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Principles of Marketing Unit 1: What Marketing Is: Value, Needs and Exchange

Marketing is the process of creating, communicating and delivering value to customers in exchange for something they value. This unit builds the vocabulary and core ideas that every later unit depends on.

Covers: Defining marketing, Needs, wants and demands, Customer value and satisfaction, Exchange and relationships, Marketing management orientations, The marketing mix (4 Ps), Customer lifetime value

Study guide

Many people think marketing means advertising or selling, but those are only small parts of it. Marketing is the set of activities a firm uses to understand what customers need, create offerings that satisfy those needs, and capture value in return. The American Marketing Association describes it as the activity and processes for creating, communicating, delivering and exchanging offerings that have value for customers, clients, partners and society. A useful short version: marketing is managing profitable customer relationships. A company that sells well but does not understand its customers is lucky, not skilled, and luck rarely lasts once competitors arrive.

Marketing starts with needs, wants and demands. A need is a state of felt deprivation, such as hunger, safety or belonging; marketers do not create needs, they are part of being human. A want is the form a need takes once it is shaped by culture and personality: a hungry student in Atlanta may want a chicken sandwich, while one in Tokyo may want ramen. Demand is a want backed by buying power. Many people want a sports car, but only those who can and will pay create demand. Firms answer needs with a market offering, which is some mix of products, services, information or experiences.

Customers choose among offerings based on perceived value: the difference between the total benefits they expect and the total costs they expect, including money, time, effort and risk. Satisfaction depends on how actual performance compares with expectations. If performance falls short, the customer is dissatisfied; if it matches, satisfied; if it exceeds, delighted. This creates a trap: overpromising can win a first sale but produces disappointed customers. Smart firms promise what they can deliver and then deliver a little more. Satisfied customers buy again, tell others, and cost less to serve than new customers cost to win.

Exchange is the act of getting something you want from someone by offering something in return. For an exchange to happen there must be at least two parties, each with something the other values, each free to accept or reject, and each able to communicate and deliver. Modern marketing aims beyond one transaction toward customer relationship management, keeping customers over time. Customer lifetime value (CLV) is the value of all the profit a customer will generate over the whole relationship. Customer equity is the total of CLV across all of a firm's customers, which makes it a better measure of long-run health than this year's sales.

Firms have followed different philosophies, called marketing management orientations. The production concept assumes customers want cheap, available goods, so the firm focuses on efficiency. The product concept assumes customers want the best quality and features, which can cause marketing myopia, focusing on the product instead of the need it serves. The selling concept pushes hard sales of what the firm makes. The marketing concept starts with customer needs and delivers value better than competitors. The societal marketing concept adds long-run consumer and social welfare. Firms then act through the marketing mix, the 4 Ps: product, price, place and promotion.

Key ideas

• Marketing is creating and capturing value through customer relationships, not just advertising or selling.
• Needs are basic human states, wants are needs shaped by culture and the individual, and demands are wants backed by buying power.
• Customer perceived value equals expected total benefits minus expected total costs, as judged by the customer.
• Satisfaction depends on whether performance meets, falls short of or exceeds the customer's expectations.
• The marketing concept starts from customer needs, while the selling concept starts from the factory's output.
• Customer lifetime value and customer equity measure long-run relationships rather than single transactions.
• The 4 Ps (product, price, place, promotion) are the tools a firm uses to carry out its marketing strategy.

Formulas and rules

Common mistakes

• Treating marketing as the same thing as advertising or selling instead of the whole value-creation process.
• Saying marketers create needs; they shape wants and offerings, but needs are basic to people.
• Confusing the product concept (better product) with the marketing concept (better meeting of customer needs).
• Forgetting that value is judged by the customer, not by the firm's cost or engineering quality.
• Assuming demand exists whenever people want something, even without the ability to pay.

Before the test, make sure you can

• Define marketing and explain why it is more than advertising or selling.
• Distinguish needs, wants and demands using an example.
• Explain customer perceived value and how expectations drive satisfaction.
• List the conditions required for an exchange to take place.
• Identify which marketing management orientation a firm is following from a description.
• Name the 4 Ps and classify a marketing decision under the correct P.
• Calculate a simple customer lifetime value and explain customer equity.

Words to know

Marketing

The process of creating value for customers and building strong customer relationships in order to capture value from customers in return.

Need

A state of felt deprivation, such as physical needs for food or social needs for belonging.

Want

The form a need takes as shaped by culture and individual personality.

Demand

A want backed by buying power and willingness to pay.

Market offering

Some combination of products, services, information or experiences offered to a market to satisfy a need or want.

Customer perceived value

The customer's evaluation of the difference between all the benefits and all the costs of an offering compared with alternatives.

Customer satisfaction

The extent to which a product's perceived performance matches a buyer's expectations.

Exchange

The act of obtaining a desired object from someone by offering something in return.

Market

The set of all actual and potential buyers of a product or service.

Marketing myopia

Paying more attention to the specific product a firm offers than to the benefits and experiences it provides.

Production concept

The idea that consumers favor products that are available and highly affordable, so the firm focuses on efficiency.

Selling concept

The idea that consumers will not buy enough unless the firm undertakes large-scale selling and promotion.

Marketing concept

The philosophy that achieving goals depends on knowing target market needs and delivering value better than competitors.

Societal marketing concept

The idea that marketing should consider consumers' wants, the firm's needs, and long-run consumer and society welfare.

Marketing mix (4 Ps)

The set of tactical tools a firm blends to get the response it wants: product, price, place and promotion.

Customer relationship management

The overall process of building and keeping profitable customer relationships by delivering superior value and satisfaction.

Customer lifetime value

The value of the entire stream of profit a customer would generate over a lifetime of patronage.

Customer equity

The total combined customer lifetime values of all of a firm's customers.

Sample practice questions

30 more questions like these, from level 1 to 5, are in the practice set.