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Marketing Ethics: Enhancing Firm Valuation and Building Competitive

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S C M S J o u r n a l o f I n d i a n M a n a g e m e n t , July - September 2 0 1 6 80

Marketing Ethics: Enhancing Firm

Valuation and Building Competitive
Advantages
Dr. Pankaj M. Madhani

A
bA Marketing ethics plays a critical role in forming, maintaining and sustaining long-term customer relationships. An

s b ethical marketing practice is a key factor of organization’s success because it affects the organizations’ capability to
s build strong relationships with customers, and accordingly, it is one of the organizational drivers enhancing Customer
t t
Lifetime Value (CLV). The CLV of a customer represents the amount the customer will contribute to the bottom line
r r
of the firm over the span of the business relationship with them. Ethical marketing are practices that emphasize
a a transparent, trustworthy, and responsible personal and organizational marketing policies and actions that exhibit
c c
t integrity as well as fairness to consumers and other stakeholders. The ethical reputation of the organization results in
t customer trust which in turn leads to satisfaction and commitment to the organization and hence builds competitive
advantages. Research provides various marketing ethics frameworks and valuation matrix along with numerical
illustrations to understand how marketing ethics help organizations in improving overall performance and ultimately
firm valuation.

Keywords : Marketing ethics, Customer satisfaction, Customer trust, Customer loyalty, Customer lifetime value, Firm
valuation

E
thics is a collection of principles of right conduct
that shape the decisions people or organizations
make. Ethics studies morality through the critical
examination of right and wrong in human action. Morality
refers to the customs, principles of conduct and moral codes
of an individual, group or society. One way in which an
organization influence ethics is by formally and explicitly
defining right from wrong. Practicing ethics in marketing
means applying standards of fairness, or moral rights and
Dr. Pankaj M. Madhani wrongs, to marketing decision making, behavior, and practice
Professor in the organization. The purpose of marketing ethics is to
ICFAI Business School (IBS) create a long term sustainable competitive advantage. Those
IBS House, Opp. AUDA Lake organizations that develop this advantage are able to satisfy
Science City Road, Off. S.G. Road
the needs of both customers and the organization. This
Ahmedabad – 380 060, India
[email protected] focus has come about for two reasons. First, when an
organization behaves ethically, customers develop more
positive attitudes about the firm, its products, and its
services. Second, when marketing practices depart from

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standards that society considers acceptable, the market discriminating against, corporations that fail to meet the
process becomes less efficient. criteria of ethical business operations and ethical
management principles (Svensson and Wood, 2004).
The ethical marketing activity is especially important in
today’s environment of increased customer awareness; According to Kotler and Armstrong (2003), “organizations
demanding customers; shorten product life cycle (PLC) and determine the needs, wants, and interests of target markets
stiff competition. Some organizations are using marketing and then strive to deliver superior value to customers in a
ethics as a key selling point, because more customers way that maintains or improves the customers’ and the
consider an organization’s ethical reputation when making society’s well being.” But consistent with the idea of
purchasing decisions. Not employing ethical marketing marketing also influencing societal well-being, it is also
practices may lead to dissatisfied customers, bad publicity, imperative to thoughtfully analyze the ethics of marketing
lack of trust, lost business, or, sometimes, legal action. Thus, practices. Trust is the foundation for the efficiency and
most organizations are very sensitive to the needs and effectiveness of the market system, and it is nurtured with
opinions of their customers and look for ways to protect high ethical standards. The law alone is not enough to ensure
their long-term interests. a sufficient quantity of honesty such that the marketplace
operates smoothly and fairly. Hence, more emphasis is on
Marketing ethics plays a critical role in forming, maintaining
the habitual ethical actions of marketing managers striving
and sustaining long-term customer relationships. As the
to keep their promises to customers by creating fair and
customer base forms a large part of an organization’s overall
transparent exchange within the economic system. If the
value, valuing customers makes it possible to value the
overall market system has ethical integrity, exchange
enterprise. This is especially applicable to the process of
becomes simpler to carry out (Laczniak and Murphy, 2006).
building long term customer relationship, whose financial
value is better captured by the concept of Customer Lifetime Marketing ethics concerns the application of ethical
Value (CLV), which is the sum of the individual value of all considerations to marketing decision making (Smith, 1993).
present and future customers measured over their lifetimes Ethical marketing are practices that emphasize transparent,
with the organization. The CLV concept proposes that price trustworthy, and responsible personal and organizational
is not the only criterion that wins the battle as customer marketing policies and actions that exhibit integrity as well
satisfaction, customer loyalty and the long term relationship as fairness to consumers and other stakeholders. Marketing
also matters. Although organizations are interested in ethics is defined as “the systematic study of how moral
knowing the CLV of their customers, they are also keen on standards are applied to marketing decisions, behaviors and
identifying the factors that are in their control that could institutions” (Murphy et al., 2005). Marketing ethics can be
increase the CLV. An ethical marketing practice is a key factor considered as moral judgment and behavior standards in
of organization’s success because it affects the marketing practice or moral code or system in marketing
organizations’ capability to build strong relationships with area (Gaski, 1999). In other words, marketing ethics is the
customers, and accordingly, it is also one of the research of the base and structure of rules of conduct,
organizational drivers enhancing CLV. standards, and moral decisions relating to marketing
decisions and practices (Lu et al., 1999).
Literature Review
Marketing ethics encompasses the societal and professional
Ethics is defined as an “inquiry into the nature and grounds
standards of right and fair practices that are expected of
of morality where morality means moral judgments,
marketing managers. The most basic ethical standards are
standards, and rules of conduct” (Tsalikis and Fritzsche,
often articulated in professional codes of marketing conduct.
1989). Business ethics is the total of rules of conduct and
Professional organizations such as the American Marketing
principles of conduct that is based on ideas relating to which
Association (AMA) likewise document ethical
business attitude is correct and which one is false (Scholl et
considerations as instrumental to their purposes.
al.,1993). Good business ethics can enhance business
Specifically, the AMA mission statement (2004) includes as
results, which leads to sustainable development of
one of its central tenets, “To advance the thought,
organizations (Weeks et al., 2004). The marketplace is
application and ethical practice of marketing.” The Norms
becoming increasingly aware of, and increasingly

