Busines

@en*

Finan*jal l nstitu*imn*

Learning Obiectives The Ups and Downs of the
Euro. The chilly December mar-
After completing this chapter,
you 11 be able to: kets were mercifirl to at least one per-

l. Describe the functions and son-\Wim Duisenberg. As late as

characteristics of money. October, the European Central Bank
chieft days seemed numbered as the
2. Explain the services that euro fell against the U.S. dollar.
Then, in late November, the cur-
banks offer. rency began climbing. On Christmas

3. Name the rypes of banks. Day, it hit 93 cents in thin Tollyo trading. The level stuck. As of
4. Identifr the functions of the December 28, it was holding around 93.10 cents. Thatt t3 per-
cent above its low of 82.25 cents reached on October 25.
Federal Reserve System.
Source: Excerpted with permission from "The Euro: Back From the
Why lt's lmportant Depths," BasinessW'eeb Online, January 8' 2001.

Understanding the way money An ExtensionActivity
and financial institutions work is
The Federal Reserve System is the centralized banking
crucial to understanding the organization in the United States. V'ho is its chairperson, and
what do you think he or she does?
economy.
BULflJL{WIS$f.fi-€J='\-, .
OKey Words
The Full Story
monetary system
money To learn more about the euro, visit the lntroduction to
financial institution BusrnessWeb site at wwwintrobus.glencoe.com, and click
bank account on BusrnessWeekFealure Story Chapter 12.
deposit
withdrawal
interest
electronic funds transfer (EFT)
coIateral
mortgage
safety-deposit box
Federal Reserve System

174

':.:::a:a+::ta+.L::.

Money and Banking

II lthough there are places in the world where money and banks play
hard for us to imagine
\only a small role in the local economy, itt

life without them. Money enables people and businesses to buy and sell

goods and services around the world with easy efficiency. Banks and the

banking system play an extremely important role in managing money

and controlling and simulating the economy.

The History of Money

The monetary system makes business much easier. In the monetary
system goods and services are indirectly exchanged using money, which
can then be exchanged for other goods and services. Money can be any-
thing that people accept as a standard for payment. Modern sociery uses
coin, currency, checks, and credit cards. In other times and places peo-
ple have used shells, stones, corn, parrot feathers, and eyen gopher tails
for money. Figure 12.1 illustrates why items might or might not be good
sources for money.

*lmagine what business would be like without money. lf you
worked in a fast-food restaurant, it might pay you in food.
Bartering is exchanging one product for another. American

Colonialists engaged in this way of doing business.
Explain why or why not these items could serve as money.
On a piece of paper; re-create this table and check the
appropriate box(es) for each that applies.

Functions of Money HOW BANKS
CREATE MONEY
Money has three basic functions. Firsr of all, it's a
medium of exchange. V/hether you buy a soda or sell a cor- The Federal Reserve System
poration, money changes hands. \Without money, people
would be forced rc fiayssy-1rade goods or services directly (Fed) is the central bank of
for other goods or services. Barter is a clumsy method of the government in the
exchange. Suppose you've grown an extra bushel of toma- United States. Suppose
toes. You'd like to use tomatoes to get new CDs. In the
barter system, you'd have to find someone willing to accept Region Bank sells a govern-
tomatoes for CDs. If you have particular CDs in mind,
you might have to make several trades to acquire some- ment bond to the Fed and
thing the CD owner would accepr. You could spend a lot
of time bartering for things you need. With money, how- receives $1,000. This is
ever, the exchange becomes easy-you sell your extra
tomatoes for money. You then exchange the money for $1,000 in "new" money
the CDs you want. In a system rhat uses money, both buy- because the Fed creates it
by writing a check.
ers and sellers agree on exchanging money. Money itself is How does the Fed create
not a good or a service but a means of exchanging goods
and services. It's a medium in that it's used berween peo- money?
ple to make business easier, just as radio is a medium that
makes communication easier. conrinued on p. 179

Money also functions as a standard of ualue. A stan-
dard is a fixed means for measuring rhe weight, amounr,
size, or value of something, like a yardstick or a scale.

Money provides a means for measuring the value of goods
and services. As a standard of value, money makes it pos-
sible to set a fixed value on a product and to compare the
costs of different products. In the United Stares, the stan-

dard used is the dollar.

Finally, money functions as a store ofualue. That means
it holds its value over time and can be stored or saved. You
can also accumulate money over time to increase your
wealth.

Characteristics of Money

Practically all over the world, paper money and coins are common
forms of money. For money to carry out its functions, it must have sev-
eral characteristics. No matter what form it takes, all money shares these

characteristics.

Money must be stable in value. To be used as mone)z, an item must

6e scarce. If the supply of an item is overly plentiful, it loses its value
and cannot serve very well as money or a store of value since it would
have little worth. People would lose faith in its value as a medium of

exchange.

Money must be accepted. People haye to be willing to take money in
exchange for goods and services. Before accepting it, people musr have

Chapter 12 Money and Financial lnstitutions 177

faith that the item used as money has value and will continue to hold
its value. If people dont have faith in the value of their money, they may

use something else like gold or diamonds. To be valuable, money must

be acceptable.

Money should be diuisible into parts. Suppose you have $20 but
spend only $4.50 on a sandwich. Since money is divisible, the cashier
can give you $ 15.50 in return. A money system using coins and bills of
different values makes that possible.

Finally, money has to be portable and durable. Coins made of metal
and bills made of strong paper can last a long time, can be used over
and over again, and are easy to replace.

4 Fast Review

l. Y/hat is the monetary sysrem?

2. How is money a standard of value?
3. \What are some of the characteristics money must have to be useful?

Busin@s$ Buitdins, Blocks

Understanding Interest Step 2. Use this formula: interest =
principal x interest rate x time
Simple interest, compounded annu-
ally, is a percentage of the amount bor- Decimal
rowed. The amount borrowed is called
the principal. Compound interest may At the end of 3 years, the cost of
be computed daily, monthly, or yearly. the loan would be $aOo. Since you

How to Compute Interest also must pay back the principal, you
owe the lender $1,300.
Simple lnterest. Imagine you bor-
Practice
row $ 1,000 for 3 years at a rate of 10
percent per year. Heret how to find Find the simple interest on a $2,000
out the amount you owe at the end of loan at 12 percent interest for 5 years.

three years.
Step 1. Convert the interest rate per-

cent to its decimal equivalent.
(10%='%.,u=.10)

178 Unit 3 Groups Affecting Business

-F-

Banking

Banks manage money, move it around, and maintain

a supply of it. A system of banks makes it possible to

keep your money in a safe place and get access to it wher-

ever you go. The banking system is the main type of
financial institution, or organization for managing
money, in our economy. Banks offer people a variety of

financial seryices.

Storing Money HOW BANKS
CREATE MONEY
One of the primary services banks provide is storing
The government requires a
money for customers in bank accounts. A bank account
is a record of how much money a customer has put in bank to keep a certain per-
to or taken out of a bank. The money put in a bank is centage of a deposit on
called a deposit, and the money taken out is called a
withdrawal. Keeping your money in a bank preyents you hand, let's say 20 percent.
With a 20 percent reserve
from losing, spending, or having your money stolen too requirement, the bank
must hold how much
easily.
money in reserve if it lends
The two main types of accounts are checking dccounts out $1,000?
and sauings dccounts. Checking accounts are used for stor-
ing money in the short term so you can draw on it easily continued on p. 18 L
if you want to go shopping or pay a bill. Banks usually

charge a fee for checking accounts to pay for the cost of

maintaining them. Savings accounts are used for storing
money over a long period of time. An advantage of a sav-
ings account is that it earns more interest than most check-
ing accounts. Interest is a rate the bank pays you for

keeping your money there. For example, if a bank pays
you 5 percent interest per year on a $1,000 savings

account, you'll have earned $50 after one year.

Tiransferring Money

Every single business transaction involves the transfer of money.

Banks make it easy to transfer money from one person or business to
another. For example, suppose you have a paycheck for $85 from the

store where you work. You take the check to your bank, and they give
you $85 cash for it. The bank then transfers the money from the store's
bank account to the bank's cash account. You could also deposit the
check into your bank account, in which case the store will transfer the
amount from the store's account into your account.

Today more banks are using electronic funds transfer (EFT) to
move money around. \X/ith EFT, money is transferred from one account
to another through a network of computers. Instead of writing a check,
your employer can use EFT to deposit your paycheck into your account

Chapter 12 Money and Financial lnstitutions 179

electronically'. You can also use EFI' to pay your phone bili, withdraw

money from your accounl, or buy movie tickcts.

Lending Money

The money you deposit in a bank makes it possible for thc bank to
lend moner/ to other customers. Just as the bank pays you inreresr on

your savings, customers have to pay the interest on the money they bor-
row from the bank. The interest earned by the bank is then used ro pay
the interest on savings accounts and to cover the bankt expenses.

