PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS
DIPLOMA THESIS
2021 Bc. Kseniia Romanova
Prague University of Economics and Business
International Business – Central European Business Realities
Promotional activities of IQOS and their impact on brand preferences
Author: Bc. Kseniia Romanova
Thesis instructor: Ing. Květa Olšanová, Ph.D.
Scholar year: 2020/2021
Acknowledgement
I hereby wish to express my appreciation and gratitude to the supervisor of my thesis, Ing.
Květa Olšanová, Ph.D., for the support during the writing, and valuable inputs to the thesis.
Table of Contents
Introduction ...1
1. Methodology ...2
1.1. Study design ...2
1.2. Data sources ...3
1.3. In-depth interview ...4
1.4. Limitations ...5
2. Literature review...6
2.1. Law in marketing communications of tobacco products ...6
2.1.1. European legislation ...6
2.1.2. Tobacco regulation in the Czech Republic ...7
2.1.3. Regulation of alternative smoking devices ...8
2.2. Marketing mix ...9
2.3. Promotion as a part of communication mix ... 11
2.3.1. Advertising ... 12
2.3.2. Public relations ... 13
2.3.3. Sponsorship and events ... 14
2.3.4. Brand activation ... 15
2.3.5. Direct marketing ... 15
2.4. Consumer brand equity ... 16
2.5. Consumer purchase decision ... 19
2.5.1. Explanation of consumer behaviour ... 19
2.5.2. Factors affecting consumer buying decisions ... 21
2.5.3. Decision-making process ... 24
2.5.4. FCB grid ... 26
3. Introducing Philip Morris ... 29
4. IQOS: product description ... 31
4.1. IQOS technology ... 31
4.2. Product line ... 32
4.3. HEETS ... 35
5. IQOS promotional activities ... 37
5.1. Points of purchase ... 37
5.2. Digital channels ... 39
5.3. IQOS Partners ... 41
5.4. IQOS-friendly zones ... 42
5.5. Events and sponsorship ... 42
6. Results and interpretation of the research ... 44
6.1. Interview findings ... 45
6.2. Interpretation of findings ... 49
Conclusion ... 54
Bibliography... 56
List of Figures ... 63
List of Pictures ... 64
List of Tables ... 65
Appendix: Interview transcripts ... 66
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Introduction
Nowadays, tobacco organizations are facing serious government restrictions. In the Czech Republic, new laws and amendments are being passed periodically, and each time they further limit the marketing opportunities for tobacco companies to communicate with consumers.
Organizations involved in tobacco production use a variety of marketing communications tools, but not to the fullest extent. Among the limited number of tools available, they have to use only the most effective and legitimate ones. Besides, more and more consumers are looking after their health, and this global positive trend leads to lower revenues and even loss of market in the future for traditional tobacco companies. As the demand for cigarettes is constantly declining, tobacco corporations change their strategy in favour of less harmful smoking options. One of these companies is international tobacco corporation Philip Morris International Inc. (PMI) which intends to completely abandon traditional cigarettes, and focus on free-smoke system based on heated tobacco technology named IQOS (PMI, n.d.).
IQOS is an innovative alternative to traditional smoking: instead of burning tobacco, the device heats it, releasing far fewer harmful substances. It is an extremely successful product that combines a lower health risk for consumer, and possibility to apply traditional cigarette sales strategy for Philip Morris. Conventional e-cigarettes can be brand-independent, as the user can buy consumables from third-party manufacturers. For IQOS, in contrast - the user buys consumables, so called HeatSticks, only from Philip Morris.
This master thesis aims to explore marketing activities of Philip Morris in the Czech Republic to promote its innovative smoke-free device IQOS by circumventing tobacco control legislation, both through new types of communication with consumers, and by actively using tools such as direct and digital marketing. Thus, the relevance of the thesis is emphasized, on the one hand, by the appeal to study new promotional activities in tobacco industry and, on the other hand, by the interest to study the reactions of consumers to these marketing incentives.
Therefore, the goal of the thesis is to investigate promotional activities of IQOS and to explain how and in what way these activities encourage consumers to choose IQOS over other brands. Moreover, after evaluating the marketing incentives and consumer’s reactions towards them, recommendations for improving the communication strategy will be suggested.
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1. Methodology
An integral part of the research is the understanding of the theoretical framework that will help to facilitate orientation in the issue, and thus process the research. For this reason, in the thesis, I will comprehensively explain related theoretical aspects, while integrating explained tools into the research.
First of all, to reveal marketing possibilities for tobacco products, the regulation of tobacco advertising in the Czech Republic is introduced. The rest of the theoretical part is processed through review of promotion techniques used by marketers, analysis of consumer behaviour, and explanation of factors important for consumers in decision-making process. The research section is dedicated to the overview of IQOS as a product and its promotional activities held in the Czech Republic. In order to verify that IQOS promotional activities play crucial role in brand preferences of consumers, other chapters are devoted to assessment of consumer’s reaction to IQOS promotions in a form of in-depth interviews and evaluation of interview findings.
1.1. Study design
According to Hendl (2017), a case study is one of the methods of qualitative research, which can be described as a detailed study of one or a few subjects. As opposed to statistical research, where a relatively limited amount of data is collected from many individuals, a case study collects a large amount of data from one or a few individuals. Yin (2003) in his book mentions reasons why to design a case study, some of them can be found below:
a) the study aims to answer "how" and "why" questions;
b) researchers are not able to influence the behavior of participants of the study;
c) other conditions can be related to the topic of the study, and therefore shall be considered.
To conduct a case study, it is crucial to correctly determine the unit (also called the case) of analysis followed by the research question (Baxter & Jack, 2010). Trochim (2020) defines the unit of analysis as the major entity being analyzed during the study, he explains that the unit is determined by the analysis that researchers perform.
It is worth noting that different types of case study exist. Yin (2003) differentiates three of them: explanatory, exploratory, and descriptive. An explanatory study is based on a
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predetermined theory, it aims to reveal less known relationships of the case and analyze the causes and consequences - it explains how and why events happened (Kähkönen, 2011). An exploratory case study examines the structure of a case, defines hypotheses, questions, and proposes theories for the following studies in case there is a lack of information during the research (Kähkönen, 2011). Baxter & Jack (2010, p. 548) in their work explain a descriptive case study based on Yin (2003): they conclude that descriptive case study is concentrated on the comprehensive description of "phenomenon and the real-life context in which it occurred".