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and Values statement of the AMA, revised in 2004, Ethical marketing activity is related to fair play, honesty and
represents a useful, duty-based specification of marketer full disclosure in customer relationship. Ethical marketing
responsibilities that exceed those codified in law. Ethical activity does not seem to translate into short-term sales
marketers must achieve a behavioral standard in excess of performance (Román and Munuera, 2005). Examples of ethical
the obligations embedded in the law. Typically, the law marketing activity include: selling products that meet
represents the lowest common denominator of expected customers’ needs, providing true information about the
behavior for marketing and business practice (Carroll, 1991). products in terms of its benefits or availability and
Ethical marketing organizations always should strive to implementing low-pressure selling techniques. The ethical
exceed the obligations embedded in the law and the legal reputation of the organization results in customer trust which
minimums of social compliance. in turn leads to satisfaction and commitment to the
organization. Commitment is one of the most crucial
Marketing activity can be ethical or unethical based upon dimensions in relationship marketing. Moorman et al., (1992)
the degree to which a proposed act is perceived as right or defined commitment as the desire or intention to sustain a
wrong, fair or unfair, just or unjust. Marketing has been
valuable relationship.
frequent targets of ethical issues. Marketing managers who
take strategic decisions often face with ethical conditions It was also found that ethical behavior has a strong positive
and their decisions is related to all sides of marketing mix relationship with customer satisfaction with the sales person.
such as product, price, place and promotion (Rallapalli et Sales people who behave in an ethical manner are honest in
al., 2000). Ethical issues in marketing such as misleading their communications, sell only those products and services
advertising, unsafe and harmful products, abuse of they believe will benefit the customer, promise only what
distribution channel power, and promotion of materialism, can be delivered, and treat customer information in a
which were the main ethical concerns of the 1950’s, are still confidential manner. Conversely, unethical marketing activity
serious problems today (Kotler, 2004). Product adulteration can be defined as any short-run conduct that enables the
is one sort of malpractice done by the marketers whereby sales person to gain at the expense of the customer (Román
they mix artificial, inferior or spurious ingredients substances and Ruiz, 2005).
in the product as well as offers the low-standard products
to the consumers in order to save cost and make more profit. According to Gruca and Rego (2005), an organization
Adulterated food includes additives, preservatives, artificial generates benefits for itself beyond the present transaction
colors or flavoring (Memery et.al., 2005). Over and above, by satisfying a customer. These benefits arise from the
new issues are regularly added to this list, including stealth positive influence of the satisfied customer’s future
marketing, predatory lending, promotion of off-label uses shopping behavior. Customer satisfaction is an important
of pharmaceuticals, and online privacy (Karpatkin, 1999). precursor to customer loyalty and subsequent repurchase
(Seiders et al., 2005). For example, satisfied customers are
Unethical marketing activity cause various problems for more loyal and over time impact their purchase intention
organizations such as lack of customer trust, spoiled (Anderson and Sullivan, 1993). Some of this increased level
customer relationships, declined customer retention, and of purchasing is due to satisfied customers being more
reduced sales (Jones et al., 2005). Research suggests receptive to cross-selling efforts (Fornell, 1992). Anderson
practices like dishonest actions and high pressure selling et al., (1994) and Rust et al., (2002) found a positive influence
tactics have a negative effect on customer trust (Kennedy of customer satisfaction on financial performance indicators
et al., 2001). Unethical sales behavior negatively impacts of a firm, such as return on investment (ROI) and return on
the profitability of the firm (Madhani, 2014). There is a assets (ROA). Luo et al., (2007), also underline that, customer
positive association between ethical behavior and satisfaction is an important driver of a firm’s profitability.
organizational performance and accordingly the financial
performance of firms committed to ethical behavior is superior The CLV of a customer represents the amount the customer
to those that are not (Verschoor, 1999; 2003). will contribute to the bottom line of the firm over the span of
the business relationship with them (Kumar and Shah, 2009).