Most bank loans require some form of collateral. Collateral is some-
thing valuable vou put up for a loan, such as a car or a coin collection,
so that the banl< can take it if you fail to pay back the loan. There are
four main tvpes of loans banks offer to businesses ar-rd individuals:

*Banks are businesses that financial services to i

make a profit. t
,
What would happen to a bank's profits if deposits suddenly
,
decreased?
,,

*;*- a ^-..'-
I

^*t---

H

A mortgage loan is a loan used to buy real estare, such
as a house or an office building. A mortgage is a
deed to give the lender the propery if the loan is
not paid back.
A commercial loan is a loan made to businesses to
buy supplies and equipmenr.
An incliuidual loan is a loan made to an individual to
pay for personal items like a car, home repairs, or a

vacation.

A line of uedit is an amount set aside by a bank for

preferred customers that is available on demand. For
example, a bank can issue a cusromer a $ 15,000 line
of credit that can be used any time for any purpose.

Other Financial Services

Banks offer a variery of other services. Many of them HOW BANKS
provide financial advice on managing and investing your CREATE MONEY
money. Not only can you store your money in a bank but Suppose you want to buy a
you can also store valuable items, such as jewelry and cer-
new mountain bike. The
tificates in safety-deposit boxes . Many banks offer bank loans you $800. The
bank must keep in its
credit cards such as MasterCard or Visa. Banks also man- reserve 20 percent of a
age trustfunds stch as an inheritance. new deposit.
How much money does the
, bank need to keep in the
bank? How much can the
Y/ Fast Heview bank lend?

1. \7hat are the three main functions of a bank? continued on p. 183

) How does an EFT work?

3. \X/hat are the types of loans a bank offers?

Types of Banks

Banks operate on a state, national, and international
Ievel. There are strict rules for starting one because banks
handle so much money. To open a federal or a stare bank, you have to
meet special requirements and apply for a charter from the federal or
state government. You must also prove you have enough capital ro start
a bank. In the United States there are three main types of banks. Figure
12.2 illustrates how banks do business in order to make a profit.

Commercial Banls

Most of the banks in the United States are commercial banks. Com-
mercial banks offer the entire range of services discussed such as check-
ing and savings accounts, loans, and financial advice. They are often
calledfull-seruice banks. They are like businesses in that they operate to
make a profit. To make a profit they usually charge much more inreresr
on the money they lend than the interest they pay on savings accounts.

Chapter 12 Money and Financial lnstitutions 181

Savings and Loan fusociations

Savings and loan associations were originally set up to offer savings
accounts and home mortgage loans. Their purpose was to encourage
people to save money and make it easier to buy a home or start a busi-
ness. To do this they charged lower interest on loans and paid higher
interest on savings. In the 1980s about 20 percent ofsavings and loans
failed. The government passed new regulations allowing them to charge
higher interest rates and offer more services like credit cards. As a result,
most savings and loans today are more like commercial banks.

Credit Unions

Credit unions are nonprofit banks set up by organizations for their
members to use. Many companies, labor unions, and professional groups
have their own credit unions. Credit unions offer members a full range
of services, including credit cards, checking accounts, and loans. They
offer low-interest loans and pay high interest rates on savings accounrs.
Many of them also pay interest on checking accounrs.

Other Financial Institutions

There are types of financial institutions other than banks that offer
some of the same services. Mortgage companies provide loans specifi-
cally for buying a home or business. Finance companies offer short-term
loans to businesses, but at much higher interest rates than banks charge.
Insurance comltanies not only provide protection against things like fire
and theft, but also offer loans to businesses. Brokeragefirms that sell
stocks and bonds, may also offer a wide range of financial services ro
its customers.

*flnr'*fr *i'i I ;iJI,j1pI-,er.i-,lro*-- # t; tYlTOme tI-qa ult.y

,.i?J?J,';;. f^--^ii You and your family are moving to a new rown and you're look-
ing for a house to buy. There's one house everyone likes that's by a
*,x,,**i ;:{J /

creek and on a wooded lot. The realtor mentions that next year a

multiplex housing complex for low-income families will be built down the road.

Making an Ethical Decision

1. \What are the most important financial issues that people should consider when

buying a home?

2. \X/hat are the advantages of living in neighborhoods that are economically mixed?

182 Unit 3 Groups Affecting Business

,

Ul".,'Frtt Review

1. \Mhat are the types of banks?
2. How is a credit union different from a commercial

bank?

Name some financial institutions other than banks
that ofltr similar services.

The Federal Reserve System

The Federal Reserve System (or Fed) is the central
banking organization in the United States. Congress set

up the Fed in l9l3 to end the periodic financial panics

during the 1800s and early 1900s. It consists of 12Fed'

eral Reserve district banks, 25 branch banks, and about

5,000 member banks. The Fed is run by the Board of Gov-
ernors, which is headed by a chairperson. It supervises the

Federal Reserve district banks and regulates activiry of the

member banks.

HOW BANKS

Functions of the Fed CREATE MONEY
The bank treats the $640 as

The Fed has six functions. These functions are as a new deposit. Eighty per-
cent of $640 (or $512)
follows: might be lent again. The
process continues, with
. Clearing checks. This transfers funds from one bank each new deposit giving
the bank new funds to con-
to another when you write or deposit a check. tinue lending.
How does the money
o Acting as the federal gouernment's fiscal agenr. The Fed
supply expand?
spends and distributes money to Federal Reserve
member banks and commercial banks. It also tracks
the deposits and holds a checking account for the

U. S. teasury.

' Superuising member banks.It regulates state banks

that are members of the Federal Reserve System.

' Regulating the money su?Pb. The primary responsibiliry of the Fed

is to determine the amount of money in circulation. This affects

the amount of credit and business activity in the economy.

o Settin{ reserue requirements. Regulating the money supply is the

most important function of the Fed. By law, banks are required to

keep a certain percentage of their deposits in reserve. This percent-

age determines the amount of money in circulation.

. Supplying ?d?er currency. The Fed is responsible for printing and

maintaining the nation's paPer currency.

fi,, .,F**|Hefiew

1. V/hat is the Fed?
2. Name the six functions of the Fed.

Chapter 12 Money and Financial lnstitutions 183





Summary

1. Money functions as a medium of exchange, a standard of value, and a store
of value. The characteristics of money include scarciry, acceptabiliry divisi-

biliry portabiliry and durabilicy.

2. Banks ofler a variety of financial services including storing money, transfer-
ring money, and lending money.

3. The three main rypes of banks are commercial banks, savings and loan
associations, and credit unions.

4. The Fed has six basic functions. Its most important function is regulating

the money supply.

lUsing Business Key Words

Understanding these business terms will help \. Something to place valuables in at the
'{hebank.money banks pay to depositors for use
you understand the banking institution. Match
of their funds.
the terms below with their definitions.
3- Sums of money placed in accounts in the
,.; monetary system
deposit bank.
. Federal Reserve System
. bank account 4. Responsible for.controlling the amount of
. mortgage
r interest money in circulation.
o electronic funds transfer (EFT)
. 5. The process of moving money from one
-L money account to another through the use of
withdrawal
. safety-deposit box computers.
o financial institution
. collateral ,6. Goods and services are indirectly

exchanged through this medium.

7. Anl.thing accepted as a standard form of

Payment.

& Thking money out of the bank.

9. An organization for managing money.
10. Records how much money a customer has

put in or taken out of his or her bank.

ll. Something of value you put up for a loan.

12. A deed that states if you cant pay back

your loan, the lender has right to take cer-

tain things.

186 Unit 3 Groups Affecting Business

e Review What You Learned e Critical Thinking

13. Describe the three functions of money. 30. \What do you think would happen if all
r4. \Mhat are the two characteristics that dol-
the depositors of a bank requested their

lars must have to be accepted as money in deposits at the same time?

our society? 3r. How can the Federal Reserve use the reserve
15. -Why must money be portable?
requirement to slow the economy's growth?

16. How does a debit card work? Find out how currency is printed and

17. \X/hat is the bank's primary source of what securiry measures are taken to avoid
counterfeiting. \What steps would you take
income?
18. \Mhy does the government require banks to suggest minimizing counterfeiting?

to keep a certain percentage oftheir )). \Vhy do you think coins have been a

deposits on hand? more desirable form of money than paper
currency throughout U.S. history?
19. Compare the three different types of

loans-mor tgage, commercial, and

individual.

How does the Federal Reserve control the
amount of money in circulation?

21. Describe the characteristics of a credit

union.
22. \fi/hat is the central banking organization

of the United States?

\7hat happened when the government

deregulated the banking industry?

