Marketing – Its Nature and Purpose

1 Introduction

The syllabus requires you to be able to describe how the finance function interacts with sales and marketing: the main role of sales and marketing, the areas of interface with finance, and the KPIs both functions share. This chapter explains what marketing is and the marketer's core toolkit – environmental analysis, segmentation, targeting and the marketing mix – together with social media and the impact of e-business. The marketer's practical tools – marketing research, channel management, sales forecasting and big data analytics – and the finance interface and shared KPIs are covered in Chapter 9, Marketing Tools.

The main role of sales and marketing is to identify customer needs, shape products, prices, promotion and distribution to meet those needs profitably, and win and keep the customers and revenue on which the whole organisation depends. Every one of those decisions has financial consequences – which is why marketing is one of finance's most important internal partners.

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2 What is marketing?

To understand the marketing concept, it is useful to contrast it with two other approaches an organisation might take.

2.1 The product-led approach

Imagine a company started by a couple of engineers – clever, successful people who are deeply interested in the technical qualities of the products they produce and take enormous satisfaction in well-engineered, innovative products. Unfortunately, just because a product is well-engineered, innovative and clever does not mean it will sell. No matter how much its makers appreciate its fine details, it may be a product nobody wants – or one that is too expensive.

2.2 The sales-led approach

This might sound reasonable, but it means placing great emphasis on selling what you happen to have – even if customers don't really want it. The sales-led company has a high-powered sales team, skilled in the arts of persuasion and in getting people to sign contracts they may later regret. Sales may be won, but customers rarely return.

2.3 The marketing-led approach

This is quite different: it is outward-looking. It asks:

• What will potential customers want?

• What do they value?

• How much do they think it is worth paying for the product or service?

Through market research the organisation establishes the needs of potential customers and then develops an appropriate product or service to match those needs. It stresses to those customers the product's ability to satisfy their needs, and it profits through customer satisfaction. In many ways it is a humble approach: the customer knows best. It is not entirely passive – customers cannot always be expected to be innovative, so market research includes developing prototypes and testing customer reaction to them. But at the end of the day the marketing concept means finding out what customers want, and developing products and services that fulfil those needs profitably.

3 The macro-environment (PESTEL)

What organisations decide to market, and how, depends on the environment they operate in. It is therefore important to analyse the environment, and a common approach is PESTEL: political, economic, social, technological, ecological/environmental and legal factors. These are the big forces that affect whole countries and industries:

• Political factors – a potential change of government, trade agreements and trade tensions, sanctions, or the threat of war all affect what can be sold and where. Unrest in a region reduces the holidays that can be sold there, and tour companies must market different destinations.

• Economic factors – changes in sales tax (VAT) affect expensive items like cars more than cheap everyday items; in a recession or a cost-of-living squeeze, marketers shift emphasis towards value ranges and away from luxuries; interest rates affect anything bought on credit.

• Social factors – population changes, fashion, habits and fads. A major change in many countries is the growing proportion of older people, a segment whose needs and preferences marketers must address. Tastes shift too – consider the growth of veganism and plant-based foods, or health-consciousness reducing alcohol consumption among younger consumers.

• Technological factors – the internet and smartphones have transformed how products are advertised, ordered and delivered, and how much is known about customers. Streaming replaced physical media; e-readers changed publishing; AI is now changing how marketing content and recommendations are produced. Businesses must keep offerings competitive as technology moves.

• Ecological/environmental factors – customers, investors and regulators increasingly expect green credentials: sustainable sourcing, recyclable packaging, low carbon footprints. These influence both what is sold and how it is presented – though invented or exaggerated claims ('greenwashing') attract regulatory and reputational punishment.

• Legal factors – laws and regulations affect how marketing can be conducted (in the UK, advertising cigarettes is almost entirely banned; data protection law governs the use of customer data) and affect products themselves, for example safety standards. Occasionally governments intervene to control prices.

