Foundations of Marketing Practice
Foundations of Marketing Practice MKTG 3650
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Date Created: 10/25/15
March 30 2003 To the reader You are enrolled in a principles of marketing course This publication is intended to supplement your lecture materials As you read through the text note that it is keyed to illustrations used in class The course is divided into three sections Section one covers introduction to marketing consumer behavior industrial buyer behavior the marketing environment where marketing fits into the organization market egmentation and product differentiation Section two covers product and pricing Section three covers promotion sales and distribution As you read the book consider that it is organized as follows marketing and its environment consumer behavior industrial buyer behavior marketing environment product pricing promotion and distribution So coverage begins with introductory concepts and proceeds into the marketing mix elements product price promotion and place You may wonder whether this book covers all aspects of marketing No it does not cover all aspects of marketing You will find only basic concepts herein If you seek specific contemporary examples of marketing concepts check out a traditional textbook from the library or purchase a recent edition from a used book store Try the Perreault and McCarthy textbook 14 11 edition or the Kotler and Armstrong textbook SectionT Concepts of Marketing A Who is a Marketer Consider first that marketing is driven by people and their needs It is people driven Contrast marketing a people driven discipline with accounting or information systemsipolicy or rule driven disciplines Tn marketing you are trying to identify and cater to people s needs In a policy driven discipline you are adhering to generally accepted accounting principles or to the precepts of C or COBOL programming languages or network structures You may wonder what is meant by needs A need is a lack of something useful Think about getting into your car on a Friday evening after a week of work and school You re really tired and irritable You start your car You turn on the radio to an easy listening station The radio croons Bryan s Songgda da da da da da daaaah You emit a sigh It s time to relax to slow down On the other hand consider your personal situation Perhaps you are single and unattached You work all week long On Saturday and Sunday you re at loose ends You find singles bars boring and expensive You aren t involved in sports You decide to visit a singles group at the local Baptist church There you find similar singles with similar feelings Again you have a need and some organization in this case a church provides a way for you to satisfy that need Marketing is just identifying the needs of a target group and preparing a way for them to satisfy those needs consistently How simple it is All right so who is a marketer A marketer is anyone who identifies the needs of a target market and develops ways for members of the target market people or business organizations to satisfy those needs The fellow who developed Domino s Pizza identified a set of people with needs He determined there were people who sought hot tasty food at late hoursidelivered to their door He set up pizza ovens in out of the way strip centers purchased a eet of economy cars promoted his product through coupons and radio ads and began to satisfy buyers needsidelivering the product along with soft drinks Word of Domino s spread sales went up new facilities opened The same story goes for UPS Federal Express WalMart and every other successful marketing organization Keep in mind that success in marketing requires two things an idea of a need that people or organizations in a target market have39 the willingness to develop a way for people in that target market to satisfy their need ie a product a pricing system a way to promote the product and a way to distribute or place the product A college degree in business is not required No college degree is required Colonel Sanders KFC Dave Thomas W endy s Sam Walton WalMart never earned college degrees Yet they successfully identified buyers needs and developed ways for buyers to satisfy those needs consistently Marketing operates along with other aspects of a business operation Marketing interfaces synergistically with business information systems with accounting control systems with production systems with sales force with human resources with public relations Synergy means productive interaction Metaphorically put synergy means two plus two equals five Okay We are at a point for consolidation Marketing means identifying and satisfying needs of people or organizations in a target group Marketing is part of a business system that includes accounting and control systems information systems hum an resource systems sales systems production systems and publicity systems B Basic Concepts of Marketing Conceptually marketing exists to satisfy utilities Utilities are economic concepts They are bases people use for making economic buy decisions Let s consider three utilities time utility place utility and ownership utility Let s say you wake up at two o clock in the morning You have a dull throbbing ache in your sinuses Apparently you have a sinus headache You roll out of bed and stumble to the bath room Opening the cabinet you find no aspirin or Tylenol Sighing you pull on jeans throw on a tshirt step into thongs grab your wallet and head for a nearby convenience store on foot At the convenience store you purchase Sudafed and a can of iced tea You pay six dollars for the headache remedy and tea using a Visa card At home