Understanding AViewing and Bepresenting
O Business Concepts
Examining the Image. Get ready. For 15
24. \Why does money need to be divisible?
seconds, look closely at the photograph. Then
Gir.e an example.
25. Banks pay depositors for leaving their cover it up with a piece of paper. List everything
you remember. \What did you remember first?
money in savings accounts. \X/hy? Are you surprised at how much information
Explain how a bank makes a profit by your mind captures in a short time? Do you
providing loans to its customers. think that images are powerful? Write a para-
27. Compare an individual loan with a line of
graph on your findings and answers.
credit. \fhat are the similarities and dif-

ferences?

28. Describe how banks help to eliminate

money.

29. \What other financial institutions, besides
banks, savings and loans, and credit
unions ofFer financial services?

Chapter 12 Money and Financial lnstitutions 147

O Building Academic Skills You'll need to pay salaries, rent, and other

@ showinglnterest costs.

Research saving and investing by working in You'll compete for customers with other
groups of three or four and calling three banks, banks in your classroom.
credit unions, or other financial institutions and
find out how much interest they pay on a regular \frite a 300-word report that explains how
savings account. Ask what alternate investments
they recommend to their best customers. Present your bank works.
the results of your research in the form of a chart.
%l ResearchingtheFed
ffiffi PersonalEssay Use e-mail to contact the nearest Federal

Team up with three classmates to form a bank. Reserve System branch bank. Request general
Open your bank with a deposit of $20,000 in information about the Federal Reserve System
pretend game money. Invite classmates to play and particular information about the Federal
the role of business and individual customers in Reserve System branch. Share the information
your bank. Determine the interest rate you will you receive with your classmates.
charge on loans andpay on deposits. Decide what
you need to do to place $200,000 into the class- Other Nations'
room economy. Remember the following may Banking
affect your decisions:
The Bank of England was used as the model
o Your bank must keep 10 percent of each for forming and organizing our Federal Reserve
System. Choose the central bank of two other
deposit on reserve. nations to research. Identify their main functions
and responsibilities and compare them to the
Federal Reserve. Prepare a three-minute oral
report to share your findings with the class.

OLinking School to Home OLinking School to Work

lnterviewing and Gharting. Interviewyour Local Advertisements. Collect various finan-

parents or other family members to find out why cial institutions' advertisements from local news-
they chose the financial institution(s) they cur- papers. Using the advertisements, list the services
rently use. Ask them about the services offered, provided by each one of the institutions. Create a
location, quality of customer service provided, chart showing the services. Then, as a class, com-
bine the charts. Evaluate the financial institutions
and interest rates. Create a chart showing the fea- based on the services provided and select one that
tures that helped make their decision. you think is the best. Invite someone from that
institution to speak to your class about their insti-
tution and the services they provide.

188 Unit 3 Groups Affecting Business

E-Homework You read the first
part of "The Euro:
Applyr"g Technology Back From the
Depths" at the begin-
Banking Decisions. Discuss how technol- ning of this chapter.
Below are a few ques-
ogy has affected where people do their banking. tions for you to answer
Include online banking in your discussion. about money. You'll
find the answers to
Digital Cash. Although cash and checks are these questions when
you're reading the entire article. First, here are
still very common methods of paying for goods the questions:
and services, various access cards are becoming
more and more popular. Use the Internet to 34. What characteristic of money is the
research stored value cards and digital cash. \7rite
a rwo-page paper sharing your findings. Present main concern of this article?
your opinion on whether or not you think cash
and checks will soon be an outdated way of doing 35. How does globalization affbct currency
in different countries?
business.
CREATIVE JOUBNAL ACTIVITY
lConnecting Academics Research the current value of the dollar

Math. Assume you live in a country where a against the currencies of three different coun-

silver coin is the currency. The weight of one sil- tries. See if you can find out what these cur-
ver dollar is 0.94 ounces. Compute the total rencies were worth in dollars last week. How
weight of the silver dollars you would have to about last year? Create a chart with your
carry to purchase the following: a television set, results. \7hich countryt economy has the most

a round trip plane ticket to Tokyo, and a new potential?

sPorts car. The Full Story

Computer/Technology. Diagrams often To learn more about the euro, visit the
lntroduction to BusinessWeb site at
help clarify information in a textbook. Create a www.introbus.glencoe.com, a nd
diagram indicating the relationship between click on BusinessWeek Feature Story
banks, bank accounts, deposits, withdrawals, Chapter 12.
interest, electronic fund transfer (EFT), and

safety-deposit boxes.

189

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,r, :.:::i:1: .;,.;;:: ..1... t-

:;=. r,,.:i! .ii-;r ..t,r.:r.1 i,:!i i t,t::i.l:t i Itt!;

ffi@, sdrlmr FrL"O*i._iiFr6*E

rpl

:

&le*'

B$secverf mg ffirxs6mes$ emneens

In Chapter 11 r,ou read rrbor-rt the impact of governmenr on a business. One of the
wavs government affects business is by influencing the economy througl-r policics estab-
lished bv the Federal Reserve, the central banking system of the United States. The Fed-
eral Reserve cuts the inter-est rates that banks charge one anodler in an effort to strengtl-ren
the economy by making borrowing money more affordable for businesses. \W4ren busi-
nesses can't afford to borrorv mone)/, businesses can'r grow and workers lose their jobs.

190

C Factoids lnvestigate the lmages

Mandatory Vacation, \7hen Look at the collage on the left page. 'What

the economy weakens, some do you see? \7hat do you think? \fhat do think
businesses shave dollars off the the images represent? The power of reading
payroll by forcing people to take
visuals is in analyzing and dissecting your
unpaid vacation. observations. On a separate piece of paper
reconstruct the worksheet below in order to
Keeping Your Options Open.
complete your investigation. The questions
Cisco Systems lays off 6,000
employees. This San Jose, Calif., may help shape and focus your analysis.
company is allowing those ter-
minated the chance to collect ^- Your Observations

one-third of their severance 1. How many photographs do you see?

package, plus benefits and stocks 2. Examine each image. How is each assem-

if they work for a local nonprofit bled in relation to the other?
organization. These individuals
are first in line for Cicso's rehire 3. \7hat is the subject ofeach photograph?

once the economy recoYers. 4. Does color signify a message?

Looking for Opportunities. 5. \flhat issues do you take from these images?

Users visited Monster.com over Information
two million times in a month'
6. Summarize what you know about the pho-
Job Stability, Seventy-four per-
tographs from your observations.
cent of working adults express
some kind of concern about job O Exploring Culture

securiry. 7. What do you know about unemployment
in this country? How does it affect your
Employee Development. U.S.
companies spend an average of community? \X/hat about your family?
$700 p.r eligible worker on
8. Do you think the media objectively rePorts
employee training.
why businesses layoff employees? -Why or
why not? Is the news the source of all
truths?

Unit 3 BusinessWeek Seminar 191

Taking Aim at Careers 4. \Write a brief report for each of the three
jobs you have identified. Each report
O Preparation should describe the job, the training and
education required, and the future outlook
In this seminaq you'll research three differ- for that job.

ent jobs and decide which job, if any, would 5. Create a poster or brochure that promotes
the positive aspects of each job. You'll use
withstand slower economic times. them to create interest in the jobs youve

Objective researched.
In this BusinessWeek Seminar, you'll:
6. As a class, stage a job fair. Set up a display
. Research three different career opportuni- for the jobs you have researched. Visit oth-
ers students' displays. \Write down any con-
ties available. cerns you have about a particular job.

. Participate in a job fair, in which each

member of your class will set up a display
of the jobs he or she has researched.

. Discuss with your classmates which three

jobs are most likely to withstand an eco-
nomic downturn.

Materials Needed

/ Recent business news publications, such as

the New Yorb Times and BusinessWeek

/ The business and classified advertisement

sections of your local newspaper

/ Notebook paper
/ Posterboard
/ Construction paper
/ Pencils
/ Pens
/ Markers

O Procedures

t. Identify three jobs that interest you.

2. Research these three jobs. Consult the
O ccupatio nal Outlo o h Handb o o h, which
should be available in your school or local
library.

3. Research business and economic trends.
Use the Internet to access BusinessWeek
Online at www.businessweek com.

192 Unit 3 Groups Affecting Business

O Chart It O Becoming an Informed Citizen

Discuss with the class which.iobs seem both Congratulations, you finished the Business-
interesting and secure during economic down- Week Seminar. Now it's time to reflect on the
turns. \fere many of the same jobs presented by decisions you made.
different classmates? Make sure you understand
what makes one job more secure than another. Critical Thinking. \Mhat are the essential
elements you look for in career? Is it straight-
As a class, vote for the three jobs most likely
to withstand an economic downturn. As a class forward? Or creative? \X/hat are some ways you
reproduce the table that is below and create a can start to pursue your interests in this career?
comprehensive list on the board.
Analyzing Your Future. Howwill the state
Jobs to Withstand an Economic Downturn
of the economy affect your career?