In the thesis, I aim to analyze the promotional activities of IQOS and their impact on the preferences of consumers, therefore the case study can be defined as an explanatory. This type of case study enables to explain relationships between promotions of IQOS, as a cause, and purchasing decisions of consumers as a consequence.
The case of analysis in the case study is the decision-making process of Czech consumers regarding the choice of smoking devices. Based on the case (unit) determined, it is now possible to formulate the following research questions: Do promotional activities of IQOS in the Czech Republic serve as an explanatory factor for the consumers to prefer IQOS over other brands? How communication of IQOS can influence the decisions of consumers? To answer the research questions, and to determine effectivity of IQOS promotions, it is necessary to study the issue from different angles. Firstly, it is important to understand what value the consumer gets from the brand; secondly we need to study consumer behaviour in order to assess factors that can influence their buying decisions. Based on it, we will be able to analyze which areas of consumer mind are touched by marketing mix of IQOS and its tools for communication, and therefore to conclude about their impact on the brands preferences.
1.2. Data sources
There are several strategies for obtaining data in qualitative research which are used depending on the objectives of the work. To reveal promotional activities of IQOS, field research together with analysis of available secondary data (desk research) will be performed.
To conduct desk research, I will use the document analysis method, which is a systematic procedure for reviewing or evaluating existing documents (Bowen, 2009); this type of analysis is less time-consuming, thus more efficient in comparison with other types (Bowen,
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2009). Within the analysis, data is being selected but not collected. Therefore, it is crucial to identify relevant information and to distinguish it from that which is inappropriate (Corbin &
Strauss, 2008). Primarily (field) research will be concentrated on observations from monitoring freely available promotional activities of IQOS on the territory of Czech Republic;
this will also include activities carried out in social networks.
To understand consumers' behavior, motivation, and to identify what encourages them to purchase the product, three in-depth interviews will be conducted. The interview process is presented in the following chapter.
1.3. In-depth interview
As mentioned above, one of the options for obtaining qualitative data is an in-depth interview, which takes place in the form of a two-way or multilateral conversation.
According to Boyce & Neale (2006) in-depth interviews help to explore new issues in depth going deeper into the thoughts, motivations, and attitudes of consumers; the core in the interview process is to understand respondent behavior and to analyze happened issue and its reasons (Boyce & Neale 2006). Therefore, the main advantage of the interview is the completeness of the obtained data together with the possibility of analyzing the respondent's behavior on the basis of the questions asked.
The process of conducting the interview consists of few parts; the first step is to outline the plan, where we should set up methodology, schedule and decide on sample (respondents to be involved). It is important to choose the participant that will best represent the opinions of the chosen segment (Boyce & Neale, 2006). The second part in preparation for the interview is to develop instruments: one of them is an interview guide that contains all areas, topics and questions that should be considered throughout the interview (Boyce & Neale, 2006). During the interview it is important to ask open-ended questions giving the respondent an opportunity to express his or her opinion. After the interview conducted, summary and analysis of responses should take place, later the findings should be reported.
Based on the above recommendations, each interview for this thesis will start with general questions to introduce the range of issues, and gradually move to special questions; in the middle of the interview the main questions related to the subject of research will be asked. I will try to let the respondents talk as much as possible while just leading them into the direction. Towards the end we will move on to personal questions as they require mutual trust.
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In order to summarize findings, the report supplemented with conclusions will be generated.
The interview transcripts will be presented in the annex of the thesis.
1.4. Limitations
The major limitation of the case study is a small sample size. For this reason it can be difficult to generalize the issue. However, through narrow description of the case a lot of insights can be discovered. For example, it will be possible to create the image of the IQOS customer that can be used as prototype for further studies. Moreover, Erickson (1986) highlights that the case may be further carried over into similar situations.
Another limitation is lack of experience of the researcher during the interview: in some cases the interviewer relies on own instincts when guiding the respondent. On the respondents’ side, a possibility of bias and subjective attitude towards the issue exists. However, many researches see these human differences as the main strength of qualitative case studies (Tomorrow’s Professor Postings, 2009).
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2. Literature review
In order to understand consumer reaction on certain marketing incentives, this part is devoted to understanding of theoretical concepts that will be further applied in practice. We will start with the explanation of legally possible marketing activities for tobacco companies, and move on to the understanding of consumer behaviour towards these marketing stimuli.
2.1. Law in marketing communications of tobacco products As Czech Republic is a member of the European Union, in this chapter we will consider EU legislation regulating advertising on tobacco products and electronic cigarettes together with the national system of regulation.
2.1.1. European legislation
One of the forms of regulation on marketing communication in the EU is the European legislation which consists of European Directives and National systems of regulation. EU Directives on advertising are set of regulatory standards applied in all EU countries, and they always need to be transposed into the national system of regulation. EU Directives regulate number of areas including advertising and sponsorship of tobacco products.
Directive on advertising of tobacco products sets just minimum standards of regulation, and national governments can adjust the regulation making it stricter. According to the regulation, the advertising is allowed only at points of sales and magazines for professionals. Advertising in television, radio, magazines for broad audience, and sponsorship of events that include several EU members is prohibited (EU, 2003). Moreover, according to Directive (2014/40/EU), all packages should be equipped with warning notices which precise formulation is provided by the directive. For some tobacco products such as “cigarettes, roll- your-own tobacco and waterpipe tobacco” it is also required to place pictures that show the effect on the organs combined with the warning notice (EU, 2014).
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Picture 1: Packages with a combination of health warning and picture
Source: plastovaprepravka.cz, (n.d.)