you open the tea and take two Sudafed pills and return to bed Your scenario represents the three utilities place utility time utility and ownership utility The convenience store was nearby place utility You could walk to it The convenience store is open twenty four hours time utility The convenience store accepts credit cards ownership utility You use the convenience store when you want it It is where you want it And you find it easy to buy things there because the store takes credit cards So what need does a convenience store cater to If you thought the need for convenience you are right A convenience store sells time or time saving You use a convenience store because you want to get in and get out quickly You want to make several purchases gasoline beverage smokes candy without having to go to several places You are willing to pay a premium for your beverage your magazine your candy or your smokes The people who own convenience store understand the need for convenience They locate their outlets at major intersections adjacent to multiplefamily living areas or next to interstate highways The convenience store owners understand the marketing concept They identify a buyer s need and develop a product service that satisfies that need consistently To be profitable a convenience store or any other business venture must satisfy customers needs consistentlyover the long run Think about restaurants and retail stores you patronize regularly You purchase items at the restaurant or the store daily weekly monthly Think about how much you spend each time you purchase For that store or restaurant to be profitable you have to come by regularly and spend a fair amount The same goes for your cell telephone carrier your cable tv provider your hair stylist or barber and your veterinarian KMart recently closed 329 stores in the southern half of the US KMart experienced declining patronage Not enough people patronized KMart Those people who patronized KMart failed to spend enough on each trip to keep the chain a oat in the southern US That s why satisfying needs consistently is important Target market members needs change Competitors change KMart could not compete with WalMart in the southern U S Marketing is developing and distributing products to chosen market segments Developing products involves identifying needs of target customers and developing products or services around those needs Distributing products involves making them available when and where target customers want them and in a form that the target customer can consumeitime place and ownership utility A market segment is a group of buyers who share certain characteristics eg age income category gender Males eighteen to thirtyfive are a target market for major brewers Females seventeen to fortyfive are a target market for makers of panty hose like Hanes Corp Market segments will be discussed in greater detail later For now keep in mind that a market segment is a group of buyers or buying organizations that is organized by selected characteristics The characteristics are left to the discretion of the marketer A market segment that is chosen for development is called a target market The marketer develops a marketing mix a specific combination of product pricing system promotion plan and distribution system for a target market An example of a target market would be Spangles shown in the text Let us say that Hanes Corporation scientists develop a nylon material that has metal akes embedded in it The material makes the hose glisten in the dark The product development team decides that the glistening nylon could be cast as panty hose On consultation the product team decides to consider market segments as follows females age categories see insert and income categories see insert The developers decide to investigate two segments in particular females ages fourteen to seventeen making zero to five thousand dollars annually teenage girls females ages twentyfive to thirtyfive making sixteen to thirty thousand dollars annually working women The product developers decide to investigate each segment For the teenage girls the product developers decide to offer a package that is shiny probably more expensive than are the panty hose inside The hose will be sold in several garish colors They decide to price the product at 595 They choose a celebrity spokesperson a lady entertainer who appeals to the target market to promote the product during concert tours and in print They decide to sell the product at stores patronized by teenage girls Eckerd and Walgreens Old Navy the Gap For the working women the product development group decides to offer a sedate package The hose will be sold in nude black and navy colors They decide to price the product at 495 and offer a coupon for 100 off on first purchase The hose will be promoted in newspaper ads and in Cosmopolitan magazine The product will be sold in C Penney Dillards and the Limited stores Notice that a different marketing mix was developed for each segment Product pricing system promotional system and distribution method differ between the segments Keep in mind that the needs of the segments differ Teenage girls are concerned more with image Who wears the hose How colorful are the hose They respond to bright packaging and celebrity spokespersons Working women seek a more durable product The are concerned with value More conservative colors appeal to the women The product development group will evaluate each segment in terms of its value to Hanes They will look at time to breakeven market share profitability over the long run repurchase rate and other indices of market performance Chances are that Hanes will conduct some