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CLV is influenced by retention rate, lifetime revenue of essential element for building and maintaining long-term
customer as well as profit margin. Customer lifetime duration customer relationships, a sustainable market share and solid
is also dependent on retention rate; with any increase in customer loyalty.
retention rate after value of 70% results into steep rise in
average customer lifetime (Madhani, 2015a). Customer trust has a positive correlation with customer
loyalty. Customer loyalty can be defined as a complement
CLV provides the present value of a customer relationship of trust (Rosanas and Velitta, 2003). Customer loyalty is
over the lifetime with an organization, and is calculated based generally described as occurring when customers repeatedly
on a number of sales transactions with customers (Kumar purchase a good or service over time and customers hold
and Rajan, 2009). CLV of customers (current as well as future), favourable attitudes about it. Customer loyalty is considered
and ultimately customer equity (CE) often eventually forms as a key underlying variable in maintaining customer
a proxy for valuation of firms (Gupta et al., 2004). CE is defined retention (Pritchard and Howard, 1997) and it concerns with
as the total of the CLV (customer lifetime value) of all the the likelihood of a customer returning frequently, making
organization’s current and potential customers (Rust et al., referrals, building strong word-of-mouth reputation, as well
2004). CE seeks to assess the value of not only a firm’s as providing references and publicity (Bowen and
current customer base but also its potential or future Shoemaker, 1998) and hence potentially expanding the
customer base and represents the entire operating cash flow customer base (Huddleston et al., 2004). Customer loyalty
of a firm. has been recognized as an important source of sustainable
competitive advantages due to customer retention,
This research works in this direction and provides various repurchase, and long-term customer relationships (Rust et
marketing ethics frameworks and valuation matrix to al., 2000).
understand how marketing ethics help organizations in
improving overall performance and ultimately firm valuation. Customer loyalty causes customers to buy a particular
brand, which improves the customer’s value and ultimately
Marketing Ethics: Enhancing Customer Trust and Loyalty the firm’s performance. Customer loyalty can result in
Today it is not enough to have satisfied customers; firms favorable operating cost advantages for retailers, fewer
should also target and try to retain their most valuable markdowns, reduction in inventory and simplified capacity
customers by building customer trust and loyalty. Ethical forecasting due to lesser fluctuations in demand. Customer
marketing facilitates firms to foster long-term relationships loyalty is seen as one of the most important criteria for a
with customers based on customer satisfaction, trust and company to obtain competitive advantage because it
loyalty. Trust is defined as the belief, feeling or expectation determines customers’ repurchases in future (Oliver, 1999).
from partner’s expertise, reliability and intentions (Cater and Customer loyalty and repurchase decisions are highly
Zabkar, 2008) in all relational exchanges. Customer trust will regarded by the firm as they determine firm’s profitability
result in the customer’s willingness to develop and maintain and growth (Palmatier et al., 2006). Since customer loyalty is
a relationship with the firm. Customer trust is based on the considered to be the complement of trust, the degree of
ongoing relationship with the firm and not merely based on customer loyalty is an important consideration for firms.
a single transaction as trust is developed through repeated Organizations that maintain relationships with customers
interactions in which customer observes the offerings of on the basis of trust, ethics, and integrity will have a
the firm to be consistent. The trust in a firm occurs when the competitive advantage over those that do not. Framework
customer ‘has confidence in the firm’s future product/service of Figure 1, shows how marketing ethics influence
performance because the level of such past performance relationship between customer trust, loyalty and long term
has been consistently satisfactory’. Customer trust is an customer relationship.

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(Source: Framework developed by Author)

Figure 1: Marketing Ethics: Enhancing Customer Trust and

Loyalty and Building Long Term Relationship

Ethical Sales/Marketing Efforts and CLV: Key Relationship satisfaction, trust and commitment with them (Hansen and
Ethical behavior is differentiated from unethical behaviour Riggle, 2009). Such relationships between organizations and
based upon the degree to which a proposed act is perceived customers have three dimensions such as (1) length or
as right versus wrong, good versus evil, fair versus unfair, duration of customer relationship corresponds to customer
or just versus unjust (Román, 2003). Unethical sales retention (or defection), defined as the probability that a
behaviour is defined as a short-run salesperson’s conduct customer continues (or ends) the relationship with the
that enables him/her to gain at the expense of the customer organization (2) depthof a relationship is reflected in the
(Alrubaiee, 2012). Ethical sales behaviour can play a critical frequency of product usage over time. It is also reflected in
role in the formation and maintenance of long-term customers’ decisions to upgrade and purchase premium
relationships with customers (Wray et al., 1994) and is an (higher margin) products instead of low-cost variants (up-
important factor of maintaining high level of relationship selling). Hence, it refers to the deepening of the customer’s
quality (Ou et al., 2015). Relationship quality can be relationship with the organization through increased usage
considered as an overall assessment of the strength of a or upgrading and (3) breadth of a relationship is reflected in
customer relationship (Wulf et al., 2001). Oliver and Swan cross-selling that is, the number of additional (different)
(1989) indicated that a customer satisfaction with the products purchased from an organization over time. Hence,
salesperson increased when the customer felt he/she had breadth refers to the expansion of the customer relationship
been fair in the transaction, which is associated to ethical with the organization.As shown in framework of Figure 2,
sales behaviour (Futrell 2002). these dimensions create various attributes of CLV such as
customer trust, customer loyalty, and customer retention.
Ethical sales behaviour displayed by employees would
All these attributes are positively influenced by ethical sales/
actively and successfully build a strong customer
marketingefforts.
relationship which will in turn increase the customers’

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Depth Customer
Customer
Loyalty
Trust
Length

Customer Breadth
Retention

(Source: Framework developed by author, adopted from Madhani (2014))

Figure 2:
Ethical Sales/Marketing Efforts and CLV Framework: Key Dimensions

Hence, all these dimensions should be applied empirically the equation (Verhoef, 2004). Equation below represents CLV
to estimate CLV, by assigning the underlying behaviors into framework shown in Figure 2:

Where loyalty becomes. As customers think their sales person’s

sales behaviors are ethical then they would tend to trust the
P(retention)it = The probability of continuation of the
sales person as well as the organization. Both customer
relationship for customer iat time t
trust in the sales person and customer trust in the
= (length of the relationship) organizations are positively related to customer loyalty.Trust
Product ijt: The purchase of product j by customeri at time t is a cumulative process that develops over the course of
(breadth) repeated and satisfactory interactions with the sales person.
Usageijt: The usage of product j by customer i at time t The sales person’s ethical sales/marketing efforts positively
(depth) affect customer trust in the sales person and hence when
the degree of the sales person’s ethical sales behavior is
Marginjt: The contribution margin for product j per usage or perceived to be high, the customer will have more trust in
volume entity on time t. the sales person. The sales person’s ethical sales/marketing
d : Discount rate efforts also positively affect customer trust in the
n : Number of periods organization.
The level of trust a customer has in the sales person is
Customer trust has a positive influence on customer loyalty.
considered as key link to the relationship and future
The greater the customer trust is, the higher the customer

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intentions. Trust is a global belief on the part of the customer communicating that offering to the target audience) and
that the sales person will fulfill its obligations as understood Place (the means of having the product offering available to
by the customer and can be relied on to deliver on its the target audience) or distribution deals with the movement
promises. Ethical sales/marketing effortsare positively of the product to the final consumer (McCarthy, 1960). The
associated with customer trust, customer loyalty and traditional marketing mix is also known as the 4 P’s of
customer retention, thus enhancing relationship quality and marketing. The organization attempts to generate a positive
CLV. response in the target market by blending these four
marketing mix variables (Product, Price, Place and Promotion)
Ethical Marketing: A Conceptual Framework
ethically. Marketing ethics systematically examines
Marketing focus on designand control various marketing marketing variables related to 4P-issues such as unsafe
mix variables in order to best satisfy needs of customers in products, deceptive pricing, discrimination in distribution
the target market. The marketing mix includes the Product and deceptive advertising. Ethical marketing processes
(what the actual offering comprises), Price (the value positively influence marketing mix variables and also increase
exchanged for that offering), Promotion (the means of CLV (Figure 3).

Higher CLV
Product Price
Higher CLV

Ethical Higher CLV

Marketing

Place Higher CLV Promotion

(Source: Framework developed by Author)

Figure 3: Ethical Marketing: A Conceptual Framework

Various marketing mix variables along with ethical considerations are explained below:

Product marketers develop or market products suited to defined

market segments, as this (along with appropriate targeting
The product is the physical product offered to the consumer;
and positioning) should help maximize sales and brand
it also refers to any services or conveniences that are part
equity. Marketing face with a lot of ethical problems in new
of the offering such as product authentication, product
product development process, since ethics is discussed less
recall, product quality, product packaging etc. Most

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than it is needed, faulty products are put on the market and grow out of firms, which form channel of distribution (such
so these products harm consumers (Morgan, 1993). Other as direct marketing and internet marketing), and have
ethical issues related to product such as rubbish problem different needs and goals. Ethical issues in direct marketing
which packing cause after its usage (Menezes, 1993), are privacy, confidentiality and intrusion (Chonko, 1995). It
information on product labels can sometimes be used as is not ethical from marketers to send unwanted spams to
deceptive although it is technically true, decline of recalling consumers, because such emails violate consumers’ privacy.
of product although it is problematic, failing in terms of Ethical problems which are faced while using of internet for
guarantee related to product and performing planned marketing are reliability of operations, illegal activities,
product obsolescence to shorten product life cycle (Chonko, privacy, accuracy, pornographic, product guarantees,
1995). The deceptive packaging can be termed as the burglary, aiming at children, spams, and deceptive
packaging that will contain false identity, faulty information advertisements (Bush et al., 2000).
and which will unfairly promote the products to the
Promotion
consumers. Mann and Thornton (1978) indicated deceptive
packaging as one sort of unscrupulous practice done by Promotion decisions are those related to communicating and
the marketers whereby the faulty product information or selling to potential consumers. Aim of promotion is to attract
misinformation is provided on the label or package in order the customers to purchase the product and to increase the
to deceive consumers. number of customers by making them switch to the brand
under promotion. Promotion is an effective tool to increase
Price
the market share in the competitive market by attracting the
Pricing includes not only the value of product to the firms, customers to purchase a brand. Consumers desire to obtain
but also considers value to the customers for the price paid. more for the same price and are thus sensitive to sales
Too high prices are not ethical, when they are a means to promotion like free gift, price reduction or special offers.
take advantage of consumers as it happens in the case The ethical issue is that companies may be tempted to take
of monopolies, oligopolies or cartels. From the ethical point advantage of customers by making promises and
of view pricing is probably one of the most difficult areas of promotions that cannot be kept. Deceptive or false promises
marketing. Unfair pricing can be defined as charging either include failure to provide promised benefits (i.e. mail in rebate)
an excessive price compared to its original price or charging or failure to provide a gift in conformity to what was promised.
fictitious pricing (Kaynak, 1985). Ethically, price should be
Ethical issues related to promotion can be analyzed under
equal or proportional to benefit which is taken by the
two topics; advertising and personal selling. The
consumers (Kehoe, 1985). However, during situations of
relationship between advertising and ethics can be analyzed
monopolistic power, it results into unreasonable price
from the point of view of persuasive trait of advertising,
increase (Ortmeyer, 1993). Other ethical issues related to
deception, puffery and making promises that cannot be kept.
pricing include non-price price increases, misleading price
Other ethical issues related to advertising include
reduction, price advertisements which can be misleading or
advertising to children, demonstrations, mock-ups,
considered as deceitful, predatory pricing which aims to
endorsements and testimonials (Drumwright, 1993). An
have monopolistic position, discriminatory pricing, pricing
advertisement will be deemed misleading or deceptive only
applications of products according to the products’ unit or
if it is reasonable to expect that persons exposed to it, or
quantity basis and practicing of misleading pricing methods
those targeted by it, would come to hold false beliefs as a
(Chonko, 1995).
result of exposure to it. A misleading advertisement is one
Place that causes a distorted perception and for which the
advertiser is considered responsible. It could be that the
Place (or distribution) decisions are those associated with
consumer misled by an advertisement will be tempted to
channels of distribution that serve as the means for getting
buy the advertised product and in that way either getting
the product to the prospective customers. The distribution
less than he thought he would or paying more than he
channel performs transactional, logistical, and facilitating
should (Attas, 1999).
functions. Ethical issues related to this marketing mix variable