2.1.2. Tobacco regulation in the Czech Republic
One of the laws reinforcing EU regulation is Advertising Regulation Act (Zákon o regulaci reklamy č.40/1995); the act addresses the issue of restricting marketing communication in the tobacco industry. Under the act the advertising is allowed in the following forms:
- Print advertising intended for professionals in the tobacco trade (leaflets, posters, periodicals, etc.);
- Advertising in retailers with a variety of goods sold (only in spaces where tobacco products are placed) ;
- Advertising in specialized tobacco shops
- Sponsorship of motorsport championships and communication at the venue (only if the event does not involve more than one members of the EU or European Economic Area; allowed only in the territory of Czech Republic);
- Publishing of print media for third countries (not allowed for EU market) (Zákon č.
40/1995 Sb.).
Another act relevant for consideration is Food and Tobacco Products Act (Zákon o potravinách a tabákových výrobcích) implemented in 2020. The goal of the act was to strengthen consumer protection and increase consumer awareness of negative impacts of tobacco products. Under the act the following restrictions were applied:
- Ban on selling chewing tobacco or any other tobacco products intended for oral use;
- Ban of flavors in cigarettes;
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- Ban on images and motifs on the package of tobacco products suggesting smell or taste;
- Ban on elements suggesting economic advantage (Agrární komora ČR, 2016).
The Anti-Smoking Act (Zákon č. 65/2017 Sb.), which was implemented in 2017, also had an impact on the marketing of tobacco products. The act aimed at protection of adults, young people and children against the health consequences that tobacco products can cause. Some of the major provisions of the act include:
- Ban on smoking in hospitality industry (restaurants, cafes, bars, pubs, etc.);
- Ban on smoking on the public transport stops and platforms, in zoos (exception is smoking areas), healthcare facilities, schools and entertainment venues (MZCR, 2016).
2.1.3. Regulation of alternative smoking devices
Under the pressure of regulations limiting promotion of tobacco products, producers started looking for new ways how to run their business. One of alternative solutions was introduction of electronic cigarettes which, unlike regular cigarettes, do not contain tobacco. Electronic cigarettes deliver nicotine from a liquid placed inside the device. Another innovative product that was introduced is a cigarette that works on the principle of heating tobacco (IQOS and GLO).
Both alternatives are regulated by the same EU directives as tobacco products are, but not to the fullest extent. The same as for tobacco products and cigarettes, the directive sets requirements on safety, quality, packaging, and labelling. Some important requirements include a mandatory health warning on the package, list of ingredients contained in the product, information on the nicotine content and a leaflet with instructions for use (EU, 2016).
In the Czech Republic, Advertising Regulation Act (Zákon o regulaci reklamy č.40/1995) prohibits any advertising that can directly or indirectly promote electronic cigarettes and their refills through printed media such as periodicals, non-periodicals, leaflets, posters or other printed matter. As with the tobacco products, exception is only printed materials for professional use and publications for third parties (out of EU). Sponsorship is allowed only if it does not achieve a cross-border effect in any other way (Zákon č. 40/1995 Sb.).
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According to the Czech Anti-Smoking Act (Zákon č. 65/2017 Sb.), use of electronic and tobacco heating cigarettes is banned wherever smoking conventional cigarettes is also banned.
However, an important exception exists: it is allowed to use the devices in such areas as restaurants, cafes and bars unless the owner of the business prohibits the use. For the rest venues ban on smoking applies (Zákon č. 65/2017 Sb.)
2.2. Marketing mix
Marketing mix is a key instrument of modern marketing. Kotler (2015, p.73) defines marketing mix as “a set of tactical marketing tools (...).” Specifically, this includes product, pricing, distribution and communication policies. By using each of these policies, a firm's offer can be adapted to the needs of customers in the target market. Studying interaction of consumers with the elements of marketing mix is also important for understanding of consumer behaviour. The four components of the marketing mix are:
- Product - Price - Place - Promotion
All marketing decisions and actions involve the marketing mix to ensure the success of a product, service or brand in the marketplace. Marketing mix components are interdependent, they work in synergy. This means that each company has the composition of the marketing mix in its own hands, and there is no universal proportional optimization of the elements.
The product is the most important component of the marketing mix. Product serves to satisfy needs, wants or can be used for exchange. According to Kotler (2015, p. 276), “a product is anything that can be offered to a market for attention, acquisition, use or consumption”.
Generally, this element answers the question: “What does the market or the target audience need?” It can be both in a form of product (tangible) or service (intangible). In the tobacco business, it may seem that companies have nothing to offer the customer other than the product itself, but in fact, some market players have diversified their offer by providing other services connected with their product. This phenomenon will be elaborated further in the thesis.
The element “Price” helps to determine the cost of goods and assess the level of profitability of sales. Kotler (2010, p. 330) defines price as “the monetary amount charged for a product
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or service; alternatively, the sum of all the values that customers exchange for the benefits of owning or using the product or service”. Various discounts, credits, terms and payment options for the product are part of the price. In tobacco industry, due to limited communication opportunities, companies are increasingly directing their promotion to the pricing (Dewhirst, 2012). In the Czech Republic, price is an important differentiating factor in cigarette marketing. Because of the constant rise in the price of cigarettes, consumers are seeking for less expensive substitutes, which lead to increase in the share of low-priced cigarette brands on the market. Aa a result of such situation, for example in 2006, market share of Philip Morris on the Czech market was 6,2 percentage points lower than in the previous year (Novinky.Cz, 2006).
Place is another element of the marketing mix, meaning the process of distributing a product.
The main purpose is to effectively ensure the right model of distribution. The product can be very sophisticated, but if the company does not have a distributor through which to offer the product, it can be difficult to sell, and the product can fall below its potential. Distribution strategy of tobacco companies was usually aimed at increasing its availability on various outlets’ shelves, as, until recently, branded stores did not exist. Restaurants and bars also play an important role in the strategy, as most of the time, at the venues, only a single cigarette brand is presented for purchase, therefore it is a good opportunity to overcome competition.
Promotion or communication is one of the most visible groups of activities in the marketing mix (Pelsmacker, 2018). The aim of overall communication in marketing is to exchange information between producers and buyers. In addition, it also performs the task of persuading and reminding customers to respond to the product or service offered. Because of the limited opportunities, currently, tobacco companies are paying more attention to differentiation through new and efficient ways of communication, which can take place either directly or indirectly.
