciao Bella with the demographic characteristics of respondents. 51 

Finally, online marketers use viral marketing, the Internet version of word-of-mouth 

marketing. Viral marketing involves creating a Web site, e-mail message, or other marketing 

event that is so infectious that customers will want to pass it along to their friends. Because 

customers pass the message or promotion along to others, viral marketing can be very inexpensive. 

And when the information comes from a friend, the recipient is much more likely to 

open and read it. Consider Burger King’s now-classic Subservient Chicken viral campaign: 

The Web site, www.subservientchicken.com, features a dingy living room, 

where the subservient chicken—someone in a giant chicken suit and a garter 

belt—hangs out in front of his Web cam and awaits your bidding. Type in commands, 

and the chicken does exactly what you ask. It will flap its wings, roll 

over, or jump up and down. It will also moon the viewer, dance the Electric 

Slide, or die. (Suggestions for lewd acts are met with a “naughty naughty” shake 

of the wing.) In other words, you can have your way with the chicken. Get it? 

Have it your way! The site promotes Burger King’s TenderCrisp chicken and ties 

it into Burger King’s successful “Have It Your Way” marketing campaign. 

“As viral marketing goes, subservientchicken.com is a colossal success,” 

says an advertising expert. “There is great overlap between Web regulars and 

Burger King’s core audience.” If nothing more, the site gets consumers to interact 

with the brand. And it gets them buzzing about Burger King’s edgy new 

positioning. Burger King has never advertised the site. When it was first created, 

the developer at Crispin Porter � Bogusky (CP�B), the ad agency that 

created the site, e-mailed the URL to several other CP�B people, asking them 

to send the link out to friends to test. From that single e-mail, without a peep of 

promotion, the Subservient Chicken site ended the day with 1 million total 

hits. It received 46 million hits in only the first week following its launch, 

385 million in the first nine months. Says one Burger King ad director, the 

award-winning site helped “sell a lot, a lot, a lot of chicken sandwiches.” 52 

THE FUTURE OF ONLINE ADVERTISING Although online advertising still accounts for 

only a minor portion of the total advertising and marketing expenditures of most 

companies, it is growing rapidly. Online advertising serves a useful purpose, especially 

as a supplement to other marketing efforts. As a result, it is playing an increasingly 

important role in the marketing mixes of many advertisers. 

For example, although Procter & Gamble spends only a small portion of its ad 

media budget online, it views the Web as an important medium. According to a P&G 

marketer, online marketing is “a permission-based way to offer consumers more 

information about a product than can be shared in a typical 30-second spot. It opens 

a two-way exchange where we can better educate consumers about our products.” 53 

Creating or Participating in Web Communities 

The popularity of blogs and other Web forums has resulted in a rash of commercially 

sponsored Web sites called Web communities, which take advantage of the C2C properties 

of the Internet. Such sites allow members to congregate online and exchange 

views on issues of common interest. They are the cyberspace equivalent to a 

Starbucks coffeehouse, a place where everybody knows your e-mail address. 

For example, iVillage.com is a Web community in which women can exchange 

views and obtain information, support, and solutions on families, food, fitness, relationships, 

relaxation, home and garden, news and issues, or just about any other topic.


The site draws more than 25 million unique visitors 

each quarter, putting it in a league with magazines such 

as Cosmopolitan, Glamour, and Vogue. Another example 

is MyFamily.com, which aspires to be the largest 

and most active online community in the world for families. 

It provides free, private family Web sites upon 

which family members can connect online to hold family 

discussions, share family news, create online family 

photo albums, maintain a calendar of family events, 

jointly build family trees, and buy gifts for family members 

quickly and easily. 54 

Visitors to these Internet neighborhoods develop 

a strong sense of community. Such communities are 

attractive to advertisers because they draw frequent, 

lengthy visits from consumers with common interests 

and well-defined demographics. For example, 

iVillage.com provides an ideal environment for the 

Web ads of companies such as Procter & Gamble, 

Kimberly-Clark, Nabisco, Avon, Clairol, Hallmark, 

and others who target women consumers. And 

MyFamily.com hosts The Shops@MyFamily, in which 

such companies as Disney, Kodak, Hallmark, Hewlett- 

Packard, and Microsoft advertise and sell their familyoriented 

products. 

Using E-Mail 

E-mail has exploded onto the scene as an important 

online marketing tool. A recent study of ad, brand, and 

marketing managers found that nearly half of all the B2B 

and B2C companies surveyed use e-mail marketing to 

reach customers. Companies currently spend about 

$1.1 billion a year on e-mail marketing, up from just 

$164 million in 1999. And this spending will grow by 

an estimated 20 percent annually through 2009. Total 

annual e-mail volume in the United States is expected 

to rise to almost 2.7 trillion messages in 2007. 55 

To compete effectively in this ever-more-cluttered 

e-mail environment, marketers are designing “enriched” e-mail messages—animated, interactive, 

and personalized messages full of streaming audio and video. Then, they are targeting 

these attention-grabbers more carefully to those who want them and will act upon them. 

Consider Nintendo, a natural for e-mail-based marketing: 

Young computer-savvy gaming fans actually look forward to Nintendo’s monthly email 

newsletter for gaming tips and for announcements of exciting new games. When 

the company launched its Star Fox Adventure game, it created an intensive e-mail 

campaign in the weeks before and after the product launch. The campaign included 

a variety of messages targeting potential customers. “Each message has a different 

look and feel, and . . . that builds excitement for Nintendo,” notes an executive working 

on the account. The response? More than a third of all recipients opened the 

e-mails. And they did more than just glance at the messages: Click-through rates 

averaged more than 10 percent. Nearly two-thirds of those opening the message 

watched its 30-second streaming video in its entirety. Nintendo also gathered 

insightful customer data from the 20 percent of people who completed an embedded 

survey. Although the company feared that the barrage of messages might create “list 

fatigue” and irritate customers, the campaign received very few negative responses. 

The unsubscribe rate was under 1 percent. 56 

■ Web communities: iVillage.com, a Web community for women, provides 

an ideal environment for Web ads of companies such as Procter & Gamble, 

Kimberly Clark, Avon, Hallmark, and others. 

Spam 

Unsolicited, unwanted 

commercial e-mail messages. 

As with other types of online marketing, companies must be careful that they don’t 

cause resentment among Internet users who are already overloaded with “junk e-mail.” The 

explosion of spam—unsolicited, unwanted commercial e-mail messages that clog up our 

e-mail boxes—has produced consumer frustration and anger. According to one research company, 

spam accounts for as much as 84 percent of total inbound e-mail. 57 E-mail marketers



17.2 

E-mail is one hot marketing medium. In mindboggling 

numbers, e-mail ads are popping onto our 

computer screens and filling up our e-mail boxes. And they’re no 

longer just the quiet, plain-text messages of old. The new breed of 

in-your-face e-mail ad is designed to command your attention— 

loaded with glitzy features such as animation, interactive links, color 

photos, streaming video, and personalized audio messages. 

But there’s a dark side to the exploding use of e-mail marketing. 

The biggest problem? Spam—the deluge of unsolicited, unwanted 

commercial messages that now clutter up our e-mail boxes and our 

lives. Various studies show that spam now accounts for an inboxclogging 

60 to 83 percent of e-mails sent daily throughout the world, 

up from only 7 percent in 2002. One recent study found that the 

average consumer received 3,253 spam messages last year. 

Despite these dismal statistics, when used properly, e-mail can be 

the ultimate direct marketing medium. Blue-chip marketers such as 

Amazon.com, Dell, L.L.Bean, Office Depot, and others use it regularly, 

and with great success. E-mail lets these marketers send highly 

targeted, tightly personalized, relationship-building messages to consumers 

who actually want to receive them, at a cost of only a few 

cents per contact. E-mail ads really can command attention and get 

customers to act. According to one estimate, well-designed e-mail 

campaigns sent to internal customer lists typically achieve 10 to 

20 percent click-through rates. That’s pretty good when compared 

with the 1 to 2 percent average response rates for traditional direct 

mail and the less than 1 percent response to traditional banner ads. 

However, although carefully designed e-mails may be effective, 

and may even be welcomed by selected consumers, critics argue 

that most commercial e-mail messages amount to little more than 

annoying “junk mail” to the rest of us. Too many bulk e-mailers blast 

out lowest-common-denominator mailings to anyone with an e-mail 

address. There is no customization—no relationship building. 

Everyone gets the same hyperventilated messages. Moreover, too 

often, the spam comes from shady sources and pitches objectionable 

products—everything from Viagra and body-enhancement products 

to pornography and questionable investments. And the messages 

are often sent from less-than-reputable marketers. 

At least in part, it’s e-mail economics that are to blame for our 

overflowing inboxes. Sending e-mail is so easy and so inexpensive 

E-Mail Marketing: The Hot Marketing Medium? Or Pestering 

Millions for Profit? 

that almost anyone can afford to do it, even at paltry response rates. 

“In the field of direct marketing, it doesn’t get much cheaper than 

spam,” says one analyst. “One needs only a credit card (to buy lists 

of e-mail addresses), a computer, and an Internet connection. 

Otherwise, it costs nothing to send bulk e-mail, even masses of it.” 

For example, Touch Media Group once pumped out eight million emails 

a day. That makes the company sound like a big-city direct marketing 

behemoth. But in reality, it began as a home-based business run 

by a 44-year-old mother, Laura Betterly, in Dunedin, Florida, dubbed 

the Spam Queen by the Wall Street Journal. Betterly regularly dispatched 

messages to half a million or more strangers with a single click 

on the “send” icon. She found that she could make a profit on even very 

low responses. For example, if only 65 of the half million recipients 

responded, Betterly’s company made $40. In all, Betterly cleared more 

than $200,000 a year in income from her small business. 

The problem, of course, is that it was far easier for Betterly to hit 

the “send” button on an e-mail to a million and a half strangers than 

it was for the beleaguered recipients to hit the delete key on all those 

messages. One analyst calculated that the recipient cost of Betterly’s 

e-mails far exceeded the $40 in revenue that it produced for her. 

Assume that the average time getting rid of the junk was two seconds, 

and that the average recipient values his or her time at the 

mean wage paid in the United States, which is around $14 per 

hour, or $0.0039 per second. This implies a total cost, incurred 

by uninterested recipients, of 500,000 times two seconds times 

$0.0039 per second, which gives $3,900. And such dollar calculations 

don’t begin to account for the shear frustration of having 

to deal with all those many junk messages. 

The impact of spam on consumers and businesses is alarming. One 

recent study places the average time spent at work each day deleting 

spam at 2.8 minutes. This loss in productivity equals $21.6 billion 

per year based on average U.S. wages. 

In response to such costs and frustrations, Internet service 

providers and Web-browser producers have created sophisticated 

spam filters. For example, AOL now blocks some 1.5 billion spam 

messages a day, more than half a trillion a year, from reaching the 

e-mail boxes of AOL subscribers. It’s blocking eight out of every ten 

attempted e-mails as spam. The government is also stepping in. In 

walk a fine line between adding value for consumers and being intrusive (see Real 

Marketing 17.2). 

To avoid irritating consumers by sending unwanted marketing e-mail, companies 

should ask customers for permission to e-mail marketing pitches. They should also tell 

recipients how to “opt in” or “opt out” of e-mail promotions at any time. This approach, 

known as permission-based marketing, has become a standard model for e-mail marketing. 

The Promise and Challenges of Online Marketing 

Online marketing continues to offer both great promise and many challenges for the future. 

Its most ardent apostles still envision a time when the Internet and online marketing will 

replace magazines, newspapers, and even stores as sources for information and buying. 

Most marketers, however, hold a more realistic view. To be sure, online marketing will 

become a successful business model for some companies, Internet firms such as 

Amazon.com, eBay, and Google, and direct-marketing companies such as Dell. Michael 

Dell’s goal is one day “to have all customers conduct all transactions on the Internet, glob-

2003, Congress passed the CAN-SPAM Act 

(the Controlling the Assault of Non-Solicited 

Pornography and Marketing Act), which 

attempts to clean up the e-mail industry by 

banning deceptive subject lines, requiring a 

real return address, and giving consumers a 

way to “opt out.” Such actions have helped 

somewhat. The number of spam messages 

received last year dropped by 17 percent over 

the previous year. However, most of us still get 

a barrage of e-mail come-ons each day. 

Most legitimate e-mail marketers welcome 

such controls. Left unchecked, they reason, 

spam will make legitimate e-mail marketing less 

effective, or even impossible. But the industry 

worries that solutions such as spam filters and 

the CAN-SPAM Act often filter out the good emails 

with the bad, dampening the rich potential 

of e-mail for companies that want to use it as a 

valid marketing tool. In fact, according to one 

study, as much as 20 percent of legitimate bulk 

commercial e-mail—which includes online statements 

and receipts as well as mail that users sign 

up to receive—gets caught in spam filters. 

So, what’s a marketer to do? Permission-based e-mail is the best 

solution. Companies can send e-mails only to customers who “opt 

in”—those who grant permission in advance. They can let consumers 

specify what types of messages they’d like to receive. 

Financial services firms such as Charles Schwab use configurable 

e-mail systems that let customers choose what they want to get. 

Others, such as Yahoo! or Amazon.com, include long lists of opt-in 

boxes for different categories of marketing material. Amazon.com targets 

opt-in customers with a limited number of helpful “we thought 

you’d like to know” messages based on their expressed preferences 

and previous purchases. Few customers object and many actually 

welcome such promotional messages. 

Permission-based marketing ensures that e-mails are sent only to 

customers who want them. Still, marketers must be careful not to 

abuse the privilege. There’s a fine line between legitimate e-mail mar- 


In response to the spam epidemic, Internet service providers such as AOL have created 

sophisticated spam filters. 

keting and spam. Companies that cross the line will quickly learn that 

“opting out” is only a click away for disgruntled consumers. 