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Personal selling by sales people who act in an ethical manner providing true information about the product (e.g. when
are more effective at building strong customer relationships comparing with the competitors’ products or in terms of its
- their customers are more satisfied with them, more trusting benefits or availability) and implementing low-pressure
of them, and more committed to them. Customer trust with selling techniques (Singhapakdi et al., 1999). The propensity
the sales person is defined as the confidence that the for sales person to make unethical choices can be reduced
customer has in the integrity and reliability of the sales by organization in various ways: developing a code of ethics,
person. This confidence in turn will result in the customer’s reinforcing ethical behavior through an ethical climate and
willingness to develop and maintain a relationship with the designing a compensation system that rewards ethical
sales person (Madhani, 2014). Ethical sales behavior is behavior and punishes unethical behavior (Madhani, 2015b).
defined as fair and honest actions that enable the salesperson
Ethical concerns can arise in every element of the marketing
to foster long-term relationships with customers based on
mix. Table 1 below shows various marketing mix variables
customer satisfaction and trust. Examples of such activities
and ethical considerations.
include: selling products that meet customers’ needs,

Table 1:Marketing Mix Variables and Ethical Considerations

Sr.
Marketing Mix Variables
No.
A) Product
1. Marketer should not manipulate the availability of a product for the purpose of exploitation.
2. Marketer should not exaggerate or lying the benefits of a product offering .
3. Information regarding all substantial risks associated with product or service usage should be
disclosed.
4. Products and services offered should be safe and fit for their intended uses.
5. Marketer should not misrepresent the credentials of the product / service provider.
6. Any product constituent substitution that might materially change the product or impact the
buyers purchase decision should be disclosed.
7. Obligation and responsibilities in contracts and mutua l agreements should be met in a timely
manner.
B) Price
1. The full price associated with any purchase should be disclosed.
2. All extra-cost added feature should be identified.
3. Marketer should not engage in price fixing.
4. Predatory pricing should not be practiced.
C) Place
1. Coercion should not be used within the marketing channel.
2. Undue influence should not be exerted over the resellers’ choice to handle a product.
3. Marketer should not implement manipulative influence techniques or high pressure selling tac tics.
4. Marketer should not sell products that customers do not need
5. Marketer should not hide mistakes or errors in product/ service delivery
D) Promotion
1. Communications about products and services offered should not be deceptive.
2. False and misleading advertising should be avoided.
3. High pressure manipulations or misleading sales tactics should be avoided.
4. Sales promotions that use deception or manipulation should be avoided.
5. Marketer should not treat customers unfairly or neglect customer requests .
6. Marketing practices that m ake it difficult to invoke a product/service guarantee for promotional
item should be avoided.

(Source: Table developed by Author)

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Honest actions such as low pressure selling techniques, found in a firm’s ability to differentiate itself from the
fairness, responsible acts, forbearance from opportunism competitors (Morgan and Strong, 2003). To gain competitive
and benevolence of a sales person are observable and are advantage over its competitors, a firm must deliver value to
suggested to increase customer trust in the sales person. its customers through cost advantage by performing
Sales person’s honest actions and ethical sales behavior activities more efficiently than its competitors or by creating
increases customer trust and loyalty. greater differentiation advantage by performing the
activities in a unique way in relation to competitors (Barney,
Illustration
1991; Peteraf, 1993; Slater, 1996). Having a competitive
Although unethical sales behaviors can damage the advantage for organization generally suggests that they
customers, organization, or both, it is the organization that can have one or more of the following capabilities when
ultimately loses (Schwepker et al., 2005). The case of Sears’s compared to its competitors: lower prices, higher quality,
automotive center service advisors, who routinely added higher dependability, and shorter delivery time. All these
contrived repairs to customers’ bills, is a good example of capabilities are positively influenced by ethical marketing.
how unethical sales behavior negatively impact organization
To grow and prosper in the time ahead, organizations must
(Babin et al., 2000). In 1992, automotive service advisors
develop and implement competitive business strategy that
were accused of overcharging auto repair customers in order
satisfies the needs of the target market. The core of any
to earn higher commissions. It was found by Sears that its
business strategy is the customer value proposition, which
automotive service advisers, acting under a commission
describes the unique mix of product and service attributes,
sales plan, were selling parts and services that customers
customer relations, and overall image that an organization
did not need. That behavior harmed both the customer and
offers. It also explains how the organization will differentiate
company in the long run. Sears was charged for fraud, making
itself from rivals to attract, retain, and strengthen
false and misleading statements and willful departure from
relationships with targeted customers.
accepted trade practices. Though customers were the first
victims of unethical behavior of sales people, Sears’s To demonstrate the ways in which ethical marketing can
reputation was irreparably damaged. Sears’ total cost to generate overall business values for an organization,
settle pending lawsuits was huge, i.e. about $60 million Porter’s (1985) value chain framework is used as a basis to
(Paine, 1994). present a business value-added framework as shown in
Figure 4. The role of added value has long been accepted as
Research Methodology
a means of securing competitive advantage (Normann and
A two stage methodological approach is adopted in this RamõÂrez, 1994; Naumann, 1995) and long-term success of
research. In the first stage, research focuses on the firm (de Chernatony and McDonald, 1998). According
development of a business value added framework to to Brown (1997), the value chain is a tool to segregate a
highlight value added for organization because of ethical business into strategically relevant activities. This
marketing. The second stage involves the development of classification enables identification of the source of
CLV framework along with valuation matrix to support competitive advantage by performing these activities more
business value added framework. cheaply or better than its competitors. Slywotzky and
Morrison (1997) used a ‘customer-centric’ approach to
A) Development of a Business Value Added Framework propose a modern value chain in which the customer is the
In the present scenario of competitive environment, more first link to all that follows. Prior researchers have also used
and more organizations are aggressively searching for value added framework (Moon and Ngai, 2008; Madhani
competitive advantages in order to get a better position in 2011; Madhani 2012; Madhani 2015c).
the markets. As shown in Figure 4, ethical marketing by organization will
Competitive advantage is the extent to which an organization have positive impacts on all elements of marketing mix of 4
is able to create a defensible position over its competitors P’s (product, price, place and promotion) and enhances
(Porter, 1985). The source of competitive advantage can be customer value proposition. However, such marketing mix