Table 1 indicates the main instruments used in the marketing mix. However, further in the thesis, we will concentrate on the tools of promotion element.
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Table 1: Instruments of marketing mix Product
(Customer need)
Price (Cost to customer)
Place (Convenience)
Promotion (Communication)
Benefits List price Channels Advertising
Features Discounts Logistics Public relations
Options Credit terms Inventory Sponsorship
Quality Payments periods Transport Brand activation
Design Incentives Assortments Direct marketing
Branding Locations Point-of-purchase
Packaging Exhibitions
Services Personal selling
Warranties Online communication
Source: Pelsmacker, (2018)
2.3. Promotion as a part of communication mix
As discussed above, marketing communication is about conveying information through different means of communication in such a way as to create one consistent message about the company. In today's competitive marketplace, most companies can't survive without marketing communications, moreover, marketing communications need to be intertwined with the other components of marketing more than ever before. The reason is in the hyper- segmentation of markets, since the increasing number of innovations means that the company must constantly analyze sales data, measure the effectiveness of campaigns, benchmark competitors and then react by adjusting different elements of the marketing mix (Frey, 2011).
Additionally, it is important for companies to be able to communicate not only with their current customers, but also with potential as the customer’s behavior is constantly evolving;
customer now is better and faster informed and has more bargaining power than ever before (Pelsmacker, 2018). Therefore, rather than depending on the information provided, consumer will find everything needed via the Internet and other technologies. At the same time, consumer can easily connect with other knowledgeable consumers in order to exchange experiences with the product or the brand itself.
When planning communication mix, companies should be guided by communication goals such as informing, creating demand, positioning or sales stabilization (Král, 2020). The main tools used for achieving these goals are indicated in the last column of Figure 1. However, as explained earlier, not all communication tools are available for tobacco companies. Therefore
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in the following chapters we will consider the activities that are allowed for them by the legislation.
2.3.1. Advertising
Term “advertising” is usually misunderstood by many people; they consider it as all marketing activities. In fact, advertising is just one tool in the communication mix. W.J.
Stanton, the author of Fundamentals of Marketing, provides the following definition of advertising:
“Advertising consists of all the activities involved in presenting to a group a non-personal, oral or visual, openly sponsored message regarding a product, service or idea, this message, called an advertisement is disseminated through one or more media and is paid for by the identified sponsor”(Definitions of Advertising: As Given By Eminent Authors, n.d.).
From this definition it is worth noting that advertising is non-personal mass communications.
Sender, i.e. firm, conveys messages through paid space in the media in order to achieve its goals (Pelsmacker, 2018). Advertising has a very important place in the communication mix because it helps to raise brand awareness and influence attitudes, i.e. its main function is brand building (Karlíček, 2011).
When we talk about advertising, it is in most cases paid information that is disseminated through various media, mainly TV, radio, newspapers, magazines, billboards, banners on websites (Pelsmacker, 2018). However, for tobacco industry, most of these channels are closed. Advertising tends to be always targeted at a specific segment, and the content varies according to the target of the message, e.g. advertising to promote a product launch or reminder advertising.
By the means of advertising, tobacco companies try not only to encourage current smokers to smoke more, but also attract a new generation of tobacco users, as the industry is constantly losing customers because of tobacco-related diseases or decisions of consumers to quit (WHO, 2008). As a result, they develop campaigns to entice young people to smoke.
However, the industry claims that the advertisement is only targeted at adult smokers and non-smokers, but some researches show the opposite (DiFranza et al., 2006).
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During the media planning process it is crucial for marketers to consider characteristics of media type, i.e. its advantages and disadvantages. Characteristics of advertising media used by marketers of tobacco companies is presented in the below table.
Table 2: Advertising media intended for tobaccoproducts and media planning criteria
Media type Advantages Disadvantages
Print media (intended for professionals only)
Selective on specific target groups
High involvement
Lot of information
Brand building
Geographically inflexible
Rather slow medium
Low reach
Digital Cost-efficient
Flexible
Brand building
Activating/interactive
High reach
High frequency
Potentially strong context
Selective
Measurable
Potentially intrusive
Low involvement
Low attention
Clutter
Outdoor (at points-of- purchase only)
Wide reach
High frequency
Long message lifetime
Immediate reach
Geographically flexible
Low involvement
Low attention potential
Limited amount of information
No context
Selective reach is impossible
Source: Adapted from Pelsmacker, (2018)
2.3.2. Public relations
According to the Public Relations Society of America (PRSA, n.d.), “Public relations is a strategic communication process that builds mutually beneficial relationships between organizations and their publics”. From the definition, we can highlight that public relations consist of all the communications a company instigates with its audiences or stakeholders.
However, in such a case the question about the difference between PR and advertising arises.
The key difference is that, in contrast to advertising, PR is not paid by the company (Pelsmacker, 2018).
Nowadays, there are many tools available for use within the PR; some of the major are press releases and conferences as their goal is to generate the publicity, which is one of the activities of PR. Publicity is impersonal mass communications in mass media, but it is not paid by a company, and the content is written by journalists (Pelsmacker, 2018). Other
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activities include CSR, lobbying, media relations, sponsorship, events, and communication with opinion leaders (Král, 2020). The last three instruments are the most effective ways how tobacco industry targets consumers and builds brand equity. Through the opinion leaders they try to influence the opinions of customers as, opinion leader’s thoughts, judgements, ideas, and actions serve as a model for others (Chu et al., 2019). While sponsorship and events help to strengthen the image and increase brand awareness.
Figure 1: Tools of PR
Source: Author creation based on Král, (2020)
2.3.3. Sponsorship and events
As mentioned above, sponsorship is one of the ways how to increase brand awareness indirectly. Different types of events such as social projects, sports, education can be sponsored by the company (Pelsmacker, 2018). However, cuurently, in the Czech Republic, tobacco companies cannot sponsor any events apart from motorsport championships.