Sources: Quotes and other information from Jennifer Drumluk and Joe 

Tyler, “Cracking the E-Mail Marketing Code,” Association Management, 

March 2005, pp. 52–56; Matt Haig and Mylene Mangalindan, “Spam 

Queen: For Bulk E-Mailer, Pestering Millions Offers Path to Profit,” Wall 

Street Journal, November 13, 2002, p. A1; Jennifer Wolcott, “You Call It 

Spam, They Call It a Living,” Christian Science Monitor, March 22, 2004, 

p. 12; “AOL Top-10 List Reveals Spammers Are Getting More 

Sophisticated,” Wireless News, December 29, 2005, p. 1; Enid Burns, 

“The Deadly Duo: Spam and Viruses,” March 2006, accessed at 

www.clickz.com; and Jessica E. Vascellaro, “Spam Filters Wild; Spate of 

Incidents at Verizon, AOL Point to Growing Problem of Blocking 

Legitimate E-Mail,” Wall Street Journal, May 3, 2006, p. D1. 

ally.” However, for most companies, online marketing will remain just one important 

approach to the marketplace that works alongside other approaches in a fully integrated 

marketing mix. 

Despite the many challenges, companies large and small are quickly integrating online 

marketing into their marketing strategies and mixes. As it continues to grow, online marketing 

will prove to be a powerful direct marketing tool for building customer relationships, improving 

sales, communicating company and product information, and delivering products and 

services more efficiently and effectively. 

Integrated Direct Marketing 

Too often, a company’s different direct-marketing efforts are not well integrated with one 

another or with other elements of its marketing and promotion mixes. For example, a firm’s 

media advertising may be handled by the advertising department working with a traditional


Integrated direct marketing 

Direct-marketing campaigns 

that use multiple vehicles and 

multiple stages to improve 

response rates and profits. 

advertising agency. Meanwhile, its direct-mail and catalog business may be handled by directmarketing 

specialists, whereas its Web site is developed and operated by an outside Internet 

firm. Even within a given direct-marketing campaign, too many companies use only a “one-shot” 

effort to reach and sell a prospect or a single vehicle in multiple stages to trigger purchases. 

A more powerful approach is integrated direct marketing, which involves using carefully 

coordinated multiple-media, multiple-stage campaigns. Such campaigns can greatly improve 

response. Whereas a direct-mail piece alone might generate a 2 percent response, adding a Web 

site and toll-free phone number might raise the response rate by 50 percent. Then, a welldesigned 

outbound e-mail campaign might lift response by an additional 500 percent. 

Suddenly, a 2 percent response has grown to 15 percent or more by adding interactive marketing 

channels to a regular mailing. 

Integrating direct marketing channels with each other and with other media has become 

a top priority for marketers. For example, consider the integrated direct marketing efforts of 

professional services firm Ernst & Young: 

Ernst & Young is taking a decidedly integrated approach with its online, e-mail, and 

other direct marketing. It integrates its e-mail efforts with other media, including 

direct mail, and tightly weaves both into interactive elements on the company’s site. 

For example, a promotion for an annual conference it hosted in October for energy 

executives began much earlier in the year with a “save the date” e-mail to clients and 

prospects. That was followed up by a rich media e-mail. “We created these flash 

movies that we e-mailed them, and the call to action was embedded there,” says an 

Ernst & Young marketing executive. “There was a link built in that brought them to 

the Web site to find out details about the conference.” Next, to reinforce the online 

messages, the company sent out direct-mail invitations, which included a registration 

form as well as the Web address for those who chose to register online. To ensure 

that Ernst & Young’s direct marketing messages are well integrated, representatives 

from each marketing discipline meet on a regular basis. “We all sit around the table 

and talk about what we’ve done, what’s in process, and what we’re planning,” says 

the marketing executive. “The results rely on ‘the whole thing.’ Otherwise, it’s like 

making a cake without putting in the flour.” 58 

Public Policy Issues in Direct Marketing 

Direct marketers and their customers usually enjoy mutually rewarding relationships. 

Occasionally, however, a darker side emerges. The aggressive and sometimes shady tactics of 

a few direct marketers can bother or harm consumers, giving the entire industry a black eye. 

Abuses range from simple excesses that irritate consumers to instances of unfair practices or 

even outright deception and fraud. The direct marketing industry has also faced growing 

invasion-of-privacy concerns, and online marketers must deal with Internet security issues. 

Irritation, Unfairness, Deception, and Fraud 

Direct-marketing excesses sometimes annoy or offend consumers. Most of us dislike directresponse 

TV commercials that are too loud, too long, and too insistent. Our mailboxes fill up 

with unwanted junk mail, our e-mail boxes fill up with unwanted spam, and our computer 

screens fill up with unwanted pop-up or pop-under ads. 

Beyond irritating consumers, some direct marketers have been accused of taking unfair 

advantage of impulsive or less-sophisticated buyers. TV shopping channels and program-long 

“infomercials” targeting television-addicted shoppers seem to be the worst culprits. They feature 

smooth-talking hosts, elaborately staged demonstrations, claims of drastic price reductions, 

“while they last” time limitations, and unequaled ease of purchase to inflame buyers 

who have low sales resistance. 

Worse yet, so-called heat merchants design mailers and write copy intended to mislead 

buyers. Even well-known direct mailers have been accused of deceiving consumers. A few 

years back, sweepstakes promoter Publishers Clearing House paid $52 million to settle accusations 

that its high-pressure mailings confused or misled consumers, especially the elderly, into 

believing that they had won prizes or would win if they bought the company’s magazines. 59 

Fraudulent schemes, such as investment scams or phony collections for charity, have also 

multiplied in recent years. Internet fraud, including identity theft and financial scams, has become


a serious problem. Internet-related complaints accounted for 46 percent of the 431,000 fraud complaints 

received by the FTC last year, resulting in monetary losses of more than $335 million. And 

last year alone, the Federal Internet Crime Complaint Center (IC3) received almost 232,000 complaints 

related to Internet fraud, a whopping 368 percent increase from 2002. 60 

One common form of Internet fraud is phishing, a type of identity theft that uses deceptive 

e-mails and fraudulent Web sites to fool users into divulging their personal data. 

According to one survey, half of all Internet users have received a phishing e-mail. Although 

many consumers are now aware of such schemes, phishing can be extremely costly to those 

caught in the Net. It also damages the brand identities of legitimate online marketers who 

have worked to build user confidence in Web and e-mail transactions. 61 

Many consumers also worry about online security. They fear that unscrupulous snoopers 

will eavesdrop on their online transactions or intercept their credit card numbers and make 

unauthorized purchases. In a recent survey, six out of ten online shoppers were concerned 

enough about online security that they considered reducing the amount of their online holiday 

shopping. 62 Such concerns are costly for direct-marketing companies. A recent study 

indicated that almost 30 percent of North American consumers who have been online but 

haven’t made a purchase cited concerns about credit card fraud and other factors as holding 

them back. Another study predicts that annual online sales could be as much as 25 percent 

higher if consumers’ security concerns were adequately addressed. 63 

Another Internet marketing concern is that of access by vulnerable or unauthorized 

groups. For example, marketers of adult-oriented materials have found it difficult to restrict 

access by minors. In a more specific example, a while back, sellers using eBay found themselves 

the victims of a 14-year-old boy who’d bid on and purchased more than $3 million 

worth of high-priced antiques and rare artworks on the site. eBay has a strict policy against 

bidding by anyone under age 18 but works largely on the honor system. Unfortunately, this 

honor system did little to prevent the teenager from taking a cyberspace joyride. 64 

Invasion of Privacy 

Invasion of privacy is perhaps the toughest public policy issue now confronting the directmarketing 

industry. Consumers often benefit from database marketing—they receive more 

offers that are closely matched to their interests. However, many critics worry that marketers 

may know too much about consumers’ lives and that they may use this knowledge to take 

unfair advantage of consumers. At some point, they claim, the extensive use of databases 

intrudes on consumer privacy. 

These days, it seems that almost every time consumers enter a sweepstakes, apply for a 

credit card, visit a Web site, or order products by mail, telephone, or the Internet, their names 

enter some company’s already bulging database. Using sophisticated computer technologies, 

direct marketers can use these databases to “microtarget” their selling efforts. Online privacy 

causes special concerns. Most online marketers have become skilled at collecting and analyzing 

detailed consumer information. 

Some consumers and policy makers worry that the ready availability of information may 

leave consumers open to abuse if companies make unauthorized use of the information in 

marketing their products or exchanging databases with other companies. For example, they 

ask, should AT&T be allowed to sell marketers the names of customers who frequently call the 

800 numbers of catalog companies? Should a company such as American Express be allowed 

to make data on its millions of cardholders worldwide available to merchants who accept 

AmEx cards? Is it right for credit bureaus to compile and sell lists of people who have recently 

applied for credit cards—people who are considered prime direct-marketing targets because 

of their spending behavior? Or is it right for states to sell the names and addresses of driver’s 

license holders, along with height, weight, and gender information, allowing apparel retailers 

to target tall or overweight people with special clothing offers? 

In their drives to build databases, companies sometimes get carried away. For example, 

Microsoft caused substantial privacy concerns when one version of its Windows software 

used a “Registration Wizard” that snooped into users’ computers. When users went online to 

register, without their knowledge, Microsoft “read” the configurations of their PCs to learn 

about the major software products they were running. Users protested loudly and Microsoft 

abandoned the practice. 

These days, it’s not only the large companies that can access such private information. 

The explosion of information technology has put these capabilities into the hands almost any 

business. For example, one bar owner discovered the power of information technology after 

he acquired a simple, inexpensive device to check IDs.


About 10,000 people a week go to The 

Rack, a bar in Boston. . . . One by one, 

they hand over their driver’s licenses to 

a doorman, who swipes them through a 

sleek black machine. If a license is 

valid and its holder is over 21, a red 

light blinks and the patron is waved 

through. But most of the customers are 

not aware that it also pulls up the 

name, address, birth date, and other 

personal details from a data strip on the 

back of the license. Even height, eye 

color, and sometimes Social Security 

number are registered. “You swipe the 

license, and all of a sudden someone’s 

whole life as we know it pops up in 

front of you,” said Paul Barclay, the 

bar’s owner. “It’s almost voyeuristic.” 

Mr. Barclay soon found that he could 

build a database of personal information, 

providing an intimate perspective 

on his clientele that can be useful in 

marketing. Now, for any given night or hour, he can break down his clientele by sex, 

age, zip code, or other characteristics. If he wanted to, he could find out how many 

blond women named Karen over 5 feet 2 inches came in over a weekend, or how 

many of his customers have the middle initial M. More practically, he can build 

mailing lists based on all that data—and keep track of who comes back. 65 

■ Privacy: The explosion of information technology has put sometimes frightening 

capabilities into the hands of almost any business. One bar owner discovered the power 

of information technology after he acquired a simple, inexpensive device to check IDs. 

A Need for Action 

All of this calls for strong actions by marketers to curb privacy abuses before legislators step 

in to do it for them. For example, in response to online privacy and security concerns, the federal 

government has considered numerous legislative actions to regulate how Web operators 

obtain and use consumer information. State governments are also stepping in. In 2003, 

California enacted the California Online Privacy Protection Act (OPPA), under which any 

online business that collects personally identifiable information from California residents 

must take steps such as posting its privacy policy and notifying consumers about what data 

will be gathered and how it will be used. 66 

Of special concern are the privacy rights of children. In 1998, the Federal Trade 

Commission surveyed 212 Web sites directed toward children. It found that 89 percent of the 

sites collected personal information from children. However, 46 percent of them did not 

include any disclosure of their collection and use of such information. As a result, Congress 

passed the Children’s Online Privacy Protection Act (COPPA), which requires Web site operators 

targeting children to post privacy policies on their sites. They must also notify parents 

about the information they’re gathering and obtain parental consent before collecting personal 

information from children under the age of 13. Under this act, Interstate Bakeries was 

recently required to rework its Planet Twinkie Web site after the Children’s Advertising 

Review Unit found that the site allowed children under 13 to submit their full name and 

phone number without parental consent. 67 

Many companies have responded to consumer privacy and security concerns with 

actions of their own. Still others are taking an industrywide approach. For example, TRUSTe, 

a nonprofit self-regulatory organization, works with many large corporate sponsors, including 

Microsoft, AT&T, and Intuit, to audit companies’ privacy and security measures and help consumers 

navigate the Web safely. According to the company’s Web site, “TRUSTe believes that 

an environment of mutual trust and openness will help make and keep the Internet a free, 

comfortable, and richly diverse community for everyone.” To reassure consumers, the company 

lends it “trustmark” stamp of approval to Web sites that meet its privacy and security 

standards. 68 

The direct-marketing industry as a whole is also addressing public policy issues. For 

example, in an effort to build consumer confidence in shopping direct, the Direct Marketing 

Association (DMA)—the largest association for businesses practicing direct, database, and 

interactive marketing, with more than 4,800 member companies—launched a “Privacy


Promise to American Consumers.” The Privacy Promise requires that all DMA members 

adhere to a carefully developed set of consumer privacy rules. Members must agree to notify 

customers when any personal information is rented, sold, or exchanged with others. They 

must also honor consumer requests to “opt out” of receiving further solicitations or having 

their contact information transferred to other marketers. Finally, they must abide by the 

DMA’s Preference Service by removing the names of consumers who wish not to receive mail, 

telephone, or e-mail offers. 69 

Direct marketers know that, left untended, such problems will lead to increasingly negative 

consumer attitudes, lower response rates, and calls for more restrictive state and federal legislation. 