type of focus group to evaluate each segment A focus group is a market research tool The researcher gathers a small group of target market members The members are paid for their time The researcher queries the group on their purchase behavior for panty hose The researcher determines what factors the target market members consider when purchasing hose Finally the researcher determines how likely the market members are to purchase Spangles hose A last step is to choose target markets The product development group at Hanes will choose zero one or both market segments as target markets Again a target market is a group of buyers or buying segments for whom the company develops a marketing mix C Consumer Behavior Consumer behavior is the process people go through in buying Before a company can sell products to target market members it must understand how those members buy I once purchased a Toyota MRZ My friend who sold me the car explained that Toyota had determined that eighty percent of car purchases were made or in uenced by women I laughed and told him they must be wrong He asked me whyl chose a white MRZ I told him because that s the color my wife likes End of story Toyota is right Most men will ask their wife mother girlfriend or livein before buying a car If you fail to consult the lady you will seldom hear the end of it In summary a marketer must study consumer behavior because it helps them understand how people go about satisfying their needs To understand how buyers satisfy needs a company might consider psychology the process of individual behavior sociology how people behave in groups education how people learn to buy and economics the relationship between supply and demand Additionally one s own insight about how people behave can be useful in developing a marketing mix Keep in mind any insights you have about how people make buying decisions or about how people behave in general Friends in the restaurant trade tell me that when a new restaurant opens it is customary to load the parking lot with cars of employees and even cars from auto dealerships The idea is to make the restaurant look crowded or successful People are more likely to dine where others are dining Perhaps diners have a need for association Okay let s discuss a model of how people buy The model is simply a learning tool It represents the thought process someone goes through in buying a product or a service The model is a cognitive modeli it covers thoughts or the thought process people go through in buying Certainly the model is more for learning and discovering than an exact representation of buyer behavior Think of the model as going from the top down A person experiences information and cues Many cues bombard the individual You are sensing cues right now You may hear an air conditioner or a heater blowing A radio or television is probably playing in the background Your dog may have just peed on the floor A y or gnat may be buzzing around the room You may hear a commercial playing on the radio You may be hungry Given the number of stimuli that bombard you you probably only perceive five or six percent of the stimuli Perception is the way an individual selects organizes and interprets information Each of us has our own perceptual system we develop as we grow up Hence only stimuli that relate to a need we have at a point in time will permeate our perceptual system Once a stimulus or cue permeates a perceptual system we sense a need A w is a lack of something useful A m is the way we choose to satisfy a need It s eleven o clock in the morning Let s say you see a person eating a candy bar Your stomach churns Qou re hungry You want a sandwich You have a profile of wants for a given need at given times Take a look at the chart of food needs posted nearby Okay So a stimuli is perceived It triggers a need and a corresponding want So if you see someone eating a candy bar and want a sandwich You will go into a search mode During the search you re sensitive to cues ads showing food items on radio or billboard restaurant signs or food smells The search can be a quick oneiyou go to a Subway store and order a veggie sub The search can be more lengthyiyou drive across town and get a barbq sandwich at Coulters The point is that you will at some point respond to your need by either buying a product or service or by postponing the search Suppose you cannot find a sandwich that suits your needs You have to go to work so you curtail the searchi postponing the response After the response reinforcement occurs The sandwich tastes good so you feel better You made a wise decision Alternately some of the lunch meat may be spoiled You get indigestion so you feel resentful towards Subway Hence quality control by Subway is important If the restaurant keeps its walkins cool and disposes of lunch meats by date there is a high likelihood that customers will receive positive reinforcement when they purchase a sandwich at Subway As well if a retailer trains its employees well customers are more likely to be satisfied with interactions at that retailer and continue patronage and referra After purchase decisions buyers undergo dissonance to varying degrees Reinforcement of the rightness of a purchase by a vendor is important Suppose you buy a Chevrolet pickup truck at James Wood Chevrolet Shortly after your purchase you receive a letter from the ceo of Chevrolet motor division In the letter the ceo thanks you for your purchase and informs you that you may call l800askchevy if you have questions or concerns about your new vehicle Purchase behavior is learned to some extent Think about CocaCola drinkers A CocaCola drinker sees the coke logo on a billboard