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elements are independent variables for 4A’s (Acceptability, and creates added value for the customers as well as for the
Affordability, Accessibility and Awareness) of customer organization (Figure 4).
value chain drivers which are in turn dependent variable

Ethical Marketing

Ethical Marketing Mix

PRODUCT PRICE PLACE PROMOTION

I Provide the Value Communicate the Value

Customer Value Proposition

Revenue / Operating Income

Enterprise Value
S Acceptability– Desired product

ROI / ROA
T Affordability– Fairpricing
P Accessibility – No discrimination in
distribution(place)
Awareness– Ethical salespromotion

Customer Value Chain Drivers Business Value Added

I = Identify the Value

S = SegmentationBased onCustomerValue Need
T = Select Target
P = Positioning the Value

(Source: Framework developed by author)

Figure 4: Ethical Marketing: A Business Value Added Framework

B-1) Development of a CLV Framework CLV is the only financial metric that incorporates into one,
all the elements of revenue, expense and customer behavior
Ethical marketing influence customer behavior (such as that drive profitability. CLV focuses on long-term profitability
customer acquisition, customer retention, and customer instead of immediate sales outcome. CLV depends on three
expansion in the form of cross-selling / up-selling), which in main components of customer relationship – acquisition,
turn affects customers’ CLV or their profitability to the firm. retention, and cross-selling. The lifetime value of a customer
CLV is the key method for determining how much each for an organization is the net revenues obtained from that
customer adds to the value of the organization. Lifetime customer over the life time of transactions with that customer
revenue of customer is dependent on average life time of minus the cost of attracting, selling, and servicing the
customer and number of purchases during lifetime. customer taking into account the time value of money (Jain

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and Singh, 2002). This metric also manages to score over promotions, particularly value added ones, and increased
other metrics by adopting a customer-centric approach brand value (Malthouse and Mulhern, 2008). Another study
instead of a product-centric one, as the driver of profitability. found that increasing customer retention rates by 5% could
CLV is a calculation of projected net cash flows that a firm increase firm’s profit by 2% to 9% (Gupta et al., 2004).
expects to receive from the customer, adjusted to the Unethical marketing practices decrease customer retention
probability of occurrence and are then discounted. Hence, rate thereby ultimately reduces CLV of customer.
it measures the present value of all future profit streams of a
One of the most effective ways to boost CLV is to increase
customer across the entire customer life cycle. Although a
customer satisfaction as it enhances customer trust, loyalty
true CLV measure implies measuring the customer’s value
and retention rate. A positive link between satisfaction and
over his or her lifetime, for most applications it is three years
usage has been documented in prior research (Bolton and
as in most cases the majority of a customer’s lifetime value
Lemon, 1999). Research on a meta-analysis of purchase
is captured within the first three years (Gupta and Lehmann,
intentions studies found that satisfied customers are more
2005). For example, if the retention rate is equal to 75%, and
loyal (Szymanski and Henard, 2001). A study conducted by
the discount rate is equal to 20%, then three years accounts
Deloitte Consulting found that firms which recognize the
for about 86% of the CLV (Kumar et al., 2008).
importance of understanding CLV are 60% more profitable
On average, firms spend six times more to acquire customers than firms that do not consider CLV (Kale, 2004). Research
than they do to keep them (Gruen, 1997). As the cost of has found that a 5% increase in customer retention can
acquiring customers is high, the profitability from a customer increase customer lifetime profits by 25% to 95%. The same
arises if customers make many repeat purchases. Customer study found that it costs six to seven times more to gain a
retention is very much a function of customer loyalty, and new customer than to keep an existing one (Reichheld and
hence, strategies that strengthen the relationship between Teal, 2001).
the firm and the customer should improve retention. Many
As shown in Figure 5, ethical marketing enhances customer
authors have documented the financial benefits to a firm of
trust, loyalty and satisfaction, strengthens customer
increasing retention rates. Firms can boost profits by almost
relationship and ultimately increase CLV through customer
100% by retaining just 5% more of their customers (Reichheld
acquisition, retention and expansion. CLV, impact CE and
and Sasser, 1990). Retention can be increased with better
eventually valuation of the firm.
products and services, more competitive pricing,