“Privacy and customer permission have become the cornerstones of customer trust, [and] 

trust has become the cornerstone to a continuing relationship,” says one expert. Companies 

must “become the custodians of customer trust and protect the privacy of their customers.” 70 

Most direct marketers want the same things that consumers want: honest and welldesigned 

marketing offers targeted only toward consumers who will appreciate and respond 

to them. Direct marketing is just too expensive to waste on consumers who don’t want it.

Value-based pricing 

Setting prices based on 

buyers’ perceptions of value 

rather than on the seller’s 

cost. 

FIGURE 10.1 

Considerations in setting 

price 

Factors to Consider When Setting Prices 

The price the company charges will fall somewhere between one that is too high to produce 

any demand and one that is too low to produce a profit. Figure 10.1 summarizes the major 

considerations in setting price. Customer perceptions of the product’s value set the ceiling for 

prices. If customers perceive that the price is greater than the product’s value, they will not 

buy the product. Product costs set the floor for prices. If the company prices the product 

below its costs, company profits will suffer. In setting its price between these two extremes, 

the company must consider a number of other internal and external factors, including its 

overall marketing strategy and mix, the nature of the market and demand, and competitors’ 

strategies and prices. 

In the end, the customer will decide whether a product’s price is right. Pricing decisions, 

like other marketing mix decisions, must start with customer value. When customers buy a 

product, they exchange something of value (the price) in order to get something of value (the 

benefits of having or using the product). Effective, customer-oriented pricing involves understanding 

how much value consumers place on the benefits they receive from the product and 

setting a price that captures this value. 

Value-Based Pricing 

Good pricing begins with a complete understanding of the value that a product or service creates 

for customers. Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, 

as the key to pricing. Value-based pricing means that the marketer cannot design a product 

and marketing program and then set the price. Price is considered along with the other marketing 

mix variables before the marketing program is set. 

Figure 10.2 compares value-based pricing with cost-based pricing. Cost-based pricing is 

product driven. The company designs what it considers to be a good product, adds up the 

costs of making the product, and sets a price that covers costs plus a target profit. Marketing 

must then convince buyers that the product’s value at that price justifies its purchase. If the 

price turns out to be too high, the company must settle for lower markups or lower sales, both 

resulting in disappointing profits. 

Value-based pricing reverses this process. The company sets its target price based 

on customer perceptions of the product value. The targeted value and price then drive 

Customer 

perceptions 

of value 

Price ceiling 

No demand above 

this price 

Other internal and external 

considerations 

Marketing strategy, objectives, 

and mix 

Nature of the market and demand 

Competitors’ strategies and prices 

Product 

costs 

Price floor 

No profits below 

this price


FIGURE 10.2 

Value-based pricing versus 

cost-based pricing 

Source: Thomas T. Nagle and 

Reed K. Holden, The Strategy 

and Tactics of Pricing, 3rd ed. 

(Upper Saddle River, NJ: 

Prentice Hall, 2002), p. 4. 

Reproduced by permission of 

Pearson Education, Inc., Upper 

Saddle River, New Jersey. 

Product 

Cost 

Cost-based pricing 

Price 


Customers Value 

Price 

Value 

Cost 

Customers 

Product 

decisions about product design and what costs can be incurred. As a result, pricing 

begins with analyzing consumer needs and value perceptions, and price is set to match 

consumers’ perceived value. 

It’s important to remember that “good value” is not the same as “low price.” For example, 

prices for a Hermes Birkin Bag start at $6,000—a less expensive handbag might carry as much, 

but some consumers place great value on the intangibles they receive from a one-of-a kind 

handmade bag that has a year-long waiting list. Similarly, some car buyers consider the luxurious 

Bentley Continental GT automobile a real value, even at an eye-popping price of 

$150,000: 

■ Value-based pricing: “Good value” is not the same as “low price.” Some car 

buyers consider the luxurious Bentley Continental GT automobile a real value, 

even at an eye-popping price of $150,000. 

Stay with me here, because I’m about to 

[tell you why] a certain automobile costing 

$150,000 is not actually expensive, but is 

in fact a tremendous value. Every Bentley 

GT is built by hand, an Old World bit of 

automaking requiring 160 hours per vehicle. 

Craftsmen spend 18 hours simply 

stitching the perfectly joined leather of the 

GT’s steering wheel, almost as long as it 

takes to assemble an entire VW Golf. The 

results are impressive: Dash and doors are 

mirrored with walnut veneer, floor pedals 

are carved from aluminum, window and 

seat toggles are cut from actual metal 

rather than plastic, and every air vent is 

perfectly chromed. . . . The sum of all this 

is a fitted cabin that approximates that of a 

$300,000 vehicle, matched to an engine 

the equal of a $200,000 automobile, within 

a car that has brilliantly incorporated . . . 

technological sophistication. As I said, the 

GT is a bargain. [Just ask anyone on the 

lengthy waiting list.] The waiting time to 

bring home your very own GT is currently 

half a year. 6 

A company using value-based pricing must find 

out what value buyers assign to different competitive 

offers. However, companies often find it hard to 

measure the value customers will attach to its product. 

For example, calculating the cost of ingredients 

in a meal at a fancy restaurant is relatively easy. But 

assigning a value to other satisfactions such as taste, 

environment, relaxation, conversation, and status is 

very hard. And these values will vary both for different 

consumers and different situations. 

Still, consumers will use these perceived values 

to evaluate a product’s price, so the company must

Good-value pricing 

Offering just the right 

combination of quality and 

good service at a fair price. 

Chapter 10 Pricing Products: Understanding and Capturing Customer Value 287 

work to measure them. Sometimes, companies ask consumers how much they would pay for 

a basic product and for each benefit added to the offer. Or a company might conduct experiments 

to test the perceived value of different product offers. According to an old Russian 

proverb, there are two fools in every market—one who asks too much and one who asks too 

little. If the seller charges more than the buyers’ perceived value, the company’s sales will suffer. 

If the seller charges less, its products sell very well. But they produce less revenue than 

they would if they were priced at the level of perceived value. 

We now examine two types of value-based pricing: good-value pricing and value-added 

pricing. 

Good-Value Pricing 

During the past decade, marketers have noted a fundamental shift in consumer attitudes 

toward price and quality. Many companies have changed their pricing approaches to bring 

them into line with changing economic conditions and consumer price perceptions. More 

and more, marketers have adopted good-value pricing strategies—offering just the right combination 

of quality and good service at a fair price. 

In many cases, this has involved introducing less-expensive versions of established, 

brand name products. Fast-food restaurants such as Taco Bell and McDonald’s offer “value 

menus.” Armani offers the less-expensive, more 

casual Armani Exchange fashion line. Procter & 

Gamble created Charmin Basic—it is “slightly 

less ‘squeezably soft’ but it’s a lot less pricey than 

Procter & Gamble’s other toilet paper.” It’s “Soft. 

Strong. Sensible.” 7 In other cases, good-value 

pricing has involved redesigning existing brands 

to offer more quality for a given price or the same 

quality for less. 

An important type of good-value pricing at 

the retail level is everyday low pricing (EDLP). 

EDLP involves charging a constant, everyday 

low price with few or no temporary price discounts. 

In contrast, high-low pricing involves 

charging higher prices on an everyday basis but 

running frequent promotions to lower prices 

temporarily on selected items. In recent years, 

high-low pricing has given way to EDLP in retail 

settings ranging from Saturn car dealerships to 

Giant Eagle supermarkets to furniture store 

Room & Board. 

The king of EDLP is Wal-Mart, which practically 

defined the concept. Except for a few sale 

items every month, Wal-Mart promises everyday 

low prices on everything it sells. In contrast, 

Kmart’s recent attempts to match Wal-Mart’s EDLP strategy failed. To offer everyday low 

prices, a company must first have everyday low costs. However, because Kmart’s costs are 

much higher than Wal-Mart’s, it could not make money at the lower prices and quickly abandoned 

the attempt. 8 

■ Good-value pricing: Procter & Gamble’s Charmin Basic is still “squeezably soft” 

but it’s a lot less pricey than P&G’s other toilet paper. It’s “the quality toilet 

tissue at the price you’ll love.” 

Value-added pricing 

Attaching value-added 

features and services to 

differentiate a company’s 

offers and to support 

charging higher prices. 

Value-Added Pricing 

In many business-to-business marketing situations, the challenge is to build the company’s 

pricing power—its power to escape price competition and to justify higher prices and margins 

without losing market share. To retain pricing power, a firm must retain or build the value of its 

market offering. This is especially true for suppliers of commodity products, which are characterized 

by little differentiation and intense price competition. If companies “rely on price to 

capture and retain business, they reduce whatever they’re selling to a commodity,” says an analyst. 

“Once that happens, there is no customer loyalty.” 9 

To increase their pricing power, many companies adopt value-added pricing strategies. Rather 

than cutting prices to match competitors, they attach value-added features and services to differentiate 

their offers and thus support higher prices (see Real Marketing 10.1). “Even in today’s economic 

environment, it’s not about price,” says a pricing expert. “It’s about keeping customers loyal 

by providing service they can’t find anywhere else.” 10

In the past few years, a new type of social interaction has exploded onto the scene— 

online social networking—carried out over Internet media ranging from blogs to social networking 

sites such as MySpace.com and Facebook.com. This new form of high-tech buzz has 

big implications for marketers. 

Personal connections—forged through words, pictures, video, and audio posted just 

for the [heck] of it—are the life of the new Web, bringing together the estimated 

60 million bloggers, [an unbelievable] 72 million MySpace.com users, and millions 

more on single-use social networks where people share one category of stuff, like 

Flickr (photos), Del.icio.us (links), Digg (news stories), Wikipedia (encyclopedia articles), 

and YouTube (video). . . . It’s hard to overstate the coming impact of these new 

network technologies on business: They hatch trends and build immense waves of 

interest in specific products. They serve [up] giant, targeted audiences to advertisers. 

They edge out old media with the loving labor of amateurs. They effortlessly provide 

hyperdetailed data to marketers. If your customers are satisfied, networks can help build 

fanatical loyalty; if not, they’ll amplify every complaint until you do something about it. 

[The new social networking technologies] provide an authentic, peer-to-peer channel of 

communication that is far more credible than any corporate flackery. 16 

Marketers are working to harness the power of these new social networks to promote 

their products and build closer customer relationships. For example, when Volkswagen set 

up a MySpace.com site for Helga, the German-accented, dominatrix-type blonde who appears 

in its controversial Volkswagen GTI ads, tens of thousands of fans signed up as “friends.” 17 

And companies regularly post ads or custom videos on video-sharing sites such as YouTube. 

When Adidas recently reintroduced its adicolor shoe, a customizable white-on-white 

sneaker with a set of seven color markers, it signed on seven top creative directors to 

develop innovative videos designed especially for downloading to iPods and other 

■ Social networking: Adidas harnessed the power of social networks to reintroduce its customizable adicolor 

shoe. It developed innovative downloadable videos that celebrate color and personal expression—here in 

pink—and then released them through e-mail and social networking sites like YouTube.

handhelds. The directors were given complete creative control to interpret their 

assigned color as they saw fit. “The directors that we chose we feel have a good deal 

of underground street cred,” says an Adidas marketing executive. The project was 

not tied specifically to the product. Rather, the directors were asked to “celebrate 

color, customization, and personal expression.” The diverse set of short films was 

then released, one film a week, via e-mail and sites such as YouTube. The films drew 

more than 2.1 million viewers within three weeks, 20 million within the first two 

months, and the numbers were growing exponentially with each new release. 18


9.1 

You will never meet Catherine, Anna, Maria, or Monica. 

But the future success of Swedish home appliances 

maker Electrolux depends on what these four women think. 

Catherine, for instance, a type A career woman who is a perfectionist 

at home, loves the idea of simply sliding her laundry basket into a 

washing machine, instead of having to lift the clothes from the basket 

and into the washer. That product idea has been moved onto the fast 

track for consideration. 

So, just who are Catherine and the other women? Well, they don’t 

actually exist. They are composites based on in-depth interviews with 

some 160,000 consumers from around the globe. To divine the 

needs of these mythical customers, 53 Electrolux employees—in 

teams that included designers, engineers, and marketers hailing 

from various divisions—gathered in Stockholm last November for a 

weeklong brainstorming session. The Catherine team began by ripping 

photographs out of a pile of magazines and sticking them onto 

poster boards. Next to a picture of a woman wearing a sharply tailored 

suit, they scribbled some of Catherine’s attributes: driven, busy, 

and a bit overwhelmed. 

With the help of these characters, Electrolux product developers 

are searching for the insights they’ll need to dream up the next batch 

of hot products. It’s a new way of doing things for Electrolux, but then 

again, a lot is new at the company. When Chief Executive Hans 

Straberg took the helm in 2002, Electrolux—which sells products 

under the Electrolux, Eureka, and Frigidaire brands—was the world’s 

number-two home appliances maker behind Whirlpool. The company 

faced spiraling costs, and its middle-market products were 

gradually losing out to cheaper goods from Asia and Eastern Europe. 

Competition in the United States, where Electrolux gets 40 percent of 

its sales, was ferocious. The company’s stock was treading water. 

Straberg had to do something radical, especially in the area of 

new-product innovation. So he began breaking down barriers 

between departments and forcing his designers, engineers, and mar- 

Chapter 9 New-Product Development and Product Life-Cycle Strategies 265 

Electrolux: Cleaning Up with Customer-Centered, 

Team-Based New-Product Development 

keters to work together to come up with new products. He also introduced 

an intense focus on the customer. He set out to become “the 

leader in our industry in terms of systematic development of new 

products based on consumer insight.” 

At the Stockholm brainstorming session, for example, group 

leader Kim Scott urges everyone “to think of yourselves as 

Catherine.” The room buzzes with discussion. Ideas are refined, 

sketches drawn up. The group settles on three concepts: Breeze, a 

clothes steamer that also removes stains; an Ironing Center, similar to 

a pants press but for shirts; and Ease, the washing machine that 

holds a laundry basket inside its drum. 