4 Market segmentation

Marketing means finding out what customers want and designing products and services to meet those needs. The first stage is to find out whether all potential customers want the same thing – or whether the market can be broken down into different sections, or segments, whose needs differ. Market segmentation looks at how a market can be split up. Commonly, consumer markets are segmented by:

• Age

• Gender

• Lifestyle and attitudes

• Income and wealth

• Geography

• Behaviour – how often customers buy, through which channels, and how loyal they are

For example, in the fashion market quite different styles are bought by younger and older people, and by different lifestyle groups; most fashion houses run cheaper 'diffusion' lines alongside expensive luxury ranges; and geography – even simply north versus south of a country – can change what people buy. Business markets are segmented too: by industry, size of customer and volume purchased.

Segmentation is where data analytics has changed marketing most. Loyalty cards, website and app behaviour, and transaction histories let organisations segment on actual behaviour rather than broad demographics – identifying, say, 'price-sensitive weekly shoppers' or 'premium customers at risk of leaving' (see the big data analytics section in Chapter 9).

Companies might decide not to sell to some segments at all: a segment may be too small or unprofitable, likely to decline because of PESTEL factors, or already saturated with competition.

5 Market targeting

After investigating segmentation, the next stage is market targeting: deciding which segments of the market to pursue, and with what. There are three broad approaches:

5.1 Undifferentiated market targeting

Research shows the market is effectively unsegmented, and one product will suit all potential buyers. This is extremely rare – it is genuinely difficult to think of an example. Even a basic product like water is sold into a segmented market: tap water, still and sparkling mineral waters, different bottle sizes, flavoured varieties.

5.2 Differentiated market targeting

By far the most common approach: the firm recognises that the market is segmented and designs a different product or service for each segment it serves. Try to buy a common consumable such as shampoo or toothpaste and you will see dozens of variants, each engineered and promoted to appeal to a particular segment. Calculators are another example: simple, robust, brightly-coloured models for schoolchildren; scientific and financial models for students; desktop models for office use – three segments, three products, three ways of selling.

5.3 Concentrated market targeting

Also known as niche marketing: the company sees that the market is segmented but deliberately targets only one segment (or a very few). Perhaps the company is too small to develop products for every segment; perhaps it has particular expertise in one; perhaps only one segment looks profitable. By concentrating its resources on the specific needs of one segment, a small specialist can serve that segment better than the generalists – and customers who feel perfectly served may pay a premium. Specialist travel firms are a good example: companies that sell only skiing holidays, or only walking tours, and have made that segment their own.

6 Product positioning (the 7Ps)

6.1 Introduction

'Positioning' means shaping an offer so that it addresses the chosen segments of the market. Originally there were four variables, or levers, that could be used – McCarthy's marketing mix, the 4Ps: product, price, promotion and place. Three more Ps – people, process and physical evidence – were added for services, giving the 7Ps (the 'service extension' to the marketing mix).

Services need the extra three Ps because there is no physical product: the skills and attitude of the people providing the service, the process by which it is delivered, and the physical evidence that it has actually been provided all shape the customer's experience. If you book a flight, you expect to be dealt with helpfully, you don't want a frustrating booking process – and you expect an email confirmation as evidence that the service will be provided.

6.2 Product

Product covers:

• The features of the product (what it does)

• Quality

• Design

• Brand

• Packaging

Take calculators again: some have simple arithmetic functions, others trigonometric, scientific or statistical ones – different features. Some are cheap and durable for everyday use; others are high-quality. Design may matter little for calculators, but consider how much people pay for beautifully designed phones and laptops. Brand and packaging are unimportant for calculators but critical for cosmetics and perfume – where the packaging can cost more than the contents.

6.3 Price

Price includes not only the price itself (the price level or price point) but discounts for bulk buying – particularly important in business-to-business sales – and terms, i.e. how long a customer has to pay. Pricing can be more sophisticated than it first looks: if a customer's business is very seasonal, for example in agriculture, the product can be made more attractive by matching the terms of sale to the customer's cash flow – buy in spring, pay after harvest.

Three strategic pricing approaches are worth knowing:

• Price skimming – a very high initial price for a new product, often new technology. The customers most eager to own it pay the top price; once they have bought, the price is lowered to capture the next layer of buyers, and so on down. Skimming is nearly always temporary: prices fall as competitors join the market and volumes grow.