ENTERPRISEVALUE

CLV

CUSTOMER CUSTOMER CUSTOMER

ACQUISITION RETENTION EXPANSION

CUSTOMER CUSTOMER LONG TERM

SATISFACTION TRUST AND LOYALTY RELATIONSHIP

Ethical Marketing Mix

ETHICAL MARKETING

Figure 5: Ethical Marketingand CLV: A Conceptual Framework

(Source: Framework developed by author)

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As the CLV concept is based on customer value, it increases to the customer and hence, marketing ethics directly
marketing’s accountability, emphasizes long term influence CLV. Unethical marketing practices such as
relationship with customers and sensitizes the organization aggressively selling to customers when not requested or
regarding negative consequences of unethical marketing hiding the facts regarding product or services might result
practices. The CLV approach quantifies the potential in customer defection. Hence, with unethical marketing
monetary value of customers over their lifetime and builds practices, customer dissatisfaction increases, resulting in
linkages between ethical marketing and the financial higher cost burden in maintaining a customer relationship.
performance of the organization. In contrast, having gained customers’ trust through honest
and ethical marketing behavior might provide enduring
B-2) Development of a Valuation Matrix
advantage to the organization in terms of higher CLV as
Typically, CLV is a function of the contribution margin, the competitors struggle to convince customers to take the risk
propensity for a customer to continue in a relationship and switch to a different organization (Figure 6).
(customer retention), and the marketing resources allocated

Sales Customer
Orientation
Orientation Orientation

High High
Quadrant – Ethical
1. Ethical Sales/Marketing
2. Customer Trust and
H Loyalty– High
3. Customer Relationship
– Long Term
Customer Lifetime

4. Customer Retention
Value (CLV)

– High
5. CLV and EnterpriseValue

Enterprise
– High

Quadrant –Unethical Value

1. Unethical Sales/Marketing
2. Customer Trust and
Loyalty– Low
3. Customer Relationship
– ShortTerm
4. Customer Retention
– Low
5. CLV andEnterpriseValue
– Low
Low Low

Short Long
Term Sales Objective Term

(Source: Matrix developed by Author)

Figure 6: Ethical Marketing – Enterprise Value Matrix

Customers are more inclined to identify themselves with the contrast, unethical sales practices may focus on short term
organization and continue to do business when organization gain by misleading customer to gain immediate sale, but
that is perceived as ethical (Ahearne et al., 2005). There is a such deception will likely jeopardize future sales. As such
negative relationship between unethical sales behavior and ethical behavior - behavior that is both legal and morally
customer-oriented selling. Ethical sales practices may avoid acceptable - plays a very important role in customer oriented
short term decisions that hamper long term benefits. In selling.

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Unethical marketing practices not only destroy sales vitality of the body. However, to increase sales volume
opportunities but also waste marketing resources in efforts quickly, marketing indulged in unethical practices by creating
to gain new customers. These organizations need to spend unrealistic product expectations as promotion campaign
more on marketing (advertising and sales promotion) budget apart from highlighting good test of ginger tea also claimed
as their practices also reduce the impact of marketing efforts. that it is health supplement and quickly reduces obesity.
The unethical marketing practices increases customer Under this circumstance, as customers were given wrong
dissatisfaction and churn rate and hence decreases retention promise about product, they were highly dissatisfied with
rate. With low retention rate of customers, organizations the newly flavored ginger tea although it was unique in test
won’t be able to up-sell or cross-sell products, there by and liked by most customers.
further decreasing sales revenue. Hence, it translates in to
lower CLV as well as enterprise value (Figure 6). Hence, after initial good response of promotion for ginger
flavored tea, demand for product quickly died down. The
Various Illustrations
retention rate, from existing data of Royal Limited, showed
1) Unethical Marketing Practices (Deceptive Promotion) that a 17% of new users become light users, 38% of light
After going through initial rapid growth, the business growth users become medium users and 40% of medium users
of Royal Limited, a tea processing and marketing company become heavy users. Royal market research team found that
began to slow down mainly because of stiff competition customers felt cheated by unethical marketing promotion
and increased demands of customers for natural flavors. (i.e. wrong promise about the product). It was the case of
After much R&D and with very encouraging customer creating unrealistic expectations (exaggerating or lying the
response during pilot test, Royal launched a new variant of benefits of a product offering). Accordingly, unethical
ginger herbal tea in the market. To revive overall growth, marketing promotion resulted into decreased customer
Royal launched a promotion scheme for the new product. satisfaction and trust, lower retention rate of customer (i.e.
As new flavor - ginger tea contained herbal medicinal retention rate decreased by 50%) and ultimately decreases
ingredients; it was good for health in long term as it increases in CLV and enterprise value (Table 2).

Table 2: New Product Launch and Unethical Marketing Promotion

Customer Hierarchy
Calculation New Light Medium Heavy
(A) (B) (C) (D)
(1) Number of purchases / lifetime - 20 60 100
(2) Average lif etime (years) - 2 4 7
(3) Lifetime revenue ($) 300 1100 3300 6400
(4) Profit margin (%) 15 9 9 9
(5) Profit by category = (3) x (4) ($) 45 99 297 576
(A) Ethical Marketing
(6) Average retention rate (%) 100 22 43 45
(7) Initial number of customers 100 - - -
(8) Customers retained from 100 = (8)prior x (6) 100 22 9 4
(9) Total profit = (5) x ( 8) ($) 4500 2178 2673 2304
(10) Profit per new customer = (9)/(8A) ($) 45 21.78 26.73 23.04
(11) CLV of new customer =
116.55
(10A) + (10B) + (10C) + (10D) ($)
(12) Number of customers 1000
(13) Firm value (in terms of CE) = (12) x (11) ($) 116,550