Half the group races off to the machine shop to turn out a prototype 

for Breeze, while the rest stay upstairs to bang out a marketing plan. 

Over the next hour, designer Lennart Johansson carves and sandpapers 

a block of peach-colored polyurethane until a contraption that resembles 

a cross between an electric screwdriver and a handheld vacuum 

begins to emerge. The designers in the group want the Breeze to be 

smaller, but engineer Giuseppe Frucco points out that would leave too 

little space for a charging station for the 1,500-watt unit. 

For company veterans such as Frucco, who works at Electrolux’s 

fabric care research and development center in Porcia, Italy, this 

dynamic groupthink is a refreshing change: “We never used to create 

new products together,” he says. “The designers would come up with 

something and then tell us to build it.” The new way saves time and 

money by avoiding the technical glitches that crop up as a new 

design moves from the drafting table to the factory floor. The ultimate 

goal is to come up with new products that consumers will gladly pay 

a premium for: Gadgets with drop-dead good looks and clever features 

that ordinary people can understand without having to pore 

through a thick users’ manual. “Consumers are prepared to pay for 

good design and good performance,” says CEO Straberg. 

Few companies have pulled off the range of hot new offerings that 

Electrolux has. One clear hit is a cordless stick and hand vacuum, 

Customer-centered new-product development: Electrolux’s new-product team starts by watching and talking 

with consumers to understand their problems. Here, they build a bulletin board packed with pictures and postits 

detailing consumers struggling with household cleaning chores and possible product solutions. Then the 

team moves to the lab to create products that solve customer problems. “We were thinking of you when we 

developed this product,” says Electrolux. 

(continues)


(continued) 

called Pronto in the United States. Available in an array of metallic hues 

with a rounded, ergonomic design, this is the Cinderella of vacuums. 

Too attractive to be locked up in the broom closet, it calls out to be displayed 

in your kitchen. In Europe, it now commands 50 percent of the 

market for stick vacs, a coup for a product with fewer than two years on 

the market. The Pronto is cleaning up in the United States, too. Stacy 

Silk, a buyer at retail chain Best Buy, says it is one of her hottest sellers, 

even though it retails for around $100, double the price of comparable 

models. A recent check at Best Buy’s online site shows that the Pronto 

is currently out of stock. “The biggest thing is the aesthetics,” Silk says. 

“That gets people to walk over and look.” 

Electrolux is crafting such new products even while moving away 

from many traditional customer research tools. The company relies 

less heavily on focus groups and now prefers to interview people in 

their homes where they can be videotaped pushing a vacuum or 

shoving laundry into the washer. “Consumers think they know what 

they want, but they often have trouble articulating it,” says 

Electrolux’s senior vice-president for global design. “But when we 

watch them, we can ask, ‘Why do you do that?’ We can change the 

product and solve their problems.” 

This customer-centered, team-based new-product development 

approach is producing results. Under the new approach, newproduct 

launches have almost doubled in quantity, and the proportion 

of new-product launches that result in outsized unit sales is now 

running at 50 percent of all introductions, up from around 25 percent 

previously. As a result, Electrolux’s sales, profits, and share price are 

all up sharply. 

It all boils down to understanding consumers and giving them 

what they need and want. According to a recent Electrolux annual 

report: 

“Thinking of you” sums up our product offering. That is how 

we create value for our customers—and thereby for our shareholders. 

All product development and marketing starts with 

understanding consumer needs, expectations, dreams, and 

motivation. That’s why we contact tens of thousands of consumers 

throughout the world every year.... The first steps in 

product development are to ask questions, observe, discuss, 

and analyze. So we can actually say, “We were thinking of you 

when we developed this product.” 

Thanks to such thinking, Electrolux has now grown to become the 

world’s biggest household appliances company. Catherine and the 

other women would be pleased. 

Source: Portions adapted from Ariene Sains and Stanley Reed, 

“Electrolux Cleans Up,” BusinessWeek, February 27, 2006, pp. 42–43; 

with quotes and extracts adapted from “Products Developed on the 

Basis of Consumer Insight,” Acceleration . . . Electrolux Annual Report, 

April 7, 2006, p. 7; accessed at www.electrolux.com/node60.aspx. 

Additional information from Caroline Perry, “Electrolux Doubles Spend 

with New Strategy,” Marketing Week, February 16, 2006, pp. 7–9.

Appendix 2 

Fixed costs 

Costs that do not vary with 

production or sales level. 

MARKETING BY THE NUMBERS 

Marketing decisions are coming under increasing scrutiny, and marketing managers must be 

accountable for the financial implications of their actions. This appendix provides a basic 

introduction to marketing financial analysis. Such analysis guides marketers in making sound 

marketing decisions and in assessing the outcomes of those decisions. 

The appendix is built around a hypothetical manufacturer of high-definition consumer 

electronics products—HDX-treme. This company is launching a new product, and we will 

discuss and analyze the various decisions HDX-treme’s marketing managers must make 

before and after launch. 

HDX-treme manufactures high-definition televisions for the consumer market. The company 

has concentrated on televisions but is now entering the accessories market. 

Specifically, the company is introducing a high-definition optical disc player (DVD) using 

the Blu-ray format. 

The appendix is organized into three sections. The first section deals with the pricing 

considerations and break-even and margin analysis assessments that guide the introduction 

of HDX-treme’s new-product launch. The second section begins with a discussion of estimating 

market potential and company sales. It then introduces the marketing budget, as illustrated 

through a pro forma profit-and-loss statement followed by the actual profit-and-loss 

statement. Next, the section discusses marketing performance measures, with a focus on helping 

marketing managers to better defend their decisions from a financial perspective. In the 

final section, we analyze the financial implications of various marketing tactics, such as 

increasing advertising expenditures, adding sales representatives to increase distribution, 

lowering price, or extending the product line. 

At the end of each section, quantitative exercises provide you with an opportunity to 

apply the concepts you learned in that section to contexts beyond HDX-treme. 

Pricing, Break-Even, and Margin Analysis 

Pricing Considerations 

Determining price is one of the most important marketing-mix decisions, and marketers 

have considerable leeway when setting prices. The limiting factors are demand and costs. 

Demand factors, such as buyer-perceived value, set the price ceiling. The company’s costs 

set the price floor. In between these two factors, marketers must consider competitors’ 

prices and other factors such as reseller requirements, government regulations, and company 

objectives. 

Current competing high-definition DVD products in this relatively new product category 

were introduced in 2006 and sell at retail prices between $500 and $1,200. HDX-treme plans 

to introduce its new product at a lower price in order to expand the market and to gain market 

share rapidly. We first consider HDX-treme’s pricing decision from a cost perspective. 

Then, we consider consumer value, the competitive environment, and reseller requirements. 

Determining Costs 

Recall from Chapter 10 that there are different types of costs. Fixed costs do not vary with production 

or sales level and include costs such as rent, interest, depreciation, and clerical and 

management salaries. Regardless of the level of output, the company must pay these costs. 

Whereas total fixed costs remain constant as output increases, the fixed cost per unit (or average 

fixed cost) will decrease as output increases because the total fixed costs are spread across 

A-11

A-12 Appendix 2 Marketing by the Numbers 

Variable costs 

Costs that vary directly with 

the level of production. 

Total costs 

The sum of the fixed and 

variable costs for any given 

level of production. 

Cost-plus pricing (or 

markup pricing) 

Adding a standard markup to 

the cost of the product. 

Relevant costs 

Costs that will occur in the 

future and that will vary 

across the alternatives being 

considered. 

Break-even price 

The price at which total 

revenue equals total cost and 

profit is zero. 

Return on investment (ROI) 

pricing (or target-return 

pricing) 

A cost-based pricing method 

that determines price based 

on a specified rate of return 

on investment. 

more units of output. Variable costs vary directly with the level of production and include 

costs related to the direct production of the product (such as costs of goods sold—COGS) and 

many of the marketing costs associated with selling it. Although these costs tend to be uniform 

for each unit produced, they are called variable because their total varies with the number 

of units produced. Total costs are the sum of the fixed and variable costs for any given 

level of production. 

HDX-treme has invested $10 million in refurbishing an existing facility to manufacture 

the new DVD product. Once production begins, the company estimates that it will incur fixed 

costs of $20 million per year. The variable cost to produce each DVD player is estimated to be 

$250 and is expected to remain at that level for the output capacity of the facility. 

Setting Price Based on Costs 

HDX-treme starts with the cost-based approach to pricing discussed in Chapter 10. Recall that 

the simplest method, cost-plus pricing (or markup pricing), simply adds a standard markup 

to the cost of the product. To use this method, however, HDX-treme must specify an expected 

unit sales so that total unit costs can be determined. Unit variable costs will remain constant 

regardless of the output, but average unit fixed costs will decrease as output increases. 

To illustrate this method, suppose HDX-treme has fixed costs of $20 million, variable 

costs of $250 per unit, and expects unit sales of 1 million units. Thus, the cost per DVD player 

is given by: 

Unit cost � variable cost � fixed costs � $250 � $20,000,000 � $270 

unit sales 1,000,000 

Note that we do not include the initial investment of $10 million in the total fixed cost 

figure. It is not considered a fixed cost because it is not a relevant cost. Relevant costs are 

those that will occur in the future and that will vary across the alternatives being considered. 

HDX-treme’s investment to refurbish the manufacturing facility was a one-time cost that will 

not reoccur in the future. Such past costs are sunk costs and should not be considered in 

future analyses. 

Also notice that if HDX-treme sells its DVD player for $270, the price is equal to the total 

cost per unit. This is the break even price—the price at which unit revenue (price) equals unit 

cost and profit is zero. 

Suppose HDX-treme does not want to merely break even but rather wants to earn a 25% 

markup on sales. HDX-treme’s markup price is: 1 

unit cost 

Markup price � 

� $270 � $360 

(1 � desired return on sales) 1 � .25 

This is the price that HDX-treme would sell the DVD player to resellers such as wholesalers or 

retailers to earn a 25% profit on sales. 

Another approach HDX-treme could use is called return on investment (ROI) pricing 

(or target-return pricing). In this case, the company would consider the initial $10 million 

investment, but only to determine the dollar profit goal. Suppose the company wants a 

30% return on its investment. The price necessary to satisfy this requirement can be determined 

by: 2 

ROI price � unit cost � ROI � investment � $270 � 0.3� $10,000,000 � $273 

unit sales 1,000,000 

That is, if HDX-treme sells its DVD players for $273 each, it will realize a 30% return on its 

initial investment of $10 million. 

In these pricing calculations, unit cost is a function of the expected sales, which were 

estimated to be 1 million units. But what if actual sales were lower? Then the unit cost would 

be higher because the fixed costs would be spread over fewer units, and the realized percentage 

markup on sales or ROI would be lower. Alternatively, if sales are higher than the estimated 

1 million units, unit cost would be lower than $270, so a lower price would produce 

the desired markup on sales or ROI. It’s important to note that these cost-based pricing methods 

are internally focused and do not consider demand, competitors’ prices, or reseller 

requirements. Because HDX-treme will be selling these DVD players to consumers through 

wholesalers and retailers offering competing brands, the company must consider markup 

pricing from this perspective.

Markup 

The difference between a 

company’s selling price for a 

product and its cost to 

manufacture or purchase it. 


Offering just the right 

combination of quality and 

good service at a fair price. 

Markup chain 

The sequence of markups 

used by firms at each level in 

a channel. 

Break-even analysis 

Analysis to determine the unit 

volume and dollar sales 

needed to be profitable given 

a particular price and cost 

structure. 

Setting Price Based on External Factors 

Appendix 2 Marketing by the Numbers A-13 

Whereas costs determine the price floor, HDX-treme also must consider external factors when 

setting price. HDX-treme does not have the final say concerning the final price to consumers— 

retailers do. So it must start with its suggested retail price and work back. In doing so, HDXtreme 

must consider the markups required by resellers that sell the product to consumers. 

In general, a dollar markup is the difference between a company’s selling price for a 

product and its cost to manufacture or purchase it. For a retailer, then, the markup is the difference 

between the price it charges consumers and the cost the retailer must pay for the product. 

Thus, for any level of reseller: 

Dollar markup � selling price � cost 

Markups are usually expressed as a percentage, and there are two different ways to compute 

markups—on cost or on selling price: 

dollar markup 

Markup percentage on cost � 

cost 

dollar markup 

Markup percentage on selling price � 

selling price 

To apply reseller margin analysis, HDX-treme must first set the suggested retail price and 

then work back to the price at which it must sell the DVD player to a wholesaler. Suppose 

retailers expect a 30% margin and wholesalers want a 20% margin based on their respective 

selling prices. And suppose that HDX-treme sets a manufacturer’s suggested retail price 

(MSRP) of $599.99 for its high-definition DVD player. 

Recall that HDX-treme wants to expand the market by pricing low and generating market 

share quickly. HDX-treme selected the $599.99 MSRP because it is much lower than most 

competitors’ prices, which can be as high as $1,200. And the company’s research shows that 

it is below the threshold at which more consumers are willing to purchase the product. By 

using buyers’ perceptions of value and not the seller’s cost to determine the MSRP, HDXtreme 

is using value-based pricing. For simplicity, we will use an MSRP of $600 in further 

analyses. 

To determine the price HDX-treme will charge wholesalers, we must first subtract the 

retailer’s margin from the retail price to determine the retailer’s cost ($600 � ($600 � 0.30) � 

$420). The retailer’s cost is the wholesaler’s price, so HDX-treme next subtracts the wholesaler’s 

margin ($420 � ($420 � 0.20) � $336). Thus, the markup chain representing the 

sequence of markups used by firms at each level in a channel for HDX-treme’s new product is: 

Suggested retail price: $600 

minus retail margin (30%): � $180 

Retailer’s cost/wholesaler’s price: $420 

minus wholesaler’s margin (20%): � $ 84 

Wholesaler’s cost/HDX-treme’s price: $336 

By deducting the markups for each level in the markup chain, HDX-treme arrives at a price for 

the DVD player to wholesalers of $336. 