Generally, sponsorship works in such a way that the sponsor (company) provides funds, goods, services or other inputs to sponsored organization in return for traslation of the brand during the event. Thus, the sponsor helps the sponsored company to carry out a project and the sponsored company helps to fulfil the sponsor's communication objectives (Karlíček, 2011). In addition to brand awareness and other goals, tobacco companies in particular use sponsorship as a mean to increase the perception of the company as socially responsible (Tobacco Companies’ Public Relations Efforts, 2008). As explained by Creyer & Ross (1996), people tend to endorse sponsorship more than other PR activities.
Companies can also sponsor or organize its own events, for instance for its sales team, its clients and prospects, personnel, distribution network, etc. (Pelsmacker, 2018). However,
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organizing own event is usually more complicated, expensive and time consuming. By either participating in sponsorship or creating its own event, companies reach a large number of people from its target audience; therefore they usually choose events that are positively perceived by their target group (Karlíček, 2011).
2.3.4. Brand activation
The purpose of brand activation is to integrate all available communication means in a creative platform in order to stimulate interest of consumers and enhance the brand image.
The brand activation is usually performed through trial initiating, i.e. marketers are trying to create brand experience, and thus secure customer loyalty (Pelsmacker, 2018).
Sales promotions are part of brand activation, they include a wide range of tools that attract the consumer's attention and at the same time provide them with information which may lead them to buy the product. Most of the time, marketers use promotions in order to stimulate sales. However, the results tend to be only for a short-term period - promotions do not create a lasting preference for the product, they are only intended to stimulate faster or greater purchases of certain products (Kotler, 2010). Some examples of sales promotions are price cuts, coupons, loyalty programmes, competitions, and free samples (Pelsmacker, 2018).
Another element of sales promotions is point-of-purchase communications with its tools such as displays, advertising within the shop, merchandising, article presentations, store layout, etc.
(Pelsmacker, 2018). Marketers of tobacco products use this type of promotion most commonly, as it allows reaching broad audience. The point-of-purchase communications aimed at encouraging the customer to buy the product: they provide information and argumentation to purchase, opportunity to compare product options, and allow for introducing new products to customers. According to American Academy of Advertising, majority of purchasing decisions are made by consumers directly on the sales floor.
2.3.5. Direct marketing
There is a variety of direct marketing tools that are used by business, some of them include personalized brochures, direct mailing, and direct response advertising. However, personal selling is one of the oldest and most important tools of the communication mix used by companies nowadays. The main advantages are direct contact with the customer, the possibility of immediate feedback, and a high probability of customer loyalty (Karlíček, 2011). Personal communications are mainly interactive marketing actions with the aim to
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persuade potential consumer by conveying a message (Pelsmacker, 2018). This tool can be used in both B2B and B2C markets. However, in B2B it is exploited the most frequently, personal selling can be even considered as the key tool. Exhibitions, trade fairs and sales representatives are the most effective forms of direct communication for industrial markets.
Until recently, tobacco companies did not use personal selling on B2C market because there were no branded shops. However, with the advent of new smoking devices, companies turning to this type of communication more and more. Currently, it is a personal selling that is the hallmark of the communication strategies used to promote innovative smoke-free devices.
Direct marketing can also take a form of online marketing which is nowadays the most widely used and effective way how to communicate with the customers or prospects (Kotler, 2010).
To communicate with the customer online, companies can use such tools as online banners, pre-roll video ads, websites and advertising on social media (Pelsmacker, 2018). Online marketing has many positive characteristics, including personalization, precise targeting, interactivity, easy measurement of effectiveness and relatively low costs. On the other hand, despite the fact that the Internet is a mass media, not everyone can access it. Just like with personal sales, traditional tobacco companies never used website of the brand to promote and sell their products online, but with the advent of heated tobacco products the situation has changed.
2.4. Consumer brand equity
As indicated in the methodological part, we are looking for the issues influencing brand preferences of customers. Therefore, we should also study the issue from the customer’s perspective. It is important to reveal set of customers’ perceptions about the brand which arise due to the formation of knowledge about this brand. Those perceptions, in turn, influence the attitude of consumers to the marketing mix of the brands. The concept of consumer brand equity described below will help to understand how the attitudes of consumers are built, and thus will be useful for analysis of consumer preferences.
Pickton & Broderick (2005) state that brand, as a set of attributes having a meaning, is able to create associations with the product when a person is considering that brand or product. It is very common for consumers to use brands as means of self-expression or self-identification.
With the help of brands, consumers express their self which can be actual, desired or ideal (Pelsmacker, 2018). Consumers also develop relationships with brands; hence brands can
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influence their behaviour (in particular such market indicators as awareness, satisfaction, preference, loyalty, etc.) (Pelsmacker, 2018). This mutual relationship between brand and consumer is an integral part of brand value.
It is important to distinguish between the two concepts – brand value and brand equity.
Brands are important intangible assets in marketing; and marketers use concept of brand equity to determine the value of the brands (Král, 2016). According to (Yoo, 2000) brand equity is understood as the value added to a product by virtue of its brand name; it is formed by brand characteristics and elements (assets and liabilities) such as “name or symbols that add to or subtracts from the value provided by a product or service to a firm and/or to this firm ́s customers” as defined by David Aaker (Král, 2016, p. 123).
In marketing two types of brand equity are distinguished – consumer and financial (Pelsmacker, 2018). The latest is used for measuring financial value for the company; in this thesis we will concentrate on customer brand equity which is more important for marketers as it helps to indicate how success of the brand is linked to positive attitude of consumers in relation to that particular brand. Hence, customer brand equity can be defined as brand’s value assessment in the minds of customers (Pelsmacker, 2018). Under the value assessment (Kotler, 2016) considers perception of customers about the product or brand. Components of brand equity are presented on the below figure.
Figure 2: Components of consumer brand equity
Source: Aaker, (1996)
Brand equity
Awareness - deep awareness - broad awareness
Imagery/feelings - user image - usage imagery - brand personality
- brand feelings
Brand loyalty - price premium - satisfaction/loyalty
- market share Other assets
- distribution - shelf space - patents and
trademarks Performance/perceived
quality - attributes, benefits
- style, price - quality, superiority
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Companies aim to create awareness of the brand and to achieve a positive perception of the brand during the first contact with the consumer (Pelsmacker, 2018). Awareness can be defined as consumer's knowledge of the existence of the brand, in other words, it is the consumer’s ability to identify the brand (Král, 2016). Awareness is also important in decision- making process of consumers; if the consumer does not know about the existence of the brand, the contact is impossible. For this reason communication mix is one of the determinants of brand awareness.