• Penetration pricing – a very low initial price aimed at winning a very high market share. High volume brings economies of scale and a low unit cost, which may let the low price be sustained indefinitely – and a dominant market share is itself a barrier that deters new entrants.

• Related product pricing – hook the customer with a low price on the initial product, then earn profit on the follow-up products it requires. Inkjet printers are the classic example: the printer is cheap – almost a loss leader – and the profit is made on ink cartridges. Games consoles and coffee-pod machines follow the same logic.

6.4 Influences on prices

The prices that can be charged depend on the four Cs: costs, competitors, consumers and controls.

Costs

Ultimately, revenue must cover costs. Cost-plus pricing is often used to give an indication of the required price: cost + desired mark-up = selling price. If the required mark-up is 30% and an item costs $150 to make, it will be priced at $150 + 30% = $195. The calculation is easy – but there is no guarantee the goods will sell at that price: there may be cheaper competitors, or customers may simply refuse it. Cost information (from finance) sets the floor; the market sets the ceiling.

Competitors

There are four main types of market, each producing a particular type of competition:

Price competition means consumers are motivated primarily by price, and suppliers must offer low prices to succeed. Organisations pursuing a cost-leadership strategy compete this way: ordinary products, but costs kept so low that prices can be kept down too. Many laptop producers compete on price because their products have been commoditised – they run the same software and offer similar reliability.

Non-price competition means consumers are influenced not only by price but by other marketing-mix variables: quality, brand and features; promotion; and place. Organisations following differentiation or focus strategies use non-price competition: they make their products distinctive so that customers willingly pay premium prices. Apple is the standard example – distinctive design, its own operating system and ecosystem make direct price comparison difficult, and its products sell well and profitably at premium prices.

Consumers

Suppliers must keep in mind both what end consumers are willing to pay and the profits expected by intermediaries in the supply chain – many industries have rules of thumb about expected mark-ups. Markets are commonly segmented by wealth: a 'value' range for price-sensitive customers and a more exclusive range for better-off customers who respond to non-price competition.

Even the same product can be sold to different groups at different prices – price discrimination. Electronic goods are often cheaper in the USA than in Europe, and student and senior discounts are everyday examples. Leakage of goods from the cheap market into the expensive one must be prevented, so the groups have to be kept sufficiently separate.

The perceived value of goods also matters: a higher price itself implies higher quality to many buyers, especially when they cannot judge the goods directly – think of two nearly identical T-shirts, one carrying a designer label at five times the price.

Whether goods are necessities or luxuries influences consumers' reaction to price changes. This is the elasticity of demand: a measure of how sales volume responds to a change in price. Luxury goods tend to have high (elastic) demand elasticity – raise the price and volume falls sharply, so revenue falls. Necessities have low (inelastic) elasticity – as prices rise, demand stays high and revenue rises, because customers need the goods. Finance can estimate elasticity from sales data at different price points – valuable input into pricing decisions.

Controls

Some industries are closely regulated, with little power to set their own prices – utility price rises in the UK, for example, require regulatory approval. Other producers try to control the final prices charged to consumers: exclusive perfume houses resist discounting by their retailers. Not all such arrangements are legal – pricing cartels (competitors fixing prices between themselves) are outlawed by most governments.

6.5 Promotion

There are four main types of promotion:

• Advertising – on television, online, in print and outdoors. The medium must match the audience: television reaches a mass audience, so specialist products are better advertised in specialist media; a roadside billboard can carry only a brief impression and a brand name. Online advertising has become dominant because it is targeted and measurable: adverts are triggered by what a user searches for or browses, and the resulting clicks and purchases can be tracked (see the big data analytics section in Chapter 9).

• Sales promotion – activity close to the point of sale: free samples in supermarkets, 'buy one get one free' offers, coupons and discount codes.

• Personal selling – a sales representative spending time with customers or potential customers to persuade them to buy. Economically justified in business-to-business sales, where orders are large and valuable; in consumer sales only for high-value items such as cars.

• Public relations – earning favourable mentions and a good public image: charitable activity, sponsoring local teams and events. PR promotes the organisation's reputation rather than a particular product.