or tshirt stimulus or cue Her throat twinges She heads for a vending machine inserts a dollar presses the CocaCola Classic button response Clunk clank clunk and the plastic container of coke drops to the retrieval hopper She picks up the bottle removes the lid lifts the bottle to her lips Soon a pleasing sensation runs up her throat and through her nose reinforcement Ahhh Each time the behavior occurs and the buyer is satisfied reinforcement occurs The learning model was derived from study of animals eg Pavlov s dogs Keep in mind that much advertising is intended to reinforce behavior of existing buyers instead of attracting new buyers Attitude influences buyer s perceptions and their behavior An attitude is an emotional disposition towards a product Some people have a negative attitude towards life insurance They believe insurance companies prey on buyers emotions and anxieties Others believe insurance is useless because benefit only occurs if you die Still other people are favorably disposed towards insurance They see life insurance assuring the well being of their family should a tragedy occur Similar effects occur for political candidates movie actors universities Notably strongly held attitudes are hard to change Years ago the Honda motor company contemplated introducing a line of light motorcycles to the US market At that time the mid 1960 s many Americans associated motorcycle gangs like Hell s Angels with motorcycles Honda knew it would be very difficult to convince Americans in the target market ounger people and their parents that motorcycles were safe efficient fun transportation Still the company decided to go ahead with the marketing effort for the Honda motorcycle They released an ad campaign themed You meet the nicest people on a Honda The campaign pictured grandmas college coeds and businessmen riding the small Honda motorcycle It worked Honda rapidly gained share in the US motorcycle market quickly eclipsing Harley Davidson They later introduced small fuel efficient autos and then power mowers Of course the campaign could have failed as well Some marketers segment markets for their products on the basis of psychographics Psychographics are combinations of activities interests and opinions that characterize a target market They are gray or subjective characteristics Let s take an example Suppose you see an ad in Cosmopolitan magazine for Dewar s Scotch The ad shows a young lady in a wet suit She is standing on a beach presumably in the tropics The ad copy reads Jane Doe CPA Jane enjoys scuba diving reading good books and working hard She drinks Dewars because it is smooth and pleasing The ad targets young professional women It targets readers who seek to be young professional women The ad targets readers who identify with young professional women Psychographics can be a powerful approach to targeting a market However they can also misfire or mistarget or even drive off target market members BMW lost some of its devotees when it targeted yuppies as did Porsche or Mercedes Social factors influence purchase behaviors For example family units are smaller today Single parent families are common A mom or dad may have two children and no spouse Single parents have more tasks to perform in less time than do dual parent families Stores like WalMart appeal to single parents They can take the children to the store feed them get them to rent videotapes shop for food and hard goods and go home What would take several hours if the parent had to shop at several stores takes fewer than two hours at WalMart Culture influences buyer behavior as do subcultures In Texas hispanic culture has its own shopping and buying behaviors Paaco caters to MexicanAmerican buyers of autos Fiesta Supermarkets cater to Mexican American buyers Fiesta carries many ethnic foods that are not available elsewhere Buyer behavior also varies by social class A number of models of social class have been offered Rather than discuss those models let s apply one of them to buyer behavior The model divides social class into three categories rich middle class lower class Of the rich there are old rich and new rich alt noveau riche Old rich hibernate They have been rich for several generations A student told me she once waited on a lady at a jewelry store in Highland Park It was a Saturday morning The lady drove up in an old Pontiac Safari station wagon She was wearing an old tshirt and jeans She asked the student to show her an expensive watch She examined the watch and indicated she would buy it The student asked And how would you like to pay for this m am The lady offered a Platinum Visa card The last name on the card was one most readers would know The lady had no need to demonstrate her wealth to the student She d always been wealthy New rich are opposite to old rich Sports stars and entertainers purchase exotic cars attend gala events and speak their minds on political causes Noveau riche seek to enjoy their wealth They spend conspicuously Most of us are middle class Americans There are all sorts of delineations of middle class An easy way to conceive middle class is to break it into two groups blue collar stars and young professionals Blue collar stars are skilled tradespeople An air power plant technician a plumber a heating and air conditioning specialist a butcher are all blue collar stars Keep in mind that all of these tradespeople are certified in their trades They usually apprentice as well Blue collar stars often own a business They must be mindful of cash flow Chances are good that a blue collar star lives in an older home pursues local recreation is married and has children A young professional goes to college The