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(B) Unethical Marketing - Deceptive Promotion

(14) Average retention rate (%) 100 11 21 22
(15) Initial number of customers 100 - - -
(16) Customers retained from 100
= (16)prior x (14) 100 11 2 0
(17) Total profit = (5) x (16) ($) 4500 1089 594 0
(18) Profit per new customer
= (17) / (15 A) ($) 45 10.89 5.94 0
(19) CLV of new customer =
61.83
(18A) + (18B) + (18C) + (18D) ($)
(20) Number of customers 1000
(21) Firm value (in terms of CE) = (19) x
61,830
(20) ($)
(22) Decrease in firm valuation with
54,720
unethical behavior =(13) – (21) ($)
(23) Decrease in firm valuation with
unethical behavior =[(22)/(13)] x100 (%) 46.94

(Source: Calculated by author)

2) Unethical Marketing Practices (Poor Product Quality) rate of 1% means that of 100 catalogues sent, only one
recipient is expected to respond. After initial success, in
A direct catalogue retailer of mobile phone/accessory has order to increase profit quickly, the retailer compromised on
been attracting new customers by sending the product product quality. This is the case of unethical marketing
catalogue through random mailing. The cost of sending a practices, i.e. product manipulation (selling inferior
general catalogue (including production and mailing cost), products). Such unethical behavior decreased loyalty of
is $1. From experience, company anticipates that the customers and resulted in drop of retention rate from 75%
response rate from a random mailing to be 1%. A response to 60% (Table 3).

Table 3: Unethical Marketing Practices: Low Quality Product

Calculation Year (n) (n >= 0)

0 1 2 3 4 5 6 7
(1) Unit cost of catalog (including
mailing cost) ($) 1 1 1 1 1 1 1 1
(2) Catalog response rate (%) 4 4 4 4 4 4 4 4
(3) Customer acquisition cost
= (1)/(2) ($) 25 25 25 25 25 25 25 25
(4) No. of times catalog sent
= (every month) 12 12 12 12 2 12 12 12
(5) Marketing promotion cost
= (1) x (4) ($) 12 12 12 12 12 12 12 12
(6) Average order si ze ($) 50 50 50 50 50 50 50 50
(7) No. of purchase/year 2 2 2 2 2 2 2 2
(8) Gross margin (%) 25 25 25 25 25 25 25 25
(9) Margin on each purchase = (6) x (8)
($) 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5
(10) Discount rate (%) 10 10 10 10 10 10 10 10

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(A) Ethical Marketing Practices(retention rate ‘r’= 75%)

(11) Retention rate across years = (r) (%)
n
100 75 56 42 32 24 18 13
(12) Expected profit/customer =
[ [(7) x (9) – (5)] x (11)] ($) 13 9.75 7.31 5.48 4.11 3.08 2.31 1.74
(13) NPV of profit/ customer =
n
[(12)/((1+(10)) ] ($) 13 8.86 6.04 4.12 2.81 1.92 1.31 0.89
(14) CLV = Cumulative profit / customer
(net of acquisition cost) ($) -12 -3.14 2.91 7.03 9.84 11.75 13.06 13.95
(15) CLV of new customer ($) 13.95
(16) Number of customers 10,000
(17) Firm value (in terms of CE) = (15) x
139,500
(16) ($)
(B) Unethical Marketing Practices – Low Product Quality (retention rate ’r’ = 60%)
(18) Retention rate across years = (r) (%)
n
100 60 36 21.6 12.96 7.78 4.67 2.80
(19) Expected profit/customer =
[ [(7) x (9) – (5)] x (18)] ($) 13 7.80 4.68 2.81 1.68 1.01 0.61 0.36
(20) NPV of profit/ customer =
n
[(17)/((1+(10)) ] ($) 13 7.09 3.87 2.11 1.15 0.63 0.34 0.19
(21) CLV = Cumulative profit / customer
(net of acquisition cost) ($) -12 -4.91 -1.04 1.07 2.22 2.85 3.19 3.38
(22) CLV of new customer ($) 3.38
(23) Number of customers 10,000
Firm value (in terms of CE) = (22) x
(24) 33,800
(23) ($)
Decrease in firm valuation with
(25) unethical behavior 105,700
= (17) – (24) ($)
Decrease in firm valuation with
(26) unethical behavior 76
= [(25)/(17)] x100 (%)
(Source: Calculated by author)

As calculated in Table 3, unethical marketing practices relationships with existing customers and expand market
decrease firm valuation by 76%. share through cross-selling and up-selling.

Conclusion With ethical marketing process, organizations exhibit a

strong sense of integrity and avoid deceptive and dishonest
Ethical marketing practices increase customer satisfaction, practices in satisfying customer needs and hence build
trust and loyalty, and builds long term customer relationship. trusting and long term customer relationships. Ethical
As customer lifetime value is a concept based on customer marketing practices play a significant role in enhancing
value, it’s derived from the long term relationship context financial performance and firm valuation. In long run, ethical
occurring throughout the customer lifetime. Ethical marketing is much more likely to achieve better corporate
marketing practices foster an environment of heightened performance in terms of sales, profitability and market share
customer trust and loyalty necessary for building long term because of higher customer satisfaction, trust and loyalty
customer relationship and enhance CLV as well as CE. Thus, and ultimately higher CLV and valuation of firm. Marketing
an emphasis on marketing ethics can help sales ethics strengthen long-term viability of the organizations
organizations attract new customers, maintain and expand and build competitive advantages.

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