Break-Even and Margin Analysis 

The previous analyses derived a value-based price of $336 for HDX-treme’s DVD player. 

Although this price is higher than the break-even price of $270 and covers costs, that price 

assumed a demand of 1 million units. But how many units and what level of dollar sales must 

HDX-treme achieve to break even at the $336 price? And what level of sales must be achieved 

to realize various profit goals? These questions can be answered through break-even and margin 

analysis. 

Determining Break-Even Unit Volume and Dollar Sales 

Based on an understanding of costs, consumer value, the competitive environment, and reseller 

requirements, HDX-treme has decided to set its price to wholesalers at $336. At that price, what 

sales level will be needed for HDX-treme to break even or make a profit? Break-even analysis 

determines the unit volume and dollar sales needed to be profitable given a particular price and


Unit contribution 

The amount that each unit 

contributes to covering fixed 

costs—the difference 

between price and variable 

costs. 

Contribution margin 

The unit contribution divided 

by the selling price. 

cost structure. At the break-even point, total revenue equals total costs and profit is zero. Above 

this point, the company will make a profit; below it, the company will lose money. HDX-treme 

can calculate break-even volume using the following formula: 3 

fixed costs 

Break-even volume � 

price � unit variable cost 

The denominator (price � unit variable cost) is called unit contribution (sometimes 

called contribution margin). It represents the amount that each unit contributes to covering 

fixed costs. Break-even volume represents the level of output at which all (variable and fixed) 

costs are covered. In HDX-treme’s case, break-even unit volume is: 

fixed cost 

Break-even volume � 

� $20,000,000 � 232,558.1 units 

price � variable cost $336 � $250 

Thus, at the given cost and pricing structure, HDX-treme will break even at 232,559 units. 

To determine the break-even dollar sales, simply multiply unit break-even volume by the 

selling price: 

BE sales � BE vol � price � 232,559 units � $336 � $78,139,824 

Another way to calculate dollar break-even sales is to use the percentage contribution margin 

(hereafter referred to as contribution margin), which is the unit contribution divided by the 

selling price: 

Then, 

Contribution margin � price � variable cost � $336�$250 � 0.256 or 25.6% 

price $336 

fixed costs 

Break-even sales � 

� $20,000,000 � $78,125,000 

contribution margin 0.256 

Note that the difference between the two break-even sales calculations is due to rounding. 

Such break-even analysis helps HDX-treme by showing the unit volume needed to cover 

costs. If production capacity cannot attain this level of output, then the company should not 

launch this product. However, the unit break-even volume is well within HDX-treme’s capacity. 

Of course, the bigger question concerns whether HDX-treme can sell this volume at the 

$336 price. We’ll address that issue a little later. 

Understanding contribution margin is useful in other types of analyses as well, particularly 

if unit prices and unit variable costs are unknown or if a company (say, a retailer) sells 

many products at different prices and knows the percentage of total sales variable costs represent. 

Whereas unit contribution is the difference between unit price and unit variable costs, 

total contribution is the difference between total sales and total variable costs. The overall 

contribution margin can be calculated by: 

total sales � total variable costs 

Contribution margin � 

total sales 

Regardless of the actual level of sales, if the company knows what percentage of sales 

is represented by variable costs, it can calculate contribution margin. For example, HDXtreme’s 

unit variable cost is $250, or 74% of the selling price ($250 ÷ $336 � 0.74). That 

means for every $1 of sales revenue for HDX-treme, $0.74 represents variable costs, and the 

difference ($0.26) represents contribution to fixed costs. But even if the company doesn’t 

know its unit price and unit variable cost, it can calculate the contribution margin from 

total sales and total variable costs or from knowledge of the total cost structure. It can set 

total sales equal to 100% regardless of the actual absolute amount and determine the contribution 

margin: 

Contribution margin � 100% � 74% � 1 � 0.74 � 1 � 0.74 � 0.26 or 26% 

100% 1 

Note that this matches the percentage calculated from the unit price and unit variable cost 

information. This alternative calculation will be very useful later when analyzing various 

marketing decisions.

Determining “Breakeven” for Profit Goals 


Although it is useful to know the break-even point, most companies are more interested in 

making a profit. Assume HDX-treme would like to realize a $5 million profit in the first year. 

How many DVD players must it sell at the $336 price to cover fixed costs and produce this 

profit? To determine this, HDX-treme can simply add the profit figure to fixed costs and again 

divide by the unit contribution to determine unit sales: 4 

Unit volume � fixed cost � profit goal � $20,000,000 � $5,000,000 � 290,697.7 units 


Thus, to earn a $5 million profit, HDX-treme must sell 290,698 units. Multiply by price to 

determine dollar sales needed to achieve a $5 million profit: 

Or use the contribution margin: 

Dollar sales � 290,698 units � $336 � $97,674,528 

Sales � fixed cost � profit goal � $20,000,000 � $5,000,000 � $97,656,250 


Again, note that the difference between the two break-even sales calculations is due to 

rounding. 

As we saw previously, a profit goal can also be stated as a return on investment goal. For 

example, recall that HDX-treme wants a 30% return on its $10 million investment. Thus, its 

absolute profit goal is $3 million ($10,000,000 � 0.30). This profit goal is treated the same 

way as in the previous example: 5 

Or 

Unit volume � fixed cost � profit goal � $20,000,000 � $3,000,000 � 267,442 units 


Dollar sales � 267,442 units � $336 � $89,860,512 

Dollar sales � fixed cost � profit goal � $20,000,000 � $3,000,000 � $89,843,750 


Finally, HDX-treme can express its profit goal as a percentage of sales, which we also saw 

in previous pricing analyses. Assume HDX-treme desires a 25% return on sales. To determine 

the unit and sales volume necessary to achieve this goal, the calculation is a little different 

from the previous two examples. In this case, we incorporate the profit goal into the unit contribution 

as an additional variable cost. Look at it this way: If 25% of each sale must go toward 

profits, that leaves only 75% of the selling price to cover fixed costs. Thus, the equation 

becomes: 6 

So, 

fixed cost fixed cost 

Unit volume � 

price � variable cost � (0.25 � price) or (0.75 � price)�variable cost 

Unit volume � 

$20,000,000 

� 10,000,000 units 

(0.75 � $336) � $250 

Dollar sales necessary � 10,000,000 units � $336 � $3,360,000,000 

Thus, HDX-treme would need more than $3 billion in sales to realize a 25% return on 

sales given its current price and cost structure! Could it possibly achieve this level of sales? 

The major point is this: Although break-even analysis can be useful in determining the level 

of sales needed to cover costs or to achieve a stated profit goal, it does not tell the company 

whether it is possible to achieve that level of sales at the specified price. To address this issue, 

HDX-treme needs to estimate demand for this product. 

Before moving on, however, let’s stop here and practice applying the concepts covered so 

far. Now that you have seen pricing and break-even concepts in action as they related to HDXtreme’s 

new DVD player, here are several exercises for you to apply what you have learned in 

other contexts.


Total market demand 

The total volume that would 

be bought by a defined 

consumer group in a defined 

geographic area in a defined 

time period in a defined 

marketing environment under 

a defined level and mix of 

industry marketing effort. 

Market potential 

The upper limit of market 

demand. 

Marketing by the Numbers Exercise Set One 

Now that you’ve studied pricing, break-even, and margin analysis as they relate to HDX-treme’s 

new-product launch, use the following exercises to apply these concepts in other contexts. 

1.1 Sanborn, a manufacturer of electric roof vents, realizes a cost of $55 for every unit it produces. 

Its total fixed costs equal $2 million. If the company manufactures 500,000 units, 

compute the following: 

a. unit cost 

b. markup price if the company desires a 10% return on sales 

c. ROI price if the company desires a 25% return on an investment of $1 million 

1.2 An interior decorator purchases items to sell in her store. She purchases a lamp for 

$125 and sells it for $225. Determine the following: 

a. dollar markup 

b. markup percentage on cost 

c. markup percentage on selling price 

1.3 A consumer purchases a toaster from a retailer for $60. The retailer’s markup is 20%, 

and the wholesaler’s markup is 15%, both based on selling price. For what price does 

the manufacturer sell the product to the wholesaler? 

1.4 A vacuum manufacturer has a unit cost of $50 and wishes to achieve a margin of 

30% based on selling price. If the manufacturer sells directly to a retailer who then 

adds a set margin of 40% based on selling price, determine the retail price charged 

to consumers. 

1.5 Advanced Electronics manufactures DVDs and sells them directly to retailers who typically 

sell them for $20. Retailers take a 40% margin based on the retail selling price. 

Advanced’s cost information is as follows: 

DVD package and disc $2.50/DVD 

Royalties $2.25/DVD 

Advertising and promotion $500,000 

Overhead $200,000 

Calculate the following: 

a. contribution per unit and contribution margin 

b. break-even volume in DVD units and dollars 

c. volume in DVD units and dollar sales necessary if Advanced’s profit goal is 20% 

profit on sales 

d. net profit if 5 million DVDs are sold 

Demand Estimates, the Marketing Budget, 

and Marketing Performance Measures 

Market Potential and Sales Estimates 

HDX-treme has now calculated the sales needed to break even and to attain various profit 

goals on its DVD player. However, the company needs more information regarding demand in 

order to assess the feasibility of attaining the needed sales levels. This information is also 

needed for production and other decisions. For example, production schedules need to be 

developed and marketing tactics need to be planned. 

The total market demand for a product or service is the total volume that would be 

bought by a defined consumer group in a defined geographic area in a defined time period in 

a defined marketing environment under a defined level and mix of industry marketing effort. 

Total market demand is not a fixed number but a function of the stated conditions. For example, 

next year’s total market demand for high-definition DVD players will depend on how 

much Samsung, Sony, Pioneer, Toshiba, and other producers spend on marketing their 

brands. It also depends on many environmental factors, such as government regulations, economic 

conditions, and the level of consumer confidence in a given market. The upper limit of 

market demand is called market potential. 

One general but practical method that HDX-treme might use for estimating total market 

demand uses three variables: (1) the number of prospective buyers, (2) the quantity purchased

Chain ratio method 

Estimating market demand by 

multiplying a base number by 

a chain of adjusting 

percentages. 


by an average buyer per year, and (3) the price of an average unit. Using these numbers, HDXtreme 

can estimate total market demand as follows: 

where 

Q � n � q � p 

Q � total market demand 

n � number of buyers in the market 

q � quantity purchased by an average buyer per year 

p � price of an average unit 

A variation of this approach is the chain ratio method. This method involves multiplying 

a base number by a chain of adjusting percentages. For example, HDX-treme’s high-definition 

DVD player is designed to play high-definition DVD movies on high-definition televisions. 

Thus, consumers who do not own a high-definition television will not likely purchase this 

player. Additionally, not all HDTV households will be willing and able to purchase the new 

high-definition DVD player. HDX-treme can estimate U.S. demand using a chain of calculations 

like the following: 

Total number of U.S. households 

� The percentage of U.S. households owning a high-definition television 

� The percentage of these households willing and able to buy a high-definition 

DVD player 

AC Nielsen, the television ratings company, estimates that there are more than 110 million 

TV households in the United States. 7 The Consumer Electronics Association estimates 

that 38% of TV households will own HDTVs by the end of 2006. 8 However, HDX-treme’s 

research indicates that only 44.5% of HDTV households possess the discretionary income 

needed and are willing to buy a high-definition DVD player. Then, the total number of households 

willing and able to purchase this product is: 

110 million households � 0.38 � 0.445 � 18.6 million households 

Because HDTVs are relatively new and expensive products, most households have only 

one of these televisions, and it’s usually the household’s primary television. 9 Thus, consumers 

who buy a high-definition DVD player will likely buy only one per household. 

Assuming the average retail price across all brands is $750 for this product, the estimate of 

total market demand is as follows: 

18.6 million households � 1 DVD player per household � $750 � $14 billion 

This simple chain of calculations gives HDX-treme only a rough estimate of potential 

demand. However, more detailed chains involving additional segments and other qualifying 

factors would yield more accurate and refined estimates. Still, these are only estimates of 

market potential. They rely heavily on assumptions regarding adjusting percentages, 

average quantity, and average price. Thus, HDX-treme must make certain that its assumptions 

are reasonable and defendable. As can be seen, the overall market potential in dollar 

sales can vary widely given the average price used. For this reason, HDX-treme will 

use unit sales potential to determine its sales estimate for next year. Market potential in 

terms of units is 18.6 million DVD players (18.6 million households � 1 DVD player per 

household). 

Assuming that HDX-treme wants to attain 2% market share (comparable to its share of 

the HDTV market) in the first year after launching this product, then it can forecast unit sales 

at 18.6 million units � 0.02 � 372,000 units. At a selling price of $336 per unit, this translates 

into sales of $124.99 million (372,000 units � $336 per unit). For simplicity, further analyses 

will use forecasted sales of $125 million. 

This unit volume estimate is well within HDX-treme’s production capacity and exceeds 

not only the break-even estimate (232,559 units) calculated earlier, but also the volume necessary 

to realize a $5 million profit (290,698 units) or a 30% return on investment (267,442 

units). However, this forecast falls well short of the volume necessary to realize a 25% return 

on sales (10 million units!) and may require that HDX-treme revise expectations. 

To assess expected profits, we must now look at the budgeted expenses for launching this 

product. To do this, we will construct a pro forma profit-and-loss statement.