young professional may be an auditor with an accounting firm a newly minted lawyer or a systems analyst Youn professionals strive to look and live professionally They may live above their means in an effort to gain the accouterments of success They have to behave along the lines expected by their organization modeling their behavior on that of their seniors D Industrial Buyer Behavior Industrial buyer behavior entails business to business transactions A plumber purchases faucet washers An accounting firm purchases a auditing software A purchasing agent purchases maintenance repair and operating supplies from WH Grainger Company Industrial buyer behavior can exhibit several characteristics First multiple buyers may be involved In some industrial buying situations a committee is involved In purchasing an AIDS test to be run in a hospital laboratory a medical doctor may be involved a pathologist may be involved a laboratory director may be involved a chief financial officer may be involved Each person has a different perspective The medical doctor may want a test that is quick The pathologist may want a test that is reliable and accurate The laboratory director may want a test that can be run in house The chief financial officer may want a test that is economical Vendors must determine what combination of characteristics are most likely to dominate the decision Essentially the buyers are buying benefits not product features The benefits define the product Characteristics of Industrial Buys Industrial buys are defined by several characteristics First consider that there may be a single buyer or several people involved in an industrial buying decision In the AIDs test example a buying committee was involved a medical doctor a pathologist a laboratory manager and a hospital chief financial officer As well a purchasing officer or materials manager is often involved in the industrial purchasing scenario The purchasing officer is responsible for maintaining a budget allocation and often for compliance with group purchasing contracts Many companies belong to purchasing groups Purchasing groups offer discounted prices on selected items from selected vendors If you work in a facility where purchasing occurs you may see signage directing salespeople to check in with the purchasing department Industrial buys can involve J T 39 quotl 39f39 39 are A 39 a vendor must meet The requirements are defined by both the buyer and the vendor Specifications apply to the product pricing of the product packaging and shipping of the product characteristics of the vendor company support requirements for the product compatibility requirements for the product and safety requirements The US government and its agencies have explicit specifications for vendors as do most state and local governments Companies that trade with the US government must adhere to government specs as well Companies normally exert a formalized paper flow for purchasing A vendor must secure a purchase order number to initiate a purchase with a company A purchase order authorizes release of funds for a product The materials manager assigns a purchase order number once the merchandise and terms of sale are settled A purchase order system is designed to help the organization manage outbound cashflow In situations where a vendor seeks to sell to a municipality or government body a bid system will be in effect Under a bid system a project or need is posted by the buying entity Sealed bids are submitted by eligible vendors Basis for the bid varies Local vendors may be preferred lIinorityowned vendors may be preferred The lowest bid may win Types ofBuys Buying setups vary The most common buy involves exchange of money or other consideration for product or serviceia direct purchase Direct purchases include purchase of inventory by a manufacturer or retailer Normally some type of trade terms exist Trade terms involve discounts and purchase requirements 210 net 60 means the buyer receives a two percent discount off the purchase price if the product is paid for within ten days The net amount is due within sixty days Trade terms can be complex Other considerations include freight and product installation requirements Abuyer who arranges shipment of the product can usually get the price net of freight cost Reciprocity involves exchange of product or service for product or service Let s say a small radio station runs spots at 630 7 900 am for the local Winnebago dealer in exchange for use of a Winnebago for onsite broadcasts No money changes hands just services Keep in mind that reciprocity may run afoul of the Sherman Antitrust Act Such arrangements exclude competitors and may thereby be in restraint of trade Industrial Marketing Mix The marketing mix is a combination of product price promotion and place an organization presents to a target market Industrial marketing mixes can be hard to identify because they sometimes bundle benefits Bundling implies mixing several benefits together as part of the product or service For example suppose a paper company agrees to stock paper in a node offsite for a customer The vendor bills the customer for the paper once it leaves the node The storage and billing setup becomes part of the product Pricing industrial products involves variation as well Trade discounts apply as mentioned under types of buys Quantity discounts often are in effect Under a quantity discount scheme the more a client buys the less the client pays Office and other types of automated equipment that are leased may be priced based on supplies utiliszation or maintenance agreements In the grocery industry products such as cereal are sold under promotional agreements