Most Most Jobs Both Bu$tltrss &
I nte resti ng Secure lnteresting and ln.lfltfflti rA-+
Jobs Jobs Secure (Explain)
-*rd
1. 1. 1.

2. 2. 2. Rmth.er Exploration

3. 3. 3. To find out more about job trends during
economic downturns, visit the Glencoe
4. 4. 4. lntroduction to Busrness Web site,
www.introbus.qlencoe.com.
5. 5. 5.

After voting for the top three jobs, answer

the questions below:

1. Decision Making. \7hat were the top
three jobs? Of those three, which job is

most interesting to you? \7hy? \)7hat makes
one job more secure than another?

2. Negotiating to Arrive at a Decision. Do
you have to choose between interest and
security in a job?

Ja . Reasoning. From all the jobs you have
learned about, through your own research
and the job fair, which job are you most
likely to pursue? \fhy?

Markrotlng to

thro ffionsumer

Chapter 13 A Hunting They Will Go
Marketing in Today's
World Don't look now, but the Cool Hunters are watching you.
Chapter 14 Cool Hunters are market researchers who try to spot the next
big trend in teen culture, whether it's mood rings, skater slang,
Advertising: The An of or pocket TVs. They hang out at malls, parks, schoolyards,
Attracting an Audience dance clubs, and basketball courts, studying teens and taking
notes. They sell their information to big corporations that use
*]i :. it to design products, logos, and ad campaigns for teens.

I ttt the RealThing
During its first year in business, the Coca-Cola Com-
pany sold 25 bottles of coke.

J nt That One Commercial Again,

With That Cool Music

According to one survey, the average American sees more
than 20,000 television commercials each year.

! Synchronized Watches
In ads that show a watch or a clock, the time displayed is
usually 10:10.

! Have a Nice Day
The Smiley Face, which has been used in countless ad
campaigns, sold more than 50 million buttons at the
height of its populariry and was even issued as a postage
stamp. It was designed in 1963 by Harvey Ball, who was
paid $45 for it.

! Soap Box
Daytime TVt soap operas got their name from soap
companies, who originally sponsored them.

19z4 unit 4

a



ng in

Thda,ykUbrtd
G

Learning Objectives

After completing this chapter, Marvel Treats lts Characters
you'll be able to: Like Brands to Maximize
Profits With Savvy Deals. For
1. List the functions of
a few days inJune, Marvel Enter-
marketing. prises saw its lethargic share price
jump from $4 to $7, then tumble
2, ldentify the importance of back to $4. It's easy to see what
caused the brief excitement. Marvel
market research. owns the fantasy comic-book prop-
erty The X-Men andanticipation of the major morion picturet
3. Explain how channels of
premier was building. In fact, The X-Men film-from 20th
distribution work.
Century Fox-was a pretry big summer hit, raking in $150 mil-
lWhy lt's lmportant lion at the box office. Too bad Marvel hasrit been able to capital-
ize on the runaway success of its cool mutant X-Men characters.
Effective marketing puts the
Source: Excerpted with permission from "Can Marvel's Heroes Save the
products in the hands of its tar- Day?" Businessweeh Online, September 6, 2000.

geted customers. An Extension Activity

lKey Words In Chapter 6 you were part of a start-up company manu-
facturing new skateboards. You found financial investors. Now
market your friends ask you to plan the company's channel of distri-
marketing
marketing concept BUmbution. What is your plan?
target marketing
relationship marketing The Full Story
marketing mix
break-even point To learn more about Maruel's marketing plan, visitthe /nfro-
market research duction fo Busrness Web site at wvwv.introbus.glencoe.com,
demographics and click on BusrnessWeekFeature Story Chapter 13.
channel of distribution
direct distribution
indirect disuibution
wholesaler
retailer

196





lVlarket!m g Hssentials

J\ .Y,,Ifinagrkedtiinagmoansdkaeteabrroinagrds.reEqaucihreisteamdiaffpepreeanlsr strategy than market-
to people of different

ages, genders, and income ranges. Every holiday season more gadgets,

toys, and clothes hit the srores. Behind a product is a companyt intense

research, development, and marketing. To successfully market a prod-

uct, a company has to understand what people want ro buy and why they

want to buy it.

Baslcs of lVNarketimg

It all comes down to knowingyour marker. Market is a group of cus-
tomers who share common wanrs and needs, and who have the ability to
purchase the product. There's more ro marketing than just selling a prod-
uct. Marketing is the process of creating, promoting, and presenting a
product to meet the wants and needs of consumers. Marketing involves

a number of stages from studying what people want to buy
to designing a productt package. For example, you might
be part of the $7 billion market who buys video game con-
soles (see Figure 13.1). Businesses need to know their cus-
tomers'wants and needs in order to make a profit. This is
known as the marketing concept.

Businesses want you to buy their product so they per-
form detailed research on markets (like teenagers) to find
and analyze potential customers in their market. This is
called target marketing. Later on in this chapter, you'll
read how marketing decisions are made based upon target

marketing.

Functions of Marketing

There are seven functions of marketing. Each aspect is
important to the entire function.

Distribution. This involves moving goods and services BEYOND STREET.

from one place to the end user. Tlucks, trains, airplanes, SKATERS
and ships are possible transportation methods. Vans lnc., the maker of slip-
on sneakers for maverick
Financing. Money is necessary to keep any business teens who like to skate-
board, is about being mar-
afloat. Businesses decide if customers can pay with credit ket smart. The last thing its
or other payment options. audience wants is to be
beaten over the head with
Marketing Information Management. Making
slick advertisements. That
an informed decision requires good research and devel-
opment. Companies conduct market research to learn would be the fastest way to
more about their market. (Market research is discussed in losing loyalty.
more detail later on in this chapter.) Name some qualities about
the teen market. What do
Pricing, Marketers have to figure out what price to you want and need?

charge for a product so the company makes a profit. Mar- continued on p. 201
keting needs to consider the impact of distribution,
because each time a product goes through another chan-
nel of distribution the price goes up. (You'll read more
about channels of distribution later in the chapter')

Product/Service Management. Obtaining information, devel-

oping, and maintaining products helps marketers decide how to respond
to market opportunities.

Promotion. Communication through any type of media gets a busi-

ness's product out and into the hands of the public'

Selling. Retailers or the business-to-business market provides cus-

tomers or industrial users with goods and services. A popular trend in

todays marketing world is relationship marketing. Companies use

Chapter 13 Marketing in Today's World 199

GrcffiGi@ this strategy to build cusromer relations. In a

l"{-:Y;+l \\ffj:i-\/ nLl;LV-r?\XEU{-Lb-5 competitive world, this keeps a company aware
of how it's meeting its customers' wanrs and

needs.

Online Whiffs of Wonder Marketing Mix

ls that scent coming from...your com- Even before a product appears on the mar-
puter? Well, DigiScents, lnc., is developing ket, marketing specialists have to consider a

a digital scent device called the iSmell. Digi- number of questions. Who will the product
appeal to? How much should it cost? \Where
Scents has indexed thousands of odors
based on their chemical structure. Each should it be sold? \il4rat's the best way ro tell peo-
ple about it? The four elements of marketing-
scent is a digitized file, which can be embed- product, place, price, and promotion-are called
ded in Web content or an e-mail message. the marketing mix, or the four Ps.

The computer user hooks up iSmell to a Product. Marketing is used first to find out if

computer and requests a scent with the click there is a demand for a product. Then it is con-
of a mouse. cerned with how to present a product to the

Critical Thinking customer to make it as appealing as possible.
How to package a product is a major element of
How might online odors
help businesses sell their marketing. Packaging includes the design, color,
products? size, and even brand name of a product. Books

and CDs rely a lot on cover designs ro amracr

buyers.

PIace. Marketers have to figure our where ro
sell a product to get it to the right customers.

One of the first things they have to consider is
w/tere to se/la product. For example, a company is much more likely to
sell snowshoes in Maine than in Texas.

Then marketers have to consider in what kind of location to sell their
product. Does the product need to be at a fast-food restaurant or gas
station? Does the product need to be in a large department srore or a
boutique?

The placement of the product in a store is equally as important. V/hen
you first enter a store you'll see featured products on display stands. At
checkout counters, you'll find key chains, candy bars, and other small
items you might want to buy at the last second.

Price. To determine the price of a product a marketer considers three

quesrions: (1) how much are cusromers willing ro pay, (2) is the price
competitive with other products, and (3) can the company make a
profit? The amount of money a company has to make on a product to
pay for its costs is called the break-even point.