Pro forma (or projected) 

profit-and-loss statement 

(or income statement or 

operating statement) 

A statement that shows 

projected revenues less 

budgeted expenses and 

estimates the projected net 

profit for an organization, 

product, or brand during a 

specific planning period, 

typically a year. 

TABLE A2.1 

Pro Forma Profit-and-Loss 

Statement for the 12-Month 

Period Ended December 31, 

2006 

The Profit-and-Loss Statement and Marketing Budget 

All marketing managers must account for the profit impact of their marketing strategies. A 

major tool for projecting such profit impact is a pro forma (or projected) profit-and-loss statement 

(also called an income statement or operating statement). A pro forma statement shows 

projected revenues less budgeted expenses and estimates the projected net profit for an organization, 

product, or brand during a specific planning period, typically a year. It includes 

direct product production costs, marketing expenses budgeted to attain a given sales forecast, 

and overhead expenses assigned to the organization or product. A profit-and-loss statement 

typically consists of several major components (see Table A2.1): 

■ Net sales—gross sales revenue minus returns and allowances (for example, trade, cash, 

quantity, and promotion allowances). HDX-treme’s net sales for 2006 are estimated to be 

$125 million, as determined in the previous analysis. 

■ Cost of goods sold (sometimes called cost of sales)—the actual cost of the merchandise sold 

by a manufacturer or reseller. It includes the cost of inventory, purchases, and other costs 

associated with making the goods. HDX-treme’s cost of goods sold is estimated to be 50% 

of net sales, or $62.5 million. 

■ Gross margin (or gross profit)—the difference between net sales and cost of goods sold. 

HDX-treme’s gross margin is estimated to be $62.5 million. 

■ Operating expenses—the expenses incurred while doing business. These include all other 

expenses beyond the cost of goods sold that are necessary to conduct business. Operating 

expenses can be presented in total or broken down in detail. Here, HDX-treme’s estimated 

operating expenses include marketing expenses and general and administrative expenses. 

Marketing expenses include sales expenses, promotion expenses, and distribution 

expenses. The new product will be sold though HDX-treme’s sales force, so the company 

budgets $5 million for sales salaries. However, because sales representatives earn a 10% 

commission on sales, HDX-treme must also add a variable component to sales expenses 

of $12.5 million (10% of $125 million net sales), for a total budgeted sales expense of 

$17.5 million. HDX-treme sets its advertising and promotion to launch this product at 

$10 million. However, the company also budgets 4% of sales, or $5 million, for cooperative 

advertising allowances to retailers who promote HDX-treme’s new product in their advertising. 

Thus, the total budgeted advertising and promotion expenses are $15 million 

($10 million for advertising plus $5 million in co-op allowances). Finally, HDX-treme budgets 

10% of net sales, or $12.5 million, for freight and delivery charges. In all, total marketing 

expenses are estimated to be $17.5 million � $15 million � $12.5 million � $45 million. 

General and administrative expenses are estimated at $5 million, broken down into 

$2 million for managerial salaries and expenses for the marketing function and $3 million 

of indirect overhead allocated to this product by the corporate accountants (such as depreciation, 

interest, maintenance, and insurance). Total expenses for the year, then, are estimated 

to be $50 million ($45 million marketing expenses � $5 million in general and 

administrative expenses). 

% of sales 

Net Sales $125,000,000 100% 

Cost of Goods Sold 62,500,000 50% 

Gross Margin $ 62,500,000 50% 

Marketing Expenses 

Sales expenses $17,500,000 

Promotion expenses 15,000,000 

Freight 12,500,000 45,000,000 36% 

General and Administrative Expenses 

Managerial salaries and expenses $2,000,000 

Indirect overhead 3,000,000 5,000,000 4% 

Net Profit Before Income Tax $12,500,000 10%

Profit-and-loss statement 

(or income statement or 

operating statement) 

A statement that shows actual 

revenues less expenses and 

net profit for an organization, 

product, or brand during a 

specific planning period, 

typically a year. 

Market share 

Company sales divided by 

market sales. 

TABLE A2.2 

Profit-and-Loss Statement for 

the 12-Month Period Ended 

December 31, 2006 


■ Net profit before taxes—profit earned after all costs are deducted. HDX-treme’s estimated 

net profit before taxes is $12.5 million. 

In all, as Table A2.1 shows, HDX-treme expects to earn a profit on its new DVD player of 

$12.5 million in 2006. Also note that the percentage of sales that each component of the 

profit-and-loss statement represents is given in the right-hand column. These percentages are 

determined by dividing the cost figure by net sales (that is, marketing expenses represent 36% 

of net sales determined by $45 million ÷ $125 million). As can be seen, HDX-treme projects a 

net profit return on sales of 10% in the first year after launching this product. 

Marketing Performance Measures 

Now let’s fast-forward a year. HDX-treme’s high-definition DVD player has been on the market 

for one year and management wants to assess its sales and profit performance. One way to 

assess this performance is to compute performance ratios derived from HDX-treme’s profitand-loss 

statement. 

Whereas the pro forma profit-and-loss statement shows projected financial performance, 

the statement given in Table A2.2 shows HDX-treme’s actual financial performance based on 

actual sales, cost of goods sold, and expenses during the past year. By comparing the profitand-loss 

statement from one period to the next, HDX-treme can gauge performance against 

goals, spot favorable or unfavorable trends, and take appropriate corrective action. 

The profit-and-loss statement shows that HDX-treme lost $1 million rather than making 

the $12.5 million profit projected in the pro forma statement. Why? One obvious reason is 

that net sales fell $25 million short of estimated sales. Lower sales translated into lower variable 

costs associated with marketing the product. However, both fixed costs and the cost of 

goods sold as a percentage of sales exceeded expectations. Hence, the product’s contribution 

margin was 21% rather than the estimated 26%. That is, variable costs represented 79% of 

sales (55% for cost of goods sold, 10% for sales commissions, 10% for freight, and 4% for coop 

allowances). Recall that contribution margin can be calculated by subtracting that fraction 

from one (1�0.79 � 0.21). Total fixed costs were $22 million, $2 million more than estimated. 

Thus, the sales that HDX-treme needed to break even given this cost structure can be calculated 

as: 

fixed costs 

Break-even sales � 

� $22,000,000 � $104,761,905 


If HDX-treme had achieved another $5 million in sales, it would have earned a profit. 

Although HDX-treme’s sales fell short of the forecasted sales, so did overall industry sales 

for this product. Overall industry sales were only $2.5 billion. That means that HDX-treme’s 

market share was 4% ($100 million ÷ $2.5 billion � 0.04 � 4%), which was higher than forecasted. 

Thus, HDX-treme attained a higher-than-expected market share but the overall market 

sales were not as high as estimated. 

% of sales 

Net Sales $100,000,000 100% 

Cost of Goods Sold 55,000,000 55% 

Gross Margin $ 45,000,000 45% 

Marketing Expenses 

Sales expenses $15,000,000 

Promotion expenses 14,000,000 

Freight 10,000,000 39,000,000 39% 

General and Administrative Expenses 

Managerial salaries and expenses $2,000,000 

Indirect overhead 5,000,000 7,000,000 7% 

Net Profit Before Income Tax ($1,000,000) (�1%)


Operating ratios 

The ratios of selected 

operating statement items to 

net sales. 

Gross margin percentage 

The percentage of net sales 

remaining after cost of goods 

sold—calculated by dividing 

gross margin by net sales. 

Net profit percentage 

The percentage of each sales 

dollar going to profit— 

calculated by dividing net 

profits by net sales. 

Operating expense 

percentage 

The portion of net sales going 

to operating expenses— 

calculated by dividing total 

expenses by net sales. 

Inventory turnover rate (or 

stockturn rate for resellers) 

The number of times an 

inventory turns over or is sold 

during a specified time period 

(often one year)—calculated 

based on costs, selling price, 

or units. 

Analytic Ratios 

The profit-and-loss statement provides the figures needed to compute some crucial operating 

ratios—the ratios of selected operating statement items to net sales. These ratios let marketers 

compare the firm’s performance in one year to that in previous years (or with industry standards 

and competitors’ performance in that year). The most commonly used operating ratios 

are the gross margin percentage, the net profit percentage, and the operating expense percentage. 

The inventory turnover rate and return on investment (ROI) are often used to measure 

managerial effectiveness and efficiency. 

The gross margin percentage indicates the percentage of net sales remaining after cost of 

goods sold that can contribute to operating expenses and net profit before taxes. The higher 

this ratio, the more a firm has left to cover expenses and generate profit. HDX-treme’s gross 

margin ratio was 45%: 

Gross margin percentage � gross margin � $45,000,000 � 0.45 = 45% 

net sales $100,000,000 

Note that this percentage is lower than estimated, and this ratio is seen easily in the percentage 

of sales column in Table A2.2. Stating items in the profit-and-loss statement as a percent 

of sales allows managers to quickly spot abnormal changes in costs over time. If there 

was previous history for this product and this ratio was declining, management should examine 

it more closely to determine why it has decreased (that is, because of a decrease in sales 

volume or price, an increase in costs, or a combination of these). In HDX-treme’s case, net 

sales were $25 million lower than estimated, and cost of goods sold was higher than estimated 

(55% rather than the estimated 50%). 

The net profit percentage shows the percentage of each sales dollar going to profit. It is 

calculated by dividing net profits by net sales: 

Net profit percentage � net profit � �$1,000,000 � �0.01 � �1.0% 

net sales $100,000,000 

This ratio is easily seen in the percent of sales column. HDX-treme’s DVD player generated 

negative profits in the first year, not a good situation given that before the product launch net 

profits before taxes were estimated at more than $12 million. Later in this appendix, we will 

discuss further analyses the marketing manager should conduct to defend the product. 

The operating expense percentage indicates the portion of net sales going to operating 

expenses. Operating expenses include marketing and other expenses not directly related to 

marketing the product, such as indirect overhead assigned to this product. It is calculated by: 

Operating expense percentage � total expenses � $46,000,000 � 0.46 � 46% 

net sales $100,000,000 

This ratio can also be quickly determined from the percent of sales column in the profit-andloss 

statement by adding the percentages for marketing expenses and general and administrative 

expenses (39% � 7%). Thus, 46 cents of every sales dollar went for operations. Although 

HDX-treme wants this ratio to be as low as possible, and 46% is not an alarming amount, it is 

of concern if it is increasing over time or if a loss is realized. 

Another useful ratio is the inventory turnover rate (also called stockturn rate for 

resellers). The inventory turnover rate is the number of times an inventory turns over or is 

sold during a specified time period (often one year). This rate tells how quickly a business is 

moving inventory through the organization. Higher rates indicate that lower investments in 

inventory are made, thus freeing up funds for other investments. It may be computed on a 

cost, selling price, or unit basis. The formula based on cost is: 

cost of goods sold 

Inventory turnover rate � 

average inventory at cost 

Assuming HDX-treme’s beginning and ending inventories were $30 million and $20 million, 

respectively, the inventory turnover rate is: 

$55,000,000 $55,000,000 

Inventory turnover rate � 

($30,000,000 � $20,000,000)/2 � � 2.2 

$25,000,000 

That is, HDX-treme’s inventory turned over 2.2 times in 2006. Normally, the higher the 

turnover rate, the higher the management efficiency and company profitability. However, this 

rate should be compared to industry averages, competitors’ rates, and past performance to

Return on investment (ROI) 

A measure of managerial 

effectiveness and efficiency— 

net profit before taxes divided 

by total investment. 

Net marketing contribution 

(NMC) 

A measure of marketing 

profitability that includes only 

components of profitability 

controlled by marketing. 

Marketing return on sales 

(or marketing ROS) 

The percent of net sales 

attributable to the net 

marketing contribution— 

calculated by dividing net 

marketing contribution by net 

sales. 


determine if HDX-treme is doing well. A competitor with similar sales but a higher inventory 

turnover rate will have fewer resources tied up in inventory, allowing it to invest in other 

areas of the business. 

Companies frequently use return on investment (ROI) to measure managerial effectiveness 

and efficiency. For HDX-treme, ROI is the ratio of net profits to total investment required 

to manufacture the new product. This investment includes capital investments in land, buildings, 

and equipment (here, the initial $10 million to refurbish the manufacturing facility) plus 

inventory costs (HDX-treme’s average inventory totaled $25 million), for a total of $35 million. 

Thus, HDX-treme’s ROI for the DVD player is: 

Return on investment � net profit before taxes � �$1,000,000 � �.0286 ��2.86% 

investment $35,000,000 

ROI is often used to compare alternatives, and a positive ROI is desired. The alternative with 

the highest ROI is preferred to other alternatives. HDX-treme needs to be concerned with the 

ROI realized. One obvious way HDX-treme can increase ROI is to increase net profit by reducing 

expenses. Another way is to reduce its investment, perhaps by investing less in inventory 

and turning it over more frequently. 

Marketing Profitability Metrics 

Given the above financial results, you may be thinking that HDX-treme should drop this new 

product. But what arguments can marketers make for keeping or dropping this product? The 

obvious arguments for dropping the product are that first-year sales were well below expected 

levels and the product lost money, resulting in a negative return on investment. 

So what would happen if HDX-treme did drop this product? Surprisingly, if the company 

drops the product, the profits for the total organization will decrease by $4 million! How can 

that be? Marketing managers need to look closely at the numbers in the profit-and-loss statement 

to determine the net marketing contribution for this product. In HDX-treme’s case, the net 

marketing contribution for the DVD player is $4 million, and if the company drops this product, 

that contribution will disappear as well. Let’s look more closely at this concept to illustrate how 

marketing managers can better assess and defend their marketing strategies and programs. 