A retailer may receive a promotional allowance in exchange for purchasing a certain quantity of product at a certain time Industrial and trade products are promoted largely through salespeople Salespeople may be employed by the manufacturer work for a distributor or they could be manufacturers representatives Manufacturers representatives represent several manufacturers of complementary product lines in a related area Whatever the case salespeople call on buyers or buying organizations Two of my former students call on WalMart One fellow represents MaltOMeal The other fellow represents CulverProline a personal care products manufacturer Both fellows are responsible for millions of dollars in business with America s largest retailer They both negotiate with WalMart purchasing agents who buy for specific categories of product Industrial products are also promoted at trade shows A trade show usually coincides with a meeting of buyers or decision makers Let s say that a publisher such as Fountainhead Press sends salespeople to the Summer Meeting of the Marketing Educators college marketing professors There salespeople from Fountainhead contact marketing faculty They promote marketing texts Fountainhead publishes do facetoface marketing research and prospect for new textbook authors At that one meeting F ountainhead s salespeople may see as many prospective authors and adopters as they see in several months of making individual sales calls A trade show can be very cost effective Trade journals are another way to promote industrial products Manufacturers like Caterpillar promote their diesel truck power plants in Southern Motor Cargo a regional trucking magazine Fleet managers and transportation coordinators get Southern Motor Cargo A reader can circle items on a postage paid reader card corresponding to advertisements placed by vendors like Caterpillar The card goes through a clearinghouse The vendor receives a notice indicating the reader s interest and can then dispatch a salesperson or send product literature Such contact perpetuates what is called a warm sales call Most industrial products flow to industrial buyers through distributors Distributors carry related lines of products for industrial buyers For example a plumbing distributor or plumbers supply carries everything from porcelin sp urinals and lavatories to Delta faucet kits to fifty gallon water heaters Plumbers seldom have the correct fitting or carry all the components necessary to do a job on their truck Usually the plumber will scope out a job gain the customer s assent and then go to the supply house to get the materials necessary to do the job The same type of situation stands for heating and air conditioning techs automotive shops and others who work with complex componentry Look in the yellow pages under plumbing supplies automotive paint and body supplies or nursery supplies You will find a number of supply houses Some supply houses such as WH Grainger will stock their wares on site for larger customers usually plants In this way Grainger can keep a large facility stocked with the thousands of maintenance repair and operating items necessary to keep things running E The Marketing Environment Business organizations operate in an environment much the same as we do The environment comprises laws or legal forces society or societal forces politics or political forces technology competitors and perhaps other constituents Of note an organization cannot control the environment but it can certainly in uence the environment How can an organization influence the political environment the legal environment or the competitive environment Aspects of the environment interrelate A pharmaceutical manufacturer may seek to accelerate release of an ethical drug Doing so requires FDA approval Doing so will give the pharmaceutical house a competitive edge over other manufacturers Hence actions taken inthe legal environment affect the competitive environment in that case But how do organizations influence lawmakers judges and regulatory bodies Keep in mind that lawyers play a key role in efforts to influence laws judges and regulators Many politicians are lawyers Politicians make laws Most judges of any caliber are lawyers So lawyers rule on actions or behaviors of businesses As well lawyers represent business organizations in court Lawyers make laws as legislators interpret laws as judges and they litigate Wow Vehicles for influence include lobby organizations trade organizations political contributions of individuals and public relations or publicity campaigns enacted by an organization The Tobacco Institute represents several tobacco companies Philip Morris RI Reynolds Lorillard Ligget and Myers sp Brown and Williamson and United States Tobacco It is a lobby organization Longshoremen have a trade guild and a union to represent them with management and with various government agencies Stockholders employees and other individuals whose interest may lie with one political candidate can contribute to that candidate s campaign The Bill and Melinda Gates Foundation underwrites public radio programs as does Archer Daniels Midland NPR has scrutinized ADM and Gates Mcrosoft several times Okay Let s look at laws themselves Marketing as a business function touches on three types of laws Antitrust laws like the Sherman Act can impact the organization e g Microsoft Consumer protection laws relate to packaging labeling content and design of products Look at the plastic wrap your shirts and pants come back from the cleaners in Read the warning on the wrap It tells you not to let small children or college students play with the wrapithey may asphixiate sp