Promotion can also be divided into two categories:

• Push promotion – getting the product into the distribution channel: persuading retailers to stock it, typically through personal selling and trade incentives.

• Pull promotion – getting consumers to demand the product, typically through advertising, so they go into shops (or online) and ask for it.

A successful launch needs both to match up: there is no point in people wanting a product that is not available, and no point in a product being available that nobody wants.

6.6 Place

The last of the four Ps is 'place' – where the customer goes to buy or acquire the product; in practice, distribution. Considerations include:

• The length of the distribution chain. The shortest chain is manufacturer direct to consumer – once the preserve of mail order, now the online 'direct-to-consumer' model used by many brands. At the other extreme, everyday convenience goods (snacks, drinks, toiletries) go from manufacturer to wholesaler to retailer to consumer, achieving very wide, deep distribution – but each intermediary needs its profit margin.

• The type and number of outlets. Rare, expensive purchases such as furniture and large appliances are sold through fewer, larger outlets that customers will travel to and where brands can be compared. Convenience goods must be available everywhere.

• Suitability of the outlet. High-end audio equipment needs knowledgeable staff and demonstration rooms; you would not expect to buy it in a supermarket.

Closely related to place is channel management – choosing, coordinating and monitoring the routes (direct, indirect, omni-channel) by which products reach the customer, including disintermediation and reintermediation. As part of the marketer's toolkit it is covered in Chapter 9, Marketing Tools, together with profitability by channel.

Sales forecasting and sales management – the forecast on which every other budget is built, and the organisation and incentivisation of the selling effort – are covered in Chapter 9.

The use of big data analytics in marketing – micro-segmentation, personalisation, dynamic pricing, churn prediction and campaign attribution – is also covered in Chapter 9, building on the introduction to big data in Chapter 4.

7 Social media

Social media platforms – Facebook, Instagram, TikTok, YouTube, X (formerly Twitter), LinkedIn – have become central promotional tools. Following a brand brings customers up-to-date offers and news; platforms carry precisely targeted advertising; and short-form video has become one of the most powerful ways of putting a product in front of millions of people. Influencer marketing – paying people with large followings to feature a product – is now a major promotion channel, subject in the UK to rules requiring paid content to be labelled as advertising.

Social media cuts both ways: dissatisfied customers can broadcast complaints, and a clumsy campaign can be amplified and mocked at scale, damaging a brand within hours. Organisations therefore monitor social media continuously and treat responding to public complaints as part of customer service.

Two social-media-era promotion techniques to know:

• Guerrilla marketing – promoting products in unconventional, attention-grabbing ways on a small budget, typically in public places: stunts, installations, flash events. The aim is to attract a crowd – and then a much larger online audience when footage spreads.

• Viral marketing – relying on people themselves to spread the message by sharing, liking and reposting content, so that reach snowballs like a virus for very little initial spend. The content must be genuinely worth sharing – amusing, surprising or useful – and success is hard to engineer: for every campaign that reaches millions, many sink without trace.

8 The impact of e-business

8.1 Introduction

The terms are often used interchangeably, but strictly e-commerce refers to the customer-facing side of the operation (website, sales, order delivery), whereas e-business includes e-commerce plus internal processes such as inventory, human resources, production and finance.

E-commerce implies marketing, buying and selling over the internet. Most businesses now have a web presence even if they do not sell through it: a well-designed site that search engines can find is a valuable source of new business. Some companies, like Amazon, trade exclusively online; others – supermarkets, most retailers – mix physical outlets with online ordering for delivery or collection.

8.2 The 6Is of e-business and e-marketing

E-business has six characteristics, known as the 6Is, which differentiate it from conventional commerce:

9 Marketing and finance

How the finance function interacts with sales and marketing – the areas of interface (pricing, budgets and return on marketing investment, sales forecasting, customer and channel profitability, credit, investment appraisal and sales incentives) and the KPIs the two functions share (CAC, CLV, conversion rate, churn, ROMI, forecast accuracy, NPS) – is drawn together at the end of Chapter 9, once the full marketing toolkit has been covered.

10 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s key terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.