Promotion. Promotion consists of making customers aware of a

product. The most familiar form of promotion is advertising, which
will be covered in the next chapter. There are, however, many other

2OO Unit 4 Marketing to the Consumer

means companies use to promote a product. One way is to BEYOND STREET-
offer discounts in the form of coupons, rebates, and sales. SKATERS
Fast-food restaurants offer package deals with free toys.
It's no longer just about
Another way companies promote their products is the shoes. lnstead of mass
through public relations, or publicity. Publicity is a kind advertisements, Vans inte-
grates its products into
of free advertising. It consists mostly of news stories on lifestyles. The company
TV, in newspapers, or in magazines. For example, com- built skateboard parks
from West Orange, Calif.,
panies like Sony and Microsoft benefit from news articles
about the latest in high-tech products. Celebrities go on to Houston, Tex., for
talk shows and appear on magazine covers to promote
their new movie or CD. Big companies sometimes stage skateboarders.
media euents,like a big party or an awards show, to pro- Describe the marketing mix
mote the company or one of its products. of these skateboard parks.

, continued an p.203

Y/ Fast Review

1. \What is marketing?
2. \Mhat are a few functions of marketing?
3. Name the marketing mix, or the four Ps.

Market Research

Have you ever been approached by a marketing
researcher while you were shopping at the mall? Market

researchers commonly ask shoppers to take a few minutes
to answer questions, taste a new food, or watch a new

commercial.

Companies do market research to gather and study
information about consumers to determine what kinds of
goods and services to produce. Figure 13.2 (see the next
page) breaks down who uses market research the most.
Marketing experts keep track of consumers using surYeys,
sales figures, databases, and the census. Marketers analyze

and categorize their markets by demographics.

Demographics are facts about the population in terms
of age, gender, location, income, and education. Once
marketers know the demographics of a market, comPa-
nies can start developing products to fit that particular

grouP.

Product Development

The demand for products changes constantly. Fads and fashions go

in and out of style. New technology replaces old technology. A com-
pany's ability to create a new product or a slight variation of an already
successful one is important to increasing sales.

There are seven steps in developing a new product. You could use
these to develop a car, dish soap, a book, or even clothing. New prod-
ucts invigorate the marketplace. Let's look at the seven important steps.

Chapter 13 Marketing in Today's World 2O1

Generating ldeas. soda cans and leftover sandwich wrappers litter

a conference table. A group of coworkers brainstorm for creative ideas
for the companyt new product line. one writes down the group's cre-

ative ideas on an interactive SMART Board". people from th. com-
pany's development department, the market research staff and even

outside market researchers are generating ideas for a new creative prod-
uct. Collaboration is key to this step.

Screening ldeas. once the team purs together a final list of creative

ideas for the product, they're evaluated. How do these ideas fit the com-
panyt mission and the companyt strategy? Does the new produo com-

pete with one of the company's existing products? If the producr's

concept is risky, the company might ask consumers about the creative
concept. consumers would identify what they liked or disliked about

*Client industry groups for marketing research spend over $3

billion annually.
Why does the government spend money on marketing research?

lVIa rketi n g. fti the Consumer

the concepts. Their responses are crucial as to whether or
not the company continues with a proposed product.

Developing a Business Proposal. Once the cre-

ative idea passes the screening process, one or two of the
ideas are developed into a business plan. (This business
plan has many of the sam€ parts and pieces as the busi-
ness proposal you read about in Chapter 5.) The wrirten
proposal provides answers about the market, potenrial
sales, costs, profit potential, market trends, the competi-
tion's products, and the level of risk.

Developing the Product. Now that the companyt BEYOND STREET.
SKATERS
appropriate managers and decision makers are in favor of
the product, a prororype is made. This is a model of the lnnovating shoes has made
actual product. It's used ro tesr ideas. If any aspects of the Vans a reputable business
prototype need to be changed this is the stage to make pioneer. The latest is its
those changes. A company might experience delays in snowboard boots but it
decided against designing
finalizing the product as it is tested. The government inline skates. For its hard-
core skateboarders, inline
requires extensive testing during various srages of product skating isn't in their interest.
development. Any one of the resring srages may delay the Why do you think Vans
product. didn't try marketing inline
skates?
Test Marketing the Product. Once the product is
continued on p. 205
fully developed, the product might be test marketed. The
goal is to collect customers' responses. Sometimes, though,
the cost of test marketing a product isn't in the budget.
Also, testing may leave time for the comperiror ro pro-
duce a similar product. Then both products may enter rhe
market at the same time.

lntroducing the Product. The product passed the
market test. Now itt ready for the marketplace. Publiciry

is used to introduce the product. The costs of doing this are
often high. The company has a small amount of time in the
market before comperition produces a similar product.

Evaluating Customer Acceptance. Once the product is intro-

duced, marketers track customers' responses. The reports answer key
questions which inform companies' research and development. \7ho
are their best customers? \7hat new products are they buying? How

often do customers buy the new product?

dtrlrr

1. \ff/hatt the purpose of market research?
2. Name the seyen steps in developing a new product.

Chapter 13 Marketing in Today's World 2O3

Channels of Distribution

Marketers have to decide how and where customers will buy their

goods and services. (This rs the place step of the marketing mix that you

learned about earlier.) A good marketing strategy includes a distribu-
tion plan.

To make this .decision, marketers must decide on their channel of
distribution. A channel of distribution is a particular way to direct

products to consumers. Producers use a specific channel to moye goods

Reaching For a real estate broker to succeed, clients
Goals must trust him to help them make one of the
most important purchases of their lives. As a
To be a successful real result, Villalobos must sell more than prop-
erty; he must also sell personal credibility and
estate broker, Gerardo individual attention.
Villalobos has learned to
The most important qualification, Villalo-
manage his time, set
bos says, is to care for your clients. He
goals, and determine what
steps are necessary to achieve them. "You stresses, "You have to care for people. lf you
always have to be prospecting. lt's a2$-hour have that quality, people will work with you
job," he says. and you'll get referrals."

At 10 a.v. Villalobos starts off each morn- S"l.ty
ing at the office, where he attends meetings,
returns phone calls, and makes a to-do Iist. The median income of a real estate bro-
It's critical for him to be organized and flexi- ker is $45,640, with a range between $28,680

ble because he handles many clients at once and $80,070 a year.
and each client's case may be in a different
Oudook forThis Career
stage. Because the real estate market is This occupation is expected to have
extremely volatile, he must make long-term
adjustments as well: "You see the industry steady, average growth.
go up and down, and when the hard times
come you have to start all over again." How might technology make a real
estate broker's job easier? Does their
use of technology affect

buyers?

2O4 Unit 4 Marketing to the Consumer

to their final user. Direct distribution occurs when the
goods or services are sold from the producer direcdy to
the customer; an intermediary isn'r involved. Indirect
distribution involves one or more inrermediaries.

_ The biggest impact distribution has on marketing is

how it affects the price of products. Each time a product
goes through another channel the cost of marketing it
increases. \Tholesalers, retailers, truck companies, and

warehouses all have to cover their own expenses and make
a profit. Therefore, the cost of distributing a product has

to be added to its price, which makes it hard for some

companies to compere. Lett take a closer look at the chan-

nel members of distribution.

Channel Members

Moving the product from manufacturer to the final
user is an intermediary, or a go-berween. Intermediaries
can include distributors, wholesalers, rerailers, and today,
even the Internet.

BEYOND STREET-

Distributors. This kind of intermediary represenrs a SKATERS

single manufacturer in a geographic area. Cosmetics, cars, The founders of Vans
furniture, and shoes are sold through distributors. wanted to manufacture
shoes and sell them directly
Wholesalers. A wholesaler receives large shipments to its customers. Over 30
years later; Vans has sold its
of products from many different producers. They break products through its own
the shipments into smaller batches for resale. A company retail stores as well as
that makes canned peas may sell a truckload of its peas ro
a wholesaler. The wholesaler, in rurn, will sell a few cases independents.
of peas to several local supermarkets.
Do you show product loy-
Retailers. A retailer sells goods directly to the cus- alty? lf so, what are these
brands? Why?
tomer. This is the final stop in the channel of distribu-
tion. \7hen you buy somerhing in the supermarker,
drugstore, or department store, you're dealing with a

retailer.

Some manufacturers or service providers go directly to the customer.
The Internet encourages producers to distribute their products them-
selves. A virtual business (as you learned in Chapter 5) allows cusromers
to order online. This cuts down on the role of intermediaries, and can

cut costs and increase profits to the producer.

YI Fast Review

t. Channels of distribution are classified in which rwo ways?
) How does distribution affect the prices of products?

3. \X/hat are rhe major types of intermediaries?

Chapter 13 Marketing in Today's World

Summary

1. The functions of marketing include distribution, financing, marketing
information management, pricing, product and service management, Pro-
motion, and selling. The four elements of the marketing mix are product,
place, price, and promotion.

) Market research is important to study the customers' wants and needs and

buying behavior. A product goes through seven developmental steps. These
include: generating ideas, screening ideas, developing a business proposal,
developing the product, test marketing the product, introducing the prod-
uct, and evaluating customer acceptance.

3. A product has to go through channels of distribution to get from producers
to consumers.

O Using Business Key Words

People who market goods and services use the $l Prodrct, price, promotion, and place-the
1 activities that go into selling a product to
following terms. See how well you know them.
consumers.
Match the word to its definition.
/. Tl - gathering of information that busi-
. target marketing@ / nesses can use to determine what kinds of
o marketQ^
7q\
a , goods and services to produce.
QrL /
{. Agroup of customers who share common
a ,/ needs and wants.
/l . B,tsinesses need to know their customers'
a / - wants and needs in order to make a profit.

a /rlpopular trend in todays marketing world.
. /,//r_-_Detarled research on a particular segment
. marketing miEfr) ^
directdistributi6dr| / of the population.
. indirectdistributiXp t6. The amount of money a company has to
. retaile/f0 I , make on a product to pay for its costs.
. ^Oo 1/. Goods and services are sold from producer
. -"rk"ffi concept

. channel of distributionQ/

market researchf| ' , direcrly to the customer.
relationshipmarEelnq9
y5, Drlirrring goods and services with one or

\ The srudy of popularion. I more intermediaries.

/t Analyzing consumer wants and providing '/f. R...i res large shipment of products from

/. goodt and services to meet those wants. many different producers.
",+*"y to direct products to consumers.
Setts goods directly to the customer.
/
f,

2OG Unit 4 Marketing to the Consumer

OReview What You Learned OCritical Thinking

15. During what marketing function is rela- 31. How might products and services
tionship marketing a consideration?
designed to meet customers'wants and
16. Describe each function of marketing.
17. What are the four Ps? needs vary berween countries?
18. tWrhat's the purpose of market research?
19. Marketers analyze and categorize their 32. Some companies plan special events to
draw publicity for a new product. \What
markets by this. kind of event could a shoe company hold
to attract publicity for a new line of ath-
20. Describe the seven important steps in
developing a new product. letic shoes?

21. -Vhy are channels of distribution impor- )).a- Collect several magazines. Based upon the

tant? advertisements, describe which demo-

)) Describe the difference between distribu- graphic the magazines cater to?

tors and wholesalers.

Understanding Viewing and Representing
O Business Concepts
Examining the lmage. Carefully observe the
23. \X4rich of the four marketing factors do
you think is the most important? Explain photograph and write what you see. '{/hat do you
why. already know about the time period and the peo-
ple shown in the picture? \ff4rat can you conclude
24. Describe a situation when low pricing
does not mean low quality. Give an exam- about what is happening in the photograph?
ple that you have personally experienced. tffhat is being promoted here? Is more than one

25. List a product that you think might not thing being promoted? -What picture of the world
have been sold for a long time because of is being presented? Are the people or other things
the marketplacet lack of interest. here being depicted with accuracy, with bias, or

Have you ever purchased something with exaggeration? Vrite your answers.
based on an interesting marketing cam-
paign? Explain.

)7 -i7hat information do you like to have
included with a product that you buy?
What could market researchers learn

about a group of people by studying the
foods they bought in the last year?

29. Explain how the Internet is a channel of
distribution.

30. \Vhy do you think companies try to

design easily recognizable logos?

Chapter 13 Marketing in Today's World 2O7

Building Academie Skills

Sociological Decisions lower than the srore across town. If the jackets
sell for $129.99 at the other srore, whar price will
In a group, conduct a survey ofother students,
teachers, family members, and people in the com- you sell the jackets for at your store?
munity to find out what factors are mosr impor-
tant in their buying decisions. Use the survey ro @fiffi Analyzingand Creatirg
determine:
Using magazines or newspapers, find ,dY.r-
. \Which stores they shop in most frequently. tisements that appeal to different demographic
o \W/hat types of advertising they pay the most categories. Mount the ads on posrer board and
write a paragraph explaining how each ad appeals
attention to. to the particular demographic category.

r V4rat factors are most important to them Designing a Flier

when making decisions about convenience Imagine youve been hired ro create a public-
goods and services, shopping goods and ity event for a shoe store that plans to introduce
services, and specialty goods and services. a new line of athletic shoes. Using a word proces-
Thbulate your resuks and create a chart to dis- sor, write a one-page paper about the event you'll
play your findings. create. Using publishing software, creare a flier
that you could use to promote your event. Dis-
Pricing play the flier in your class.

Your boss has asked that you price the new
shipment of leather jackets that have just arrived.
She wants the jackets to be priced 11.5 percent

lLinking School to Home O Linking School to Work

Mini Survey. During the next rwo weeks, save Promoting a Product. If you're employed,

all the advertising and promotional material that choose a product sold by your company and
comes in the mail for you and your family. Cat- determine the following:
egorize each one based on the type ofproduct
being advertised. Conduct a mini-survey among . The pricing srrategy utilized by your
your family and friends. Find out whether or nor
they would buy the products based on the adver- company.
tising material that has been sent to your home.
. The marketing approach used to sell the

product.

. The channel(s) of distribution used to

direct the product to the consumer.
If you're not employed, choose a product
sold at school.

2Oa Unit 4 Marketing to the Consumer

E-Homework You read the first
part of "Can Marvelt
Applyr"g Technology Heroes Save the Day?,
at the beginning of this
Online Want Ads. Use the Internet ro chapter. Below are a
few questions for you
research the entry-level advertising positions to answer about Mar-
available online. Find out where the job is vel Enterprises. You ll
located, the starting salary, duties and responsi- find the answers to
bilities, and education required. Write a para- these questions when
graph summarizing your findings. you're reading the entire article. First, here are
the questions:
Surveying E-tailers. Select three stores that
you shop in regularly that also have a presence 34. What product does Marvel Enterprises
on the Internet. Log on to their \feb sites and
plan to use to become the leading enter-
evaluate their \Web pages in order to answer these tainment company in the world?
questions:
35. How is Marvel planning to change its
. Is the site attractive and user friendly? pricing strategy with movie studios?
' \X/hat types of products are sold online? Are
CREATIVE JOURNAL ACTIVITY
they different from the products sold in the Break into small groups. You're a product
stores? How?
team for Marvel Enterprises. Using one of its
. \X/hat security measures are in place to pro- characters, come up with a new product to sell.
How will you price it? How will you promote
tect online buyers? it? rVhere will you sell it? \7rite your ideas in
\7rite a one-page paper describing the site you a marketing plan and then present your ideas
liked the best and why. to the Marvel Board of Directors (i.e., your

d9onnecting Academics class).

Math. You're manager of the sweatshirt depart- The Full Storry

ment at tends, a clothing manufacturer. Trends To learn more about Marvel's marketing
plan, visit the lntroduction to Business
plans to produce 25,000 sweatshirts. The sweat-
shirts will be sold to stores for $ 16 each. The cost Web site at ww\ Lintrobus.glenco ,
of manufacturing and marketing each sweatshirt
is $ 10. How many sweatshirts must your depart- and click on BusinessWeekFealure Story
ment sell at $16 to reach the break-even point? Chapter 13.

Language Arts. \Morking in a team of three,

find and read several articles on marketing, mar-
ket research, or relationship marketing. Together,
create a one-minute news report titled, "Mar-
keting Fast Facts" on topics from the articles.

209

ktisin$TheArtuf

futra,cting iln Audien**

Learning Objectives The Portal's Approach to
Advertising. The slor most cov-
After completing this chapter,
you'll be able to: eted by advertisers on Super Bowl
Sunday isnt during the pregame
1. Identifr the differenr rypes show, or right before the start of the
celebrity-studded half-time extrava-
of media that can be used to ganzaIt wont be during the game at
advertise products. all. This year, the crbme-dela-crbme
2. List advantages and disad-
ofTV commercial positioning will be those precious three min-
Yantages for each type of
utes between the end of the National Football Leaguet champi-
advertising media. onship game on CBS and the beginning of the networkt second
Suruiuor series: "The Australian Outback."
). Name factors in the cost of
Source: Excerpted with permission from "Yahoo! and Pepsi: "Fusion
advertising.
Marketing" in Prime'lime," BusinessWeeh Online, January 26 2OOI.
Why lt's lmportant
An ExtensionActivity
Businesses rely on advertising
to get your attention and to pro- \fhy do companies hire models, actors, or other celebrities
mote their products. Advertising
pays for many of the costs ofTV, to sell products?
radio, newspapers, and magazines.
&BUvI $f)Ifiil&Tlt$f$lei..C-r h-
t Key Words
The Full Story
advertising
mass media To learn more about "fusion marketing," visit the lntroduction
direct- mail advertising to B u s in e ss W eb site at wwwintrobus. gle0coe.com, a n d
transit advertising click on BusinessWeekFeature Story Chapter 14.
infomercial
webcast
cyber ads
pop-up ads
banner ads
screen ads

210



Confronting lssues With lmages

II corporation iust might be watching you. \7hat you buy. How you
Lact. Anything that pushes your buttons is of inreresr to corpora-

dons that have something to sell.'w4rat they sell you is a product through

an image. Buying a product when there's an image attached-that some-

how it'll make you better looking or cooler-is exactly what the com-

pany wants you ro do. This way you help their profits.

Advertising Media

Advertisements are everpvhere you look. You see them on TV in

movie theaters, on the streets, at checkout counters, in magazines, on the
Internet, and on T-shirts. The average person sees hundreds of ads each

week. In a world with so many choices for essentially the same prod-
uct, advertisers use their wit, wisdom, and originality to ger consumer's
attention. often companies with deep pockets gobble up the market
share by spending the mosr on advertising campaigns. Advertising is
the paid, nonpersonal form of communication that businesses use to

DAdvertising slogans have become so well known in many cases
that people all over the country recognize them. Here are ten slo-
gans from advertisements.
How many of the products or services can you name?

1. "lf keeps going, and going, and going . . ."

3. "Doesnt your dog deserve _?"

5. "Dont leave home without it."

7. "Wouldn't you really rather have a _?'

9. "Tastes so good cats ask for it by name."

izc* ea:r'a:'

?=Ec4ff-
,{'

promote their products. Creating and using a cat.chy

advertising slogan over and over again is one way a com-

pany sells a product (see Figure l4.l).

Most ads consist of short messages designed to attract

your attention, identify a product, and tell you something
about it. They are sent using one or more types of mass

media. Mass media are means of communication such

as TV radio, and newspapers. The rype of medium an

advertiser uses depends on the market it wants to reach.

Print Media

Print media uses writing and pictures to communi-
cate. It includes newspapers, magazines, signs, and bill-
boards. In fact, the age of advertising began with the
invention of the printing press in the fifteenth century.
Fliers could be mass produced and put in newspapers or
posted in public places. It's stillone of the most popular

means of adverrising.

Newspapofs. Newspapers are the main advertising BATHED IN BLUI
medium in the United States. More than 50 percent of
Who doesn't love a sale?
adults in the United States read newspapers. Advertisers The ad promises 40 percent
off for that beach towel.
can target people within a certain area. This is especially "Excellent," you think. And
useful for neighborhood businesses like hair salons and you throw two into your

restaurants. Newspapers usually come out daily, which cart as a blue police light

allows businesses to run an ad several days at a time or f lashes.
once a week. Advertisers can also place ads quickly and
What store are you in?

update them easily. continued on p.215
The cost of printing an ad is fairly cheap. Newspaper

ads often include coupons that can be clipped out, so the

ads can have a life beyond the newspaper. On the other

hand, most people throw their newspapers away after they

read them, so an ad's lifespan is usually short. Ads have to compete with

news, sports, comics, editorials, and other features for attention. Many

readers simply ignore the ads. Since most newspapers are printed in

black and white and use recycled paper and soy-based ink, the actual

ad design is less intricate than in glossy magazines.

Magazines. Most magazines are national in scope and appear every

week (such as Time) or every month (such as Vanity Fair).People from
around the country can see the same ad in an issue of the magazine.
Many magazines also offer regional editions for different parts of the
country. Special-interest magazines like Tben and Sports lllustrated make
it possible to reach target markets on a large scale. For example, mak-
ers of computer software can reach the right market by placing ads in

magazines Llke PC.

Chapter 14 Advertising: The Art of Attracting an Audience 213

People take their time to read magazines and

often save them, so magazine ads have a much

longer lifespan than newspaper ads. Since people

tend to look at magazines more than once, they

might see the same ad several times. Most mag-

Pushing the Limits azines are printed in color with much higher

Advertisers reach people with push tech- qualiry ink and paper than newsPapers. For these
nology (also known as webcasting, chan- reasons the ads often look more attractive.
neling, niche casting, and narrowcasting).
The Massachusetts lnstitute of Technology Magazines are so broadly circulated theyre of
(MlT) students called their push product
fishWrap@, which refers to the old expres- little use to local advertisers. Another disadvan-
sion, "Yesterday's news wraps today's fish." tage is that magazines take longer to prePare so
ads are placed weeks or even months in advance.
They cant be easily changed or used to promote

a limited offer.

This personalized news service is tailor- Direct-Mail Advertising. Direct-mail
made for its users, who fill out a personal
advertising consists of ads sent by mail to peo-
profile when they subscribe. ple's homes. It's the biggest advertising medium

Critical Thinking after TV and newspaPers. Direct mail allows
advertisers to reach a specific target market. A
How might push technologY
work against comPanies that business can?ut together a mailing list of cus-
try pushing their tomers who live within a certain area, belong to
products to the a certain age grouP, or buy certain kinds ofprod-

marketplace? ucts. It can then mail ads only to people who

might be interested. For example, a college stu-

dent might receive ads in the mail for backpacks,

credit cards, or "spring break" specials.

Direct-mail advertisers can use a variety of

f61m315-lstters, fliers, postcards, and catalogs-

and include coupons or free samples. Internet servers such as America

online (AOL) send out free trial CDs through the mail. Direct mail

can also be used to make sales by including order forms'
The cost of sending ads through the mail can be very high. Mailing

lists have to be constantly maintained and updated' Only 1 percent of

people who receive ads in the mail actually respond. Direct mail is often

,.f.rr.d to as "junk mail" because people who receive direct-mail adver-
tising often throw it out without ever looking at it'

DirectOry Advertising. Directory advertising, which consists mostly

of phone books, is especially useful for local advertisers. They can list

th.i, .r.rlnber and display an ad under a heading for the type of prod-

uct or service they offer.
The cost of a directory is usually very cheap. Phone books are used

in almost every home, in all areas, and kept for at least ayeaf.They help

Iocal businesses by making it easy for consumers to find them on

demand.

A disadvantage of directory ads is that they have to compete with
numerous similai ads. Directory ads are so brief-often consisting of

214 Unit 4 Marketing to the Consumer

little more than a name, address, and phone number-

that they have no way to stand out. \X.4rich business a per-
son calls is often randomly picked. Most ads run can't be

used to advertise prices, sales, and they can't be easily

updated.

Outdoor Advertising. The mosr common form of BATHED IN BLUE
Kmart is known for its Blue
outdoor advertising is a billboard. Most billboards are
very large and placed near highways where they're highly Light Special. That infa-
mous voice over any one of
visible. They can be seen many times by thousands of its store's P.A. systems that
drivers. A billboard is usually placed for several months. calls, "Attention Kmart
They're useful for local businesses and businesses that shoppers!," was started in
cater to travelers, such as fast-food stands, motels, and 1965 by a store manager in
Fort Wayne, lnd.
radio stations. What do you think was
The main disadvantage of billboards is that people the impetus behind this

often drive by them too quickly to notice. If you see the creation?
same billboard often enough you also begin to ignore it.
Billboards are banned in some states, such as Maine and
Alaska, because they detract from the scenery. In many

urban areas like Los Angeles, billboards are restricted along
freeways because they distract drivers too much.

Transit Advertisitlg. Tlansit advertising uses public

transportation, such as buses and trains to display ads.
Thansit advertising usually consists of posters placed on
the sides of buses, in subway stations, inside trains, and
at airports. They're most common in urban areas where
public transportation is used more often. For this reason,
they're useful for advertising things like concerts, public
events, and local TV.

Broadcast Media continued on p. 2I7

Broadcast media (primarilyTV and radio) are the most
effective means of advertising. Over 9B percent of all
homes in the United States have at least one TV and almost everyAmer-
ican owns a radio. The popularity of broadcast media makes it possible
for advertisers to reach a mass audience. Figure 14.2 illustrates the
amount of money corporations will spend to get their product out there.

Television. Television has an advantage over any other media because
it combines sounds, images, and motion. Advertisers can be more
informative, entertaining, or creative with TV ads. Some ads are so effec-
tive that they become part of our everyday language.

TV ads can be shown on national, local, or cable stations to reach any
kind of market. Advertisers can also reach target markets by showing
ads during certain rypes of shows. Ads for an animated movie are shown
during Saturday morning cartoons and ads for an action movie are aired

during Monday Night Football.

Chapter 14 Advertising: The Art of Attracting an Audience 215

Most TV ads are 30- or 60-second "spors." Another type of TV
ad is the infomercial. An infomercial is a TV program, usually 30
minutes long, made to advertise a product. It is often set up like a talk

show with a live studio audience and a celebriqy guest who demonsrrates
the product.

The biggest disadvantage ofTV ads is that they can be very expen-

siye to produce. Advertisers also have ro pay to broadcast an ad during
a TV show The more popular a show is, the more it costs to air an ad
during it.

Radio. Like TV ads, radio ads can reach a very wide audience. Radio
ads may not be as effective as TV or even magazine ads, because they

can't use images. They can, however, use music, dialogue, and sound
effects creatively to get an audience's attention.

Radio stations broadcast within certain areas so they're a good medium
for local advertising. They also specialize in certain rypes of programs: talk

lthis chart shows the five companies who spent the largest sums

of money on advertising in a recent year. General Motors Corpora-
tion, for example, spent about $2.9 billion on advertising.
Think about the advertisements for these five companies. ln what
media have you seen their advertisements? Why do you think their
spending for advertising is so extensive?

shows, news, classical music, rock, or country-western music.

Advertisers can reach people on rhe move-when driving
or even jogging with a \Malkmanr.

Webcasting. \Webcasting is a new broadcast medium
made possible by the Inrernet. A webcast is like a TV or
radio broadcast but it's sent and received oyer rhe \feb. A

webcast usually consisrs of a live broadcast made by a \Web

camera (or "cam") crew hired to film a specific location

or event. For example, many radio stations now use Y/eb
cams so audiences can both see and hear the station. To
promote its products, a clothing company can broadcast
a live fashion show on the Internet. Marketers can also
use webcasting to promote concerts, sports, or other events
by broadcasting them live over the Internet.

Cyber Ads BATHED IN BLUE

Cyber ads are ads on that appear on rhe Internet. Recently Kmart developed a
They're different from webcasts in that they're displayed $30 million campaign to
like magazine ads rather than broadcast like TV ads. The modify the Blue Light Spe-
three main types of cyber ads are pop-up ads, banner ads, cial tradition. The idea is
and screen ads. Pop-up ads appear for a few seconds that every hour on the
when you first log onro rhe Internet or when you click on hou4 Kmart will select one
a site. Banner ads are displayed across the top or bottom item and drastically reduce
of the screen and remain there. Screen ads appear ar the its price for 20 minutes. The
left or right of rhe screen and can be printed for future blue light will go off and a
reference. To get to the advertisert \7eb site you simply song like Johnny Cash's
click on the ad.
"Blue Train" will play.
Cyber ads have many of the advantages of different Why does Kmart go to such
types of print media. They can be sent directly to people
on mailing lists and can include order forms like direct- creative lengths?
mail ads. Like directory ads, consumers can look up a
business easily by logging onto the Internet. Cyber ads continued on p.219
can erren be displayed in public (like billboards) on large
computer screens. They have an added advantage in that
they can use sound effects and animation.

{ Fast Heview

1. What are some of the differences berween newspaper and maga-
zine ads?

2. \fhat are some disadvantages of outdoor ads such as billboards?

3. Name places where you would see transit ads.
4. -Mhat are some advantages of advertising on rhe radio rather than

on TV?
5. \7hat are the three biggest media for advertisers?
6. \7hat advantages do print and cyber ads share?

Chapter 14 Advertising: The Art of Attracting an Audience 217

Advertising Rates

The amount of money it costs to display or broadcast an ad is sep-
arate from the amount it costs to actually produce an ad. News and
entertainment media pay for much of their costs by selling advertising
space. The advertising rates are determined by several factors: the size of
the ad, the number of people it reaches, how often it appears, when it

appears, and where it's placed.

Print Media

Newspaper and magazine rates are based on circulation, or the num-
ber of people who read them. An advertiser usually pays a rate for every

Bu*ina*r Buildlne B*eelx*

Distinguishing Between Practice

Relevant and IrreleYant Read the following case study Decide

Information what information is necessary for the
main character to know, and write that
Information bombards you. On the information on a piece of paper.

job, you'll have to figure out what Case Study: F,xamine
information is necessary, or releuant.
the Information
Other information is ine leuant. Irrele-
vant information may be very interest- You go to a local store to buy an
ing, but has no significant connection inexpensive CD player so you can lis-
to your work. To be successful in the ten to music on the bus. You're espe-
business world, you need to know how cially interested in a feature you saw
to distinguish relevant from irrelevant advertised in the morning newspaper.
information. You're looking for one with the anti-
roll feature. The clerk grabs off the
Relevant information will define, shelf a model thatt on sale. He says all
the cool color CD players are on sale.
explain, illustrate, or offbr cause-and- These also come with three free CDs
effect relationships concerning the main that are in the bin over there. You ask
topic you're exploring. Before gathering him how the anti-roll feature works
information, write down what you need on the model in your hand. He says it
doesnt have it. The clerk says that the
to know. If someone gives you irrele- CD players in the corner have that
mechanism, but they're not on sale.
vant information, ask questions that
will redirect his or her focus to whatt
important. If you're reading, learn to
sort out irrelevant information from
that which is important and useful.

218 Unit 4 Marketing to the Consumer

v-

1,000 people a newspaper or magazine reaches. Advertis-
ing in a local weekly newspaper costs a fraction of an ad
in a large daily newspaper. An ad in a national magazine
can cost thousands of dollars.

Newspaper and magazine ads are sold by the inch on
the page. Ads can be small display ads, half-page ads, or
full-page ads. Ads that appear on the front or back cover
of a magazine cost more than ads inside the magazine.
\Whether an ad is in black and white or color also affects

the cost.

Broadcast Media BATHED IN BLUE

The cost of radio and TV ads depends on the size of the ln the discount store arena,
audience. The cost to advertise on a national nerwork is competition is fierce. Kmart
much more expensive than on a local station. The cost is vying for customers just
also depends on what time of day an ad is broadcast. An
adinprime time costs more than an ad aired at midnight. like its main competitors
For radio, prime time on weekdays is during the morn-
ing or afternoon hours when most people are driving. TV Target and Wal-Mart. Each
prime time on weekdays is beween 8:00 and 1 1:00 p.rra. needs its own image. Kmart
when most people are home. Advertisers also pay more has an alliance with Martha
for special events like the Oscar@ Awards or the Super
Bowl. During the Super Bowl, a single 30-second ad costs Stewart to help distinguish
about $2 million. itself from the crowd.
How will Martha Stewart
Radio and TV advertisers usually pay for ads that are
10, 30, or 50 seconds long. They also pay more to show Everyday@ help Kmart?
an ad several times a day. Sometimes an advertiser buys

ads on different stations to be broadcast at the same time

or buys a combination of radio and TV ads. Advertisers
often hire media consultants and ad agencies to put
together advertising packages for them.

The fnternet

The cost of Internet advertising is based on the size and format of ads.
Advertisers can buy pop-up ads, banner ads, screen ads, or ads in other
formats. Ads can be large, medium, or small. The length of time an ad
runs also affects the price. Like newspaper and magazine ads, Internet
advertisers pay a certain amount for every 1,000 people that receive the

ad. The number of people who click on a \feb site determines this.

Fast Heview

1. What factors determine media costs?
2. On what day and what time might a film studio advertise an

adult, action movie?

Chapter 14 Advertising:The Art of Attracting an Audience 219





Summary

1. Advertising is a paid, nonpersonal form of communication that businesses
use to promote their products. Advertising media include print, broadcast,

and the Internet.

2. Printmedia like newspapers, magazines, direct-mail advertising, directory

advertising, outdoors advertising, and transit advertising are all highly visi-
ble in today's culture. Constant advertising makes consumers almost
immune to its effect. Companies spend millions of dollars hoping you pay
attention to their ad. You can find them on newsstands, sent to your home,
on the side of buses, or on billboards. Broadcast media like TV, radio, and

webcasting offer many advantages and disadvantages as well. \7hi1e TV is
highly visual and reaches national markets, it's also Yery exPensive to pro-

duce. Radio reaches a wide audience and is good for local advertising.
Lastly, people find cyber ads helpful or annoying. The use of sound effects
and animation might capture your attention while surfing the Internet.

3. Advertising rates depend on the length of an ad, when it appears, where it
appears, how often it appears, and the number of people it reaches.

lUsing Business Key Words A nonpersonal way of communicating with

There are many ways to attract an audience m the public, using a mass medium.
order to sell a product. See how well you under-
stand the terms that businesses use when they Ads on the Internet.
want to pass along information about their prod-
Means of mass communication such as TV
.ucts. Match each term with its definition.
radio, and newspapers.
adverti.irrg,c
I L\Web site that uses the Internet to broad-
. cyber ds (\
o transit advi-rtising cast information.

I Atelevision program that sells a product.
Internet ads displayed on the right or left of
/ ft
the computer screen and that can be

- printed.
71. Xd"rnising that uses public transportation
to disolav ads.
,L/

/9/ . Advertising sent to people's homes by mail.

I.,t.rn.t ads that are displayed across the

screen like billboards.

'/6, In rrret ads that appear briefly when a user

logs on or clicks on a site.

222 Unit 4 Marketing to the Consumer