Societal protection laws involve the organization and aspects of the environment Automakers must comply with federal CAFE requirements corporate average fuel economy Broadcasters must meet FCC regulations Even Howard Stern cautions guests against foul language He could be taken off the air Societal protection laws were enacted to protect the ecosystem and progeny future consumers A myriad of laws sit within each category antitrust laws consumer protection laws societal protection laws Let s confine our discussion to two of the major antitrust laws the Sherman Antitrust Act and the Robinson Patman Act The Sherman Antitrust Act of 1890 is the basis for all American antitrust law It arose with the industrial revolution 1870 through 1914 Moguls like Andrew Carnegie JP Morgan George Eastman and He Ford arose during the industrial revolution Each fellow developed an industry Carnegie developed rolled steel as a product for manufacturing rails and other necessities of industrialization Morgan was a financier Eastman developed photography such that everyone could take pictures including doctors Henry Ford developed manufacturing as a way to bring capital items to every citizen eg the Model T auto Among the moguls was John D Rockafeller Mr Rockafeller perhaps the greatest industrialist developed Standard Oil Standard Oil controlled marketing and distribution of ninety percent of petroleum products purchased in the USithat s almost all isn t it Rockafeller was a tough and resilient competitor Through coercive tactics he was able to extinguish most of his viable competitors If he heard of a competitor shipping oil by rail he would have his agents threaten to pull his shipping business from that railroad unless rates were raised for the competitor Of course Rockafeller only pioneered such tactics in the US Some say WalMart has refined them In any case Rockafeller was accused of runnin Standard Oil as a monopolyiunder the Sherman AntiTrust Act The Sherman Act forbids contracts combinations or conspiracies in restraint of trade monopolies or attempts to monopolize A monopoly is when an organization has the power to control price in a market A conspiracy exists when one entity gains assent from another to set price or to control a situation so as to harm a third party eg Standard and a railroad agree to restrict shipping by another oil company In 1914 I believe after years of court battles Rockafeller conceded Standard Oil was broken into several smaller independent oil companies You may recognize the names Chevron Standard Oil of California Exxon Standard Oil of New Jersey Mobil Standard Oil of New York Sohio pretty easy to guess Until the late 1990 s the oil industry remained as set by the courts In recent years Mobil merged with Exxon Texaco and Chevron merged British Petroleum merged with Amoco So what constitutes restraint of trade depends largely on the time or situation and who is on the Supreme Court The Robinson Patman Act is a refinement to the Sherman Act The Sherman Act is broad It s akin to my telling students not to cheat before or during examinations What constitutes cheating you may ask Good question What is a monopoly What is a conspiracy in restraint of trade What is price discrimination Robinson Patman addresses price discrimination Price discrimination exists when a business sells the same product alt Products of like grade and quality to two different buyers for two different prices You may balk Perhaps your employer sells the same type of item to different customers for different prices There are ways around Robinson Patman First let s set the assumptions of the law Price discrimination is illegal in interstate commerce That means almost all businesses are subject to the RP law or to state level equivalents Second the law considers the burden of proving innocence to be on the alleged violator So if you and your employer are accused of price discrimination you must prove otherwise Your accuser can watch Is the law serious Yes A colleague informed me that courts can award treble damages to your accuser should price discrimination be upheld A student told me of a vice president at a travel agency who lost his job and was fined 100000 as a result of a price discrimination suit It s a serious law So how can companies charge different prices to different customers for the same product Consider first that a company needs to be able to support its pricing policy with data Suppose your company provides a quantity discount to all industrial customers One to five cases of product sell for 10 per case Six to ten cases of product sell for 850 per case and so on Youmust be able to show that your costs of selling shipping and processing decline as the number of cases sold escalates You might provide a discount to customers who pick up their product and transport it That is okay as long as you offer that discount to all customers Suppose you sell transformer oil to power companies You sell 1000 bbl of transformer oil on Feb 1 to Texas Utilities in Galveston for 30 each The same day you sell 1000 bbl to Niagara Utilities in Buffalo New York for 35 each Suppose the two purchasing agents discover the price variance during a telephone conversation It doesn t look good for you does it Well suppose you have competitive pricing information for the Galveston market and the Upstate New York market On Feb 1 market price in Galveston was 29 Market price in Buffalo that day was 37 Lucky you You were meeting market price in good faith Such situations justify marketing intelligence efforts and they validate resale price control systems Finally consider the different pricing structures that exist Vendors like Xerox and