Emotional component is another important part of consumer brand equity. At this stage consumers have certain perception or opinion about the brand in their mind before the first contact (Pelsmacker, 2018). Customers form perceptions based on associations obtained from advertising or positioning, therefore, it is crucial for marketers to match these points (Pelsmacker, 2018). After the first contact with the brand, consumers are able to formulate their opinion about the quality of the product; as explained by David Aaker, they evaluate
“superiority of a product or service with respect to its intended purpose, relative to alternatives” (Joshi, 2005, p. 342)
Loyalty is the highest form of brand preference. In contrast to brand attitudes, loyalty implies strength of association between a consumer and the brand (Král, 2016); it is the willingness of the consumer to buy the product even in the situation when there are some reasons to buy other brands. Pelsmacker (2018) differentiates levels of loyalty based on strength of connection/attachment to the brand as indicated in Figure 2. When building brand loyalty communications play as much a role as in building awareness - they help to maintain and develop brand.
Figure 3: The loyalty pyramid
Source: Pelsmacker, (2018)
Commited buyer Likes the brand - considers it a
friend
Satisfied buyer with switching costs
Satisfied/habitual buyer who has no reason to change Switchers/price sensitive - indifferent - no brand loyalty
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2.5. Consumer purchase decision
Nowadays, customers are target of any action by marketers who seek to find the best ways to meet their demands and interests. Therefore, it is necessary for the firms to study consumers’
buying behavior in terms of their motives and habits. Customer’s buying process can be described as a process of selecting alternative solutions, thus it is important that marketing activities differ from the competition. The marketing strategy should be formulated in a way that it provides the consumer with more value than competitors. For this purpose marketers create unique selling proposition, conduct promotions and other various advertising campaigns. Communication tools, however, will not achieve their benefits if businesses do not know their audience. Without knowing the consumers, their preferences and needs businesses will not be able to conduct effective marketing communication. Thus, in order to anticipate consumer reactions and understand how marketing activities can influence consumer preferences, we should examine the journey customers go through before they make a purchase decision. In this chapter we will start with investigation of buyer behaviour to reveal process of making decisions about purchases, and continue with factors influencing those decisions. We will also analyze consumer decision-making process to understand at which stage businesses can influence the decision of the customer by using its promotions, and consider how certain types of products are perceived by consumers.
2.5.1. Explanation of consumer behaviour
Consumer behaviour can be described as a certain established pattern of people's interaction with the marketing environment. It studies the process of choosing, buying and using goods, services or ideas among different groups of consumers (Blackwell, 2001). Hence, consumer behavior includes everything that leads to purchasing activity and subsequent use of products.
As explained, consumer behaviour does not occur in isolation, but rather interacts with other components of human behaviour. For this reason, to study consumer behaviour, we can rely on model-based perspectives (Zamazalová, 2010). Nowadays variety of approaches to modelling of purchasing behaviour exists; some of them are: economic, sociological or psychological. In this chapter we will consider psychological approach that is generally divided into two categories: behavioristic and neobehavioristic models.
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Behavioristic models
Behavioristic or so called stimulus-response models (SR models) trace the relationship between directly observable stimuli and responses of consumers to those stimuli (Redler, 2021). Stimuli may be expressed in the form of internal or external stimuli to the senses of the consumer, while reactions appear in subsequent consumer behavior. However, the model is being criticized for ignoring “inner” factors such as consumer personal preferences, mood, etc. (Redler, 2021).
In the course of the interviews, which are part of the research in the thesis, it is important to reveal in what way IQOS marketing stimuli touch the consumer senses. Having studied the existing literature, we can assume several factors that serve as stimuli for consumers to purchase smoke-free alternative, they are: new taste experience, health concerns, ability to smoke in enclosed areas, digital technology and premium offers (Research&Markets, 2020).
Figure 4: The basic structure of SR models
Source: Author creation based on Redler (2021)
Neobehavioristic models
When considering consumers’ stimuli and reaction, neobehavioristic or so called stimulus- organism-response models (SOR) also take into account unobservable processes in the consumer’s mind (Redler, 2021). These inner processes such as psychological characteristics or personality type are placed in so called “black box” of the model which is the consumer's consciousness, sometimes also called organism (Lamb, 2004). The consciousness of each buyer has certain characteristics. These features, the characteristics of the buyer, have a major influence on how the person perceives the stimuli to buy, and responds to them (Lamb, 2004).
The response can be understood through explanation of stages of consumer decision-making process that will be described in following chapters.
According to the SOR model, the stimulus first affects the consciousness and the consciousness in turn triggers behaviour (Redler, 2021). Important to mention, when
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considering this model it is not always possible to determine why a particular stimulus caused the particular reaction of the consumer; the model does not explain why some stimuli have more impact than others, and why different consumers respond differently to the same stimulus (Esser, 2008). Inside the “black box” various non-observable variables (e.g. memory, attitudes) interact and determine if and how a response, in this case, purchasing reactions such as choice of goods, company, time and volume of purchase occur (Cornelis 2010).
According to (Kotler, 2010) mental processes in the “black box” are influenced either by marketing mix, which is controlled by marketers, or by other external factors such as economic, political, technological or cultural environments.
Figure 5: The basic structure of SOR models
Source: Author creation based on Redler (2021) and Kotler (2010)
2.5.2. Factors affecting consumer buying decisions
As discussed earlier, majority of companies' marketing policies are based on consumer behaviour and the factors that influence purchasing decisions. Currently the main question in any market research is how consumers react to the different marketing stimuli applied by businesses. A firm that understands how consumers react to various product features, prices, or advertising, will have a huge advantage over competitors. For this reason businesses spend so much time investigating the relationship between marketing stimuli and consumer responses. However, consumers do not make their decisions in isolation. Lamb (2004) differentiates four main groups of factors that have an impact on consumer decision making process; they are cultural, social, individual, and psychological factors. Most of the time, these factors are beyond the control of marketers, but still should be taken into account.