NET MARKETING CONTRIBUTION Net marketing contribution (NMC), along with other marketing 

metrics derived from it, measures marketing profitability. It includes only components 

of profitability that are controlled by marketing. Whereas the previous calculation of net 

profit before taxes from the profit-and-loss statement includes operating expenses not under 

marketing’s control, NMC does not. Referring back to HDX-treme’s profit-and-loss statement 

given in Table A2.2, we can calculate net marketing contribution for the DVD player as: 

NMC � net sales � cost of goods sold � marketing expenses 

� $100 million � $55 million � $41 million � $4 million 

The marketing expenses include sales expenses ($15 million), promotion expenses ($14 million), 

freight expenses ($10 million), and the managerial salaries and expenses of the marketing 

function ($2 million), which total $41 million. 

Thus, the DVD player actually contributed $4 million to HDX-treme’s profits. It was the 

$5 million of indirect overhead allocated to this product that caused the negative profit. 

Further, the amount allocated was $2 million more than estimated in the pro forma profitand-loss 

statement. Indeed, if only the estimated amount had been allocated, the product 

would have earned a profit of $1 million rather than losing $1 million. If HDX-treme drops the 

DVD player product, the $5 million in fixed overhead expenses will not disappear—it will 

simply have to be allocated elsewhere. However, the $4 million in net marketing contribution 

will disappear. 

MARKETING RETURN ON SALES AND INVESTMENT To get an even deeper understanding of the 

profit impact of marketing strategy, we’ll now examine two measures of marketing efficiency— 

marketing return on sales (marketing ROS) and marketing return on investment (marketing 

ROI). 10 

Marketing return on sales (or marketing ROS) shows the percent of net sales attributable 

to the net marketing contribution. For our DVD player, ROS is: 

Marketing ROS � net marketing contribution � $4,000,000 � 0.04 � 4% 

net sales $100,000,000


Marketing return on 

investment (or marketing 

ROI) 

A measure of the marketing 

productivity of a marketing 

investment—calculated by 

dividing net marketing 

contribution by marketing 

expenses. 

Thus, out of every $100 of sales, the product returns $4 to HDX-treme’s bottom line. A high 

marketing ROS is desirable. But to assess whether this is a good level of performance, HDXtreme 

must compare this figure to previous marketing ROS levels for the product, the ROSs of 

other products in the company’s portfolio, and the ROSs of competing products. 

Marketing return on investment (or marketing ROI) measures the marketing productivity 

of a marketing investment. In HDX-treme’s case, the marketing investment is represented 

by $41 million of the total expenses. Thus, Marketing ROI is: 

Marketing ROI � net marketing contribution � $4,000,000 � 0.0976 � 9.76% 

net sales $41,000,000 

As with marketing ROS, a high value is desirable, but this figure should be compared with 

previous levels for the given product and with the marketing ROIs of competitors’ products. 

Note from this equation that marketing ROI could be greater than 100%. This can be 

achieved by attaining a higher net marketing contribution and/or a lower total marketing 

expense. 

In this section, we estimated market potential and sales, developed profit-and-loss statements, 

and examined financial measures of performance. In the next section, we discuss 

methods for analyzing the impact of various marketing tactics. However, before moving on to 

those analyses, here’s another set of quantitative exercises to help you apply what you’ve 

learned to other situations. 

Marketing by the Numbers Exercise Set Two 

2.1 Determine the market potential for a product that has 50 million prospective buyers 

who purchase an average of 3 per year and price averages $25. How many units must a 

company sell if it desires a 10% share of this market? 

2.2 Develop a profit-and-loss statement for the Westgate division of North Industries. This 

division manufactures light fixtures sold to consumers through home improvement 

and hardware stores. Cost of goods sold represents 40% of net sales. Marketing 

expenses include selling expenses, promotion expenses, and freight. Selling expenses 

include sales salaries totaling $3 million per year and sales commissions (5% of sales). 

The company spent $3 million on advertising last year, and freight costs were 10% of 

sales. Other costs include $2 million for managerial salaries and expenses for the marketing 

function and another $3 million for indirect overhead allocated to the division. 

a. Develop the profit-and-loss statement if net sales were $20 million last year. 

b. Develop the profit-and-loss statement if net sales were $40 million last year. 

c. Calculate Westgate’s break-even sales. 

2.3 Using the profit-and-loss statement you developed in question 2.2b, and assuming that 

Westgate’s beginning inventory was $11 million, ending inventory was $7 million, and 

total investment was $20 million including inventory, determine the following: 

a. gross margin percentage 

b. net profit percentage 

c. operating expense percentage 

d. inventory turnover rate 

e. return on investment (ROI) 

f. net marketing contribution 

g. marketing return on sales (marketing ROS) 

h. marketing return on investment (marketing ROI) 

i. Is the Westgate division doing well? Explain your answer. 

Financial Analysis of Marketing Tactics 

Although the first-year profit performance for HDX-treme’s DVD player was less than desired, 

management feels that this attractive market has excellent growth opportunities. Although 

the sales of HDX-treme’s DVD player were lower than initially projected, they were not unreasonable 

given the size of the current market. Thus, HDX-treme wants to explore new marketing 

tactics to help grow the market for this product and increase sales for the company. 

For example, the company could increase advertising to promote more awareness of the 

new DVD player and its category. It could add salespeople to secure greater product distribution. 

HDX-treme could decrease prices so that more consumers could afford its player.

Workload method 

An approach to determining 

sales force size based on the 

workload required and the 

time available for selling. 


Finally, to expand the market, HDX-treme could introduce a lower-priced model in addition 

to the higher-priced original offering. Before pursuing any of these tactics, HDX-treme must 

analyze the financial implications of each. 

Increase Advertising Expenditures 

Although most consumers understand DVD players, they may not be aware of highdefinition 

DVD players. Thus, HDX-treme is considering boosting its advertising to make 

more people aware of the benefits of high-definition DVD players in general and of its own 

brand in particular. 

What if HDX-treme’s marketers recommend increasing national advertising by 50% to 

$15 million (assume no change in the variable cooperative component of promotional expenditures)? 

This represents an increase in fixed costs of $5 million. What increase in sales will 

be needed to break even on this $5 million increase in fixed costs? 

A quick way to answer this question is to divide the increase in fixed cost by the contribution 

margin, which we found in a previous analysis to be 21%: 

Increase in sales � increase in fixed cost � $5,000,000 � $23,809,524 


Thus, a 50% increase in advertising expenditures must produce a sales increase of almost $24 

million to just break even. That $24 million sales increase translates into an almost 1 percentage 

point increase in market share (1% of the $2.5 billion overall market equals $25 million). 

That is, to break even on the increased advertising expenditure, HDX-treme would have to 

increase its market share from 4% to 4.95% ($123,809,524 ÷ $2.5 billion � 0.0495 or 4.95% 

market share). All of this assumes that the total market will not grow, which might or might 

not be a reasonable assumption. 

Increase Distribution Coverage 

HDX-treme also wants to consider hiring more salespeople in order to call on new retailer 

accounts and increase distribution through more outlets. Even though HDX-treme sells directly 

to wholesalers, its sales representatives call on retail accounts to perform other functions in addition 

to selling, such as training retail salespeople. Currently, HDX-treme employs 60 sales reps 

who earn an average of $50,000 in salary plus 10% commission on sales. The DVD player is currently 

sold to consumers through 1,875 retail outlets. Suppose HDX-treme wants to increase that 

number of outlets to 2,500, an increase of 625 retail outlets. How many additional salespeople 

will HDX-treme need, and what sales will be necessary to break even on the increased cost? 

One method for determining what size sales force HDX-treme will need is the workload 

method. The workload method uses the following formula to determine the salesforce size: 

where 

NC � FC � LC 

NS � 

TA 

NS � number of salespeople 

NC � number of customers 

FC � average frequency of customer calls per customer 

LC � average length of customer call 

TA � time an average salesperson has available for selling per year 

HDX-treme’s sales reps typically call on accounts an average of 20 times per year for about 

2 hours per call. Although each sales rep works 2,000 hours per year (50 weeks per year � 

40 hours per week), they spent about 15 hours per week on nonselling activities such as administrative 

duties and travel. Thus, the average annual available selling time per sales rep per year 

is 1,250 hours (50 weeks � 25 hours per week). We can now calculate how many sales reps HDXtreme 

will need to cover the anticipated 2,500 retail outlets: 

NS � 2,500 � 20 � 2 � 80 salespeople 

1,250 

Therefore, HDX-treme will need to hire 20 more salespeople. The cost to hire these reps will 

be $1 million (20 salespeople � $50,000 salary per sales person).


What increase in sales will be required to break even on this increase in fixed costs? The 

10% commission is already accounted for in the contribution margin, so the contribution 

margin remains unchanged at 21%. Thus, the increase in sales needed to cover this increase 

in fixed costs can be calculated by: 

Increase in sales � increase in fixed cost � $1,000,000 � $4,761,905 


That is, HDX-treme’s sales must increase almost $5 million to break even on this tactic. So, 

how many new retail outlets will the company need to secure to achieve this sales increase? 

The average revenue generated per current outlet is $53,333 ($100 million in sales divided by 

1,875 outlets). To achieve the nearly $5 million sales increase needed to break even, HDXtreme 

would need about 90 new outlets ($4,761,905 ÷ $53,333 � 89.3 outlets), or about 4.5 

outlets per new rep. Given that current reps cover about 31 outlets apiece (1,875 outlets ÷ 60 

reps), this seems very reasonable. 

Decrease Price 

HDX-treme is also considering lowering its price to increase sales revenue through increased volume. 

The company’s research has shown that demand for most types of consumer electronics 

products is elastic—that is, the percentage increase in the quantity demanded is greater than the 

percentage decrease in price. It has also been found that when the price of HDTVs goes down, the 

quantity of DVD players demanded increases because they are complementary products. 

What increase in sales would be necessary to break even on a 10% decrease in price? 

That is, what increase in sales will be needed to maintain the total contribution that HDXtreme 

realized at the higher price? The current total contribution can be determined by multiplying 

the contribution margin by total sales: 11 

Current total contribution � contribution margin � sales � .21 � $100 million � $21 million 

Price changes result in changes in unit contribution and contribution margin. Recall that the 

contribution margin of 21% was based on variable costs representing 79% of sales. Therefore, 

unit variable costs can be determined by multiplying the original price by this percentage: 

$336 � 0.79 � $265.44 per unit. If price is decreased by 10%, the new price is $302.40. 

However, variable costs do not change just because price decreased, so the contribution and 

contribution margin decrease as follows: 

Old New (reduced 10%) 

Price $336 $302.40 

� Unit variable cost $265.44 $265.44 

� Unit contribution $70.56 $36.96 

Contribution margin $70.56/$336 � 0.21 or 21% $36.96/$302.40 � 0.12 or 12% 

So a 10% reduction in price results in a decrease in the contribution margin from 21% to 

12%. 12 To determine the sales level needed to break even on this price reduction, we calculate 

the level of sales that must be attained at the new contribution margin to achieve the original 

total contribution of $21 million: 

So, 

New contribution margin � new sales level � original total contribution 

New sales level � original contribution � $21,000,000 � $175,000,000 

new contribution margin 0.12 

Thus, sales must increase by $75 million ($175 million � $100 million) just to break even on a 

10% price reduction. This means that HDX-treme must increase market share to 7% ($175 million 

÷ $2.5 billion) to achieve the current level of profits (assuming no increase in the total 

market sales). The marketing manager must assess whether or not this is a reasonable goal. 

Extend the Product Line 

As a final option, HDX-treme is considering extending its DVD player product line by offering 

a lower-priced model. Of course, the new, lower-priced product would steal some sales from

Cannibalization 

The situation in which one 

product sold by a company 

takes a portion of its sales 

from other company 

products. 


the higher-priced model. This is called cannibalization—the situation in which one product 

sold by a company takes a portion of its sales from other company products. If the new product 

has a lower contribution than the original product, the company’s total contribution will 

decrease on the cannibalized sales. However, if the new product can generate enough new 

volume, it is worth considering. 

To assess cannibalization, HDX-treme must look at the incremental contribution gained 

by having both products available. Recall in the previous analysis we determined that unit 

variable costs were $265.44 and unit contribution was just over $70. Assuming costs remain 

the same next year, HDX-treme can expect to realize a contribution per unit of approximately 

$70 for every unit of the original DVD player sold. 

Assume that the first model high-definition DVD player offered by HDX-treme is called 

HD1 and the new, lower-priced model is called HD2. HD2 will retail for $400, and resellers 

will take the same markup percentages on price as they do with the higher-priced model. 

Therefore, HD2’s price to wholesalers will be $224 as follows: 

Retail price: $400 

minus retail margin (30%): � $120 

Retailer’s cost/wholesaler’s price: $280 

minus wholesaler’s margin (20%): � $ 56 

Wholesaler’s cost/HDX-treme’s price $224 

If HD2’s variable costs are estimated to be $174, then its contribution per unit will equal $50 

($224 � $174 � $50). That means for every unit that HD2 cannibalizes from HD1, HDX-treme 

will lose $20 in contribution toward fixed costs and profit (that is, contribution HD2 � contribution 

HD1 � $50 � $70 � �$20). You might conclude that HDX-treme should not pursue this 

tactic because it appears as though the company will be worse off if it introduces the lowerpriced 

model. However, if HD2 captures enough additional sales, HDX-treme will be better 

off even though some HD1 sales are cannibalized. The company must examine what will happen 

to total contribution, which requires estimates of unit volume for both products. 

Originally, HDX-treme estimated that next year’s sales of HD1 would be 600,000 units. 