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Figure 6: Factors infuencing consumer decision making process
Source: Lamb, (2004)
Cultural factors
Culture, subculture and the social status of the customer plays the most important role in consumer behaviour. According to Aaker (1996), some of the elements of a culture are values, perceptions and needs, and they are embedded in a person by his family. However, culture influences not only intrapersonal components such as values and attitudes, but also the processes of socialization. Within certain social groups there are some subcultural groups which determine the patterns of consumer behavior of their members. People unite on the basis of national, religious, racial features, or geographical region. Differences between countries are evident in the ethnic composition of the population (Malhotra, 2006). Each ethnic group has specific needs and purchasing habits. Therefore, a significant number of businesses adapt their production based on those ethnical differences. Another important component of culture is a social class – group of people whose members have approximately the same interests, behavior, and values. Members of social classes have certain common preferences in their choice of different products and brands. Some businesses take advantage of this fact to focus their attention on meeting the needs of a particular class.
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Social factors
In addition to culture, consumer behavior is influenced by social factors such as reference groups, family, and opinion leaders. Reference groups are able to influence not only persons’
behavior but also their attitude toward something or someone. For example, in order to save time, people tend to ask their friends or family (one of the most influential reference groups) about the product they wish to purchase. Thus, consumer’s decisions can reflect the impact of reference groups and family.
Individual factors
Individual characteristics such as age and life cycle stage of the family, work, economic situation, lifestyle, character traits and self-esteem also have a significant impact on consumer's decision (Kotler, 2016). Throughout life, a person acquires a variety of goods and services. For example, a child probably does not know much about smoking and does not think to try it, an adult seeks to try a variety of products and thus can start smoking, and in old age he can meet health issues and quit. The consumption structure of an individual also depends on what stage of the life cycle his family is at. Studying certain personality types, another element of individual characteristics, allows businesses for determination and prediction of relatively constant and consistent reactions of consumers to environmental influences (Oke et al., 2016)
Psychological factors
Motivation, perception, learning, and beliefs & attitudes are four psychological factors by means of which the consumer engages with the society. By discovering these features companies are able to better meet customer needs (Oke et al., 2016):
- Motivation: most of the customer needs do not require immediate fulfillment. A need becomes a motive when it forces a person to act, and its satisfaction reduces psychological tension.
- Perception: very often people perceive the same situation differently. As a result, the consumer does not always see or hear the signals sent to him by marketers.
- Learning: by doing some processes person learns certain knowledge, thus learning can be seen as certain changes in human behavior that occur as person accumulates experience.
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- Beliefs and attitudes are formed through actions and learning, and thus influence consumer behavior. Firms are very interested in customers' beliefs about products and services, as it helps them in creating images of products and brands. Based on beliefs, people take actions (Kotler, 2015).
The evidence suggests that decision on use of tobacco depends on the factors explained above. However, research did not prove a certain impact of each factor on the decision.
Supposedly, interaction of all factors allows influencing the process of decision-making on tobacco use (U.S. Department of Health and Human Services, 1998); all together, factors create either barriers for smoking or facilitate it (Mohammadnezhad et al., 2015). For example, use of tobacco can be determined by cultural factors such as traditional tobacco use or acculturation (U.S. Department of Health and Human Services, 1998), at the same time, it can be influenced by reference group’s attitude towards smoking, social norms or individual perception.
According to the above explanation, we can conclude that businesses should optimize their marketing mix by identifying and using the most significant factors or their mix, affecting the decision-making process of the consumer. This optimization should take place at each stage of the decision-making process which will be explained in the following chapter.
2.5.3. Decision-making process
In order to succeed in sales and attract more audience firms need to know what stages consumers go through in the process of choosing products or services. Knowing the stages of this process companies are able to influence the decisions of their customers.
According to (Kotler, 2007) the consumer buying process begins long time before the actual buying and carries on after the purchase has taken place. The consumers go through all five stages indicated below in any purchase. However, in ordinary shopping, they tend to skip some of the steps, relying on stereotypes. There are also situations where consumers can change the sequence of steps.
Figure 7: A problem-solving perspective on the five steps in consumer decision
Source: Engel, (1990) Need
recognition Search for
information Alternative
evaluation Purchase Outcomes
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One of the models of consumer decision making process was mentioned in the book of Engel, (1990). Authors use approach of John Dewey that describes decision-process behavior a problem solving. By problem-solving authors understand actions that are undertaken in order to satisfy the need.
Need recognition
At this stage the customers realize a difference between their actual and desired state (Engel, 1990); they identify a need and believe that it can be met. There are many factors that can trigger the need, however only few of them (usually ordinary human needs such as hunger or thirst) lead to an immediate purchase response (Pelsmacker, 2018). For businesses it is important to identify the circumstances that prompt the person to recognize the problem. It is necessary to find out what caused the emergence of a problem or need and how they led the consumer to a particular product. By doing so, it is possible to identify stimuli that attract the individual's interest in the product more often than other.
Search for information
Since the identification of a need triggers an immediate purchase response only in some cases, need recognition phase is followed by the information search. In situations where consumer is excited about the product or the need is very strong, search for information is unlikely to happen at all. Yet conversely, the need can be fixed in the memory and prospective customer will start searching for information. The information can be obtained from various sources, starting from personal (friends, family) and ending with commercial sources such as advertising. Important to note that most of the information comes from commercial sources managed by marketers, however the most effective are personal (Pelsmacker, 2018). For this reason marketers should pay just as much attention to reference groups.
Alternative evaluation
Consumers use information to compile a set of brands from which they make a final choice. It is important to understand how choices are done among several brands, and how the consumer evaluates the information: consumers view given product as a set of properties;
different consumers consider different properties that are relevant to their needs. They also tend to create a set of beliefs or perceptions about brands or products which is known as a brand image (Kotler, 2015).
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Purchase
The evaluation of alternatives leads to a ranking of products in the set of choices. The consumer intents to make the most preferred purchase. In such situation marketers need to understand how exactly the choice among several brands is done; in other words they need to find the most important benefits of the consumers in their decision-making process. When deciding about a purchase there are some factors which can interfere: attitude of reference groups to the brand (consumer’s decision may be based on attitudes of other people) and unforeseen circumstances such as the loss of a job, or the need for some other purchases (Kotler, 2015).