However, with the introduction of HD2, it now estimates that 200,000 of those sales will be 

cannibalized by the new model. If HDX-treme sells only 200,000 units of the new HD2 model 

(all cannibalized from HD1), the company would lose $4 million in total contribution 

(200,000 units � �$20 per cannibalized unit � �$4 million)—not a good outcome. However, 

HDX-treme estimates that HD2 will generate the 200,000 of cannibalized sales plus an additional 

500,000 unit sales. Thus, the contribution on these additional HD2 units will be $25 

million (i.e., 500,000 units � $50 per unit � $25 million). The net effect is that HDX-treme 

will gain $21 million in total contribution by introducing HD2. 

The following table compares HDX-treme’s total contribution with and without the introduction 

of HD2: 

HD1 only HD1 and HD2 

HD1 contribution 600,000 units � $70 400,000 units � $70 

� $42,000,000 � $28,000,000 

HD2 contribution 0 700,000 units � $50 

� $35,000,000 

Total contribution $42,000,000 $63,000,000 

The difference in the total contribution is a net gain of $21 million ($63 million � $42 million). 

Based on this analysis, HDX-treme should introduce the HD2 model because it results in 

a positive incremental contribution. However, if fixed costs will increase by more than $21 million 

as a result of adding this model, then the net effect will be negative and HDX-treme should 

not pursue this tactic. 

Now that you have seen these marketing tactic analysis concepts in action as they related 

to HDX-treme’s new DVD player, here are several exercises for you to apply what you have 

learned in this section in other contexts. 

Marketing by the Numbers Exercise Set Three 

3.1 Kingsford, Inc. sells small plumbing components to consumers through retail outlets. 

Total industry sales for Kingsford’s relevant market last year were $80 million, with


Kingsford’s sales representing 10% of that total. Contribution margin is 25%. 

Kingsford’s sales force calls on retail outlets and each sales rep earns $45,000 per year 

plus 1% commission on all sales. Retailers receive a 40% margin on selling price and 

generate average revenue of $10,000 per outlet for Kingsford. 

a. The marketing manager has suggested increasing consumer advertising by $300,000. 

By how much would dollar sales need to increase to break even on this expenditure? 

What increase in overall market share does this represent? 

b. Another suggestion is to hire three more sales representatives to gain new consumer 

retail accounts. How many new retail outlets would be necessary to break even on 

the increased cost of adding three sales reps? 

c. A final suggestion is to make a 20% across-the-board price reduction. By how much 

would dollar sales need to increase to maintain Kingsford’s current contribution? 

(See endnote 12 to calculate the new contribution margin.) 

d. Which suggestion do you think Kingsford should implement? Explain your 

recommendation. 

3.2 PepsiCo sells its soft drinks in approximately 400,000 retail establishments, such as 

supermarkets, discount stores, and convenience stores. Sales representatives call on 

each retail account weekly, which means each account is called on by a sales rep 52 

times per year. The average length of a sales call is 75 minutes (or 1.25 hours). An average 

salesperson works 2,000 hours per year (50 weeks per year � 40 hours per week), 

but each spends 10 hours a week on nonselling activities, such as administrative tasks 

and travel. How many sales people does PepsiCo need? 

3.3 Hair Zone manufactures a brand of hair-styling gel. It is considering adding a modified 

version of the product—a foam that provides stronger hold. Hair Zone’s variable costs 

and prices to wholesalers are: 

Current hair gel New foam product 

Unit selling price 2.00 2.25 

Unit variable costs .85 1.25 

Hair Zone expects to sell 1 million units of the new styling foam in the first year after 

introduction, but it expects that 60% of those sales will come from buyers who normally 

purchase Hair Zone’s styling gel. Hair Zone estimates that it would sell 1.5 million 

units of the gel if it did not introduce the foam. If the fixed cost of launching the 

new foam will be $100,000 during the first year, should Hair Zone add the new product 

to its line? Why or why not?

chapter 


So far, you’ve learned what marketing is 

and about the importance of understanding 

consumers and the marketplace environment. 

With that as background, you’re 

now ready to delve deeper into marketing 

strategy and tactics. This chapter looks 

further into key customer-driven marketing 

strategy decisions—how to divide up 

markets into meaningful customer groups 

(segmentation), choose which customer 

groups to serve (targeting), create market 

offerings that best serve target customers 

(differentiation), and position the offerings 

in the minds of consumers (positioning). 

Then, the chapters that follow explore 

the tactical marketing tools—the Four 

Ps—by which marketers bring these strategies 

to life. 

As an opening example of segmentation, 

targeting, differentiation, and positioning 

at work, let’s look at Dunkin’ 

Donuts. Dunkin’, a largely Eastern U.S. 

coffee chain, has ambitious plans to 

expand into a national powerhouse, on a 

par with Starbucks. But Dunkin’ is no 

Starbucks. In fact, it doesn’t want to be. It 

targets a very different kind of customer 

with a very different value proposition. 

Grab yourself some coffee and read on. 

182 

7 

Part 3: Designing a Customer-Driven Marketing 

Strategy and Integrated Marketing Mix 

Customer-Driven 

Marketing Strategy 

Creating Value 

for Target Customers 

Last year, Dunkin’ Donuts paid dozens of faithful customers in Phoenix, 

Chicago, and Charlotte, North Carolina, $100 a week to buy coffee at 

Starbucks instead. At the same time, the no-frills coffee chain paid Starbucks 

customers to make the opposite switch. When it later debriefed the two groups, Dunkin’ 

says it found them so polarized that company researchers dubbed them “tribes”— 

each of whom loathed the very things that made the other tribe loyal to their coffee 

shop. Dunkin’ fans viewed Starbucks as pretentious and trendy, whereas Starbucks loyalists 

saw Dunkin’ as plain and unoriginal. “I don’t get it,” one Dunkin’ regular told 

researchers after visiting Starbucks. “If I want to sit on a couch, I stay at home.” 

William Rosenberg opened the first Dunkin’ Donuts in Quincy, Massachusetts, in 

1950. Residents flocked to his store each morning for the coffee and fresh doughnuts. 

Rosenberg started franchising the Dunkin’ Donuts name, and the chain grew 

rapidly throughout the Midwest and Southeast. By the early 1990s, however, 

Dunkin’ was losing breakfast sales to morning sandwiches at McDonald’s and 

Burger King. Starbucks and other high-end cafes began sprouting up, bringing more 

competition. Sales slid as the company clung to its strategy of selling sugary doughnuts 

by the dozen. 

In the mid-1990s, however, Dunkin’ shifted its focus from doughnuts to coffee in 

the hope that promoting a more frequently consumed item would drive store traffic. 

The coffee push worked—coffee now makes up 62 percent of sales. And Dunkin’s 

sales are growing at a double-digit clip, with profits up 35 percent over the past two 

years. Based on this recent success, Dunkin’ now has ambitious plans to expand 

into a national coffee powerhouse, on a par with Starbucks, the nation’s largest coffee 

chain. Over the next three years, Dunkin’ plans to remake its nearly 5,000 U.S. 

stores and to grow to triple that number in less than 15 years. 

But Dunkin’ is not Starbucks. In fact, it doesn’t want to be. To succeed, it must 

have its own clear vision of just which customers it wants to serve (what segments 

and targeting) and how (what positioning or value proposition). Dunkin’ and 

Starbucks target very different customers, who want very different things from their 

favorite coffee shop. Starbucks is strongly positioned as a sort of high-brow “third 

place”—outside the home and office—featuring couches, eclectic music, wireless 

Internet access, and art-splashed walls. Dunkin’ has a decidedly more low-brow, 

“everyman” kind of positioning. 

With its makeover, Dunkin’ plans to move upscale—a bit but not too far—to 

rebrand itself as a quick but appealing alternative to specialty coffee shops and fastfood 

chains. A prototype Dunkin’ store in Euclid, Ohio, outside Cleveland, features

ounded granite-style coffee bars, where workers make espresso drinks face-to-face 

with customers. Open-air pastry cases brim with yogurt parfaits and fresh fruit, and 

a carefully orchestrated pop-music soundtrack is piped throughout. 

Yet Dunkin’ built itself on serving simple fare to working-class customers. Inching 

upscale without alienating that base will prove tricky. There will be no couches in the 

new stores. And Dunkin’ renamed a new hot sandwich a “stuffed melt” after customers 

complained that calling it a “panini” was too fancy. “We’re walking that [fine] 

line,” says Regina Lewis, the chain’s vice president of consumer insights. “The thing 

about the Dunkin’ tribe is, they see through the hype.” 

Dunkin’s research showed that although loyal Dunkin’ customers want nicer 

stores, they were bewildered and turned off by the atmosphere at Starbucks. They 

groused that crowds of laptop users made it difficult to find a seat. They didn’t like 

Starbucks’ “tall,” “grande,” and “venti” lingo for small, medium, and large coffees. 

And they couldn’t understand why anyone would pay as much as $4 for a cup of 

coffee. “It was almost as though they were a group of Martians talking about a group 

of Earthlings,” says an executive from Dunkin’s ad agency. One customer told 

researchers that lingering in a Starbucks felt like “celebrating Christmas with people 

you don’t know.” The Starbucks customers that Dunkin’ paid to switch were equally 

uneasy in Dunkin’ shops. “The Starbucks people couldn’t bear that they weren’t 

special anymore,” says the ad executive. 

Objectives 


be able to 

1. define the four major steps in designing a 

customer-driven market strategy: market 

segmentation, market targeting, 

differentiation, and positioning 

2. list and discuss the major bases for 

segmenting consumer and business markets 

3. explain how companies identify attractive 

market segments and choose a market 

targeting strategy 

4. discuss how companies position their 

products for maximum competitive 

advantage in the marketplace 

183


Market segmentation 

Dividing a market into smaller 

groups with distinct needs, 

characteristics, or behaviors 

who might require separate 

products or marketing mixes. 

Such opposing opinions aren’t surprising, given the differences in the two stores’ customers. About 

45 percent of Dunkin’ Donuts customers have an annual household income between $45,000 and 

$100,000 a year, with 30 percent earning less than that and 25 percent earning more. Dunkin’s customers 

include blue- and white-collar workers across all age, race, and income demographics. By 

contrast, Starbucks targets a higher-income, more professional group. 

But Dunkin’ researchers concluded that it wasn’t income that set the two tribes apart, as much as 

an ideal: Dunkin’ tribe members want to be part of a crowd, whereas members of the Starbucks tribe 

want to stand out as individuals. “The Starbucks tribe, they seek out things to make them feel more 

important,” says Dunkin’ VP Lewis. Members of the Dunkin’ Donuts tribe “don’t need to be any more 

important than they are.” 

Based on such findings, Dunkin’ executives have made dozens of store-redesign decisions, big and 

small, ranging from where to put the espresso machines to how much of its signature pink and orange 

color scheme to retain to where to display its fresh baked goods. Out went the square laminate tables, 

to be replaced by round imitation-granite tabletops and sleek chairs. Dunkin’ covered store walls in 

espresso brown and dialed down the pink and orange tones. Executives considered but held off on 

installing wireless Internet access because customers “just don’t feel it’s Dunkin’ Donuts.” Executives 

continue to discuss dropping the word “donuts” from its signs to convey that its menu is now broader. 

To grab a bigger share of customers, Dunkin’ is expanding its menu beyond breakfast with hearty 

snacks that can substitute for meals, such as smoothies and dough-wrapped pork bites. The new 

Euclid store is doing three times the sales of other stores in its area, partly because more customers 

are coming after 11 A.M. for new gourmet cookies and Dunkin’ Dawgs, hot dogs wrapped in dough. 

Focus groups liked hot flatbreads and smoothies, but balked at tiny pinwheels of dough stuffed with 

various fillings. Customers said “they felt like something at a fancy cocktail hour,” says Lewis, and they 

weren’t substantial enough. 

Stacey Stevens, a 34-year-old Euclid resident who recently visited the new Dunkin’ prototype store, 

said she noticed it felt different than other Dunkin’ locations. “I don’t remember there being lots of 

music,” she said, while picking up a dozen doughnuts. “I like it in here.” She said it felt “more upbeat” 

than Starbucks. One Euclid store manager even persuaded Richard Wandersleben to upgrade from a 

regular coffee to a $2.39 latte during a recent visit. The 73- year-old retired tool-and-die maker, who 

drinks about three cups of coffee a day, says the Dunkin’ Donuts latte suited him fine. “It’s a little 

creamier” than regular coffee, he said. 

Dunkin’ knows that it’ll take some time to refresh its image. And whatever else happens, it plans to stay 

true to the needs and preferences of the Dunkin’ tribe. Dunkin’s “not going after the Starbucks coffee 

snob,” says one analyst, it’s “going after the average Joe.” Dunkin’s positioning and value proposition are 

pretty well summed up in its new ad campaign, which features the slogan “America Runs on Dunkin’.” 

The ads show everyone from office and construction workers to harried families relying on the chain to get 

them through their day. Says one ad, “It’s where everyday people get things done every day.” 1 

Companies today recognize that they cannot appeal to all buyers in the marketplace, or at least 

not to all buyers in the same way. Buyers are too numerous, too widely scattered, and too varied 

in their needs and buying practices. Moreover, the companies themselves vary widely in their 

abilities to serve different segments of the market. Instead, like Dunkin’ Donuts, a company must 

identify the parts of the market that it can serve best and most profitably. It must design 

customer-driven marketing strategies that build the right relationships with the right customers. 

Thus, most companies have moved away from mass marketing and toward target 

marketing—identifying market segments, selecting one or more of them, and developing 

products and marketing programs tailored to each. Instead of scattering their marketing efforts 

(the “shotgun” approach), firms are focusing on the buyers who have greater interest in the 

values they create best (the “rifle” approach). 

Figure 7.1 shows the four major steps in designing a customer-driven marketing strategy. 

In the first two stpes, the company selects the customers that it will serve. Market segmentation 

involves dividing a market into smaller groups of buyers with distinct needs, characteristics, 

or behaviors who might require separate products or marketing mixes. The company

Marketing - Pearson

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