Outcomes
After the purchase is made, consumer evaluates if chosen product meets his needs and expectations, thus he can either be satisfied or dissatisfied. Companies should not mislead the customer if they want to keep long-term relationships (Kotler, 2015). For this reason it is recommended for businesses to establish mechanisms for capturing dissatisfaction and address the factors that cause it.
After identifying different stages of consumer decision-making process, we are able to connect them with the concept of neobehavioristic models as discussed in chapter 2.5.1. Need recognition, search for information and alternative evaluation are three stages that can be placed in the consumer “black box”. The rest of the stages of decision-making process are based on the “black box” and therefore are related to the reaction of consumer.
2.5.4. FCB grid
In order to structure the information about purchasing behavior and to identify brand or company positioning in the minds of consumers, it is good to introduce Foot-Cone-Belding (FCB) grid model. The model was presented by Vaktratsas (1999) and integrated different sequence models to understand the way consumers process given marketing communications.
In the model, four different situations are distinguished: the high-low involvement and think- feel dimensions. According to Pelsmacker (2018) involvement expresses how important a given product for consumer is. It is the extent to which a person has to think it over and the level of perceived risk associated with an inadequate brand choice. The think-feel dimension represents the extent to which a decision is made on a cognitive or an affective basis.
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Figure 8: The FCB Grid
Source: Author creation based on Nuweihed, 2018
The upper-left quadrant describes purchase situations where involvement is high and the method of cognition is predominantly intellectual (rational decision criteria). This situation corresponds to the model: Learn-Feel-Do. This model is followed when purchasing expensive goods of major appliance (cars, refrigerator, etc.). The objectives and functional characteristics of such products are important. First of all, the consumer thoroughly researches the desired product, after starts to desire it, and only after that the purchase is done Pelsmacker (2018).
The upper-right quadrant describes decisions that are characterized by a high level of involvement and affective decision criteria. Cognition of reality is dominated by emotions as the choice of goods or brands reveals the buyer's values. For this reason Ratchford (1987) suggests a need for emotional advertising. The model of this situation is Feel-Learn-Do. The buyer initially wants to possess the item; he starts the research and acquires it. Examples of such goods are jewelry, perfume, fashion clothes and other products for which their role as symbols is valuable.
In the lower-left quadrant, the intellectual method dominates, but involvement is low. The process in this case is Do-Learn-Feel. In this quadrant the routine goods with minimal involvement are placed. Consumer acquires a product out of necessity without knowing anything about it. Learning about the product takes place while using it, and only after an impression is formed. Those goods usually leave the consumer indifferent as long as they fulfill the basic function expected of them. Examples might be the purchase of household
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cleaning products. The strategy for advertising of such products should be aimed at creating and reinforcing habits (Ratchford, 1987).
Finally, in the lower-right quadrant, law involvement coexists with the high level of emotions.
Here are the goods that deliver "little pleasures" to consumers. After purchasing a product, the consumer gets emotional and only afterwards evaluates the product. Typical representatives of such goods are beer, chocolate, cigarettes etc. The model here is Do-Feel-Learn.
Advertising should emphasize personal satisfaction from the product.
Based on the theoretical knowledge, we can determine the position of cigarettes and its substitutes in consumer’s mind. As we could see, conventional cigarettes do not require high involvement of consumer. Because of nicotine addiction, the consumer seeks for satisfaction and emotional input. On the other hand, new smoke-free devices, such as IQOS, can trigger much more attention and need for research about the product. Depending on motives, people can approach the purchase of IQOS more rationally, considering product as a way to quit regular smoking. Therefore, in the mind of consumer, this purchase can move to the upper- right quadrant.
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3. Introducing Philip Morris
Philip Morris International Inc. (PMI) is one of the largest tobacco companies in the world producing variety of different cigarettes brands and smoke-free products; the company was founded in the United States and currently has a significant presence in more than 180 countries (PMI, n.d.). To the markets outside the US, PMI manufactures, sells, and markets its branded tobacco products through subsidiaries, affiliates and licensees. The EU market accounts for approximately 35% of the company's sales (CSIMarket, 2014).
PMI was originally owned by Altria Group, and became a spun-off company in 2008 (CNBC, 2019). The following years, as a result of willingness of consumers to reduce the harms of smoking, electronic cigarettes and vapes of different brands began to develop on the markets.
Their positioning was an alternative to smoking and additional way to quit nicotine addiction.
The popularity was growing, and people were switching from cigarettes to new gadgets. This situation led to a decrease in conventional cigarettes sales, but PMI found the way how to fight the competition. The company has taken the development of innovative world-class product seriously, and in the end introduced its new heated tobacco product – IQOS. In 2014 it was firstly launched Italian and Japanese markets (IQOS Czech Republic, 2021). Currently the product is available in most parts of the world:
Picture 2: IQOS availability
Source: Philip Morris International, (n.d.)
Later, PMI announced its intention to discontinue the production of conventional cigarettes in future, and focus on free-smoke system based on heated tobacco technology (PMI, 2019). For
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this reason, new merger with Altria happened in 2019 with the aim to focus on IQOS launch on the territory of the United States (PMI, 2019).
In the Czech Republic, Philip Morris ČR a.s. was firstly introduced in 1882. Nowadays, the subsidiary is a leader in sales and production of tobacco products in the country. Its factory, located in Kutná Hora, exports manufactured products to 46 countries of the world (Czech Republic| PMI, n.d.). In 2017 with the vision to „replace cigarettes with the smoke-free products“ PM launched IQOS on the territory of Czech Republic (PM ČR press release, 2020). At the same time PM ČR introduced HEETS – tobacco sticks for IQOS. Over time IQOS has been gaining in popularity in the country, in the annual quarter reports of PMI a rapid growth is shown in IQOS sales since it was released to the market. The share of HEETS currently has an increasing trend as well:
Picture 3: HEETS SoM performance
Source: PMI (2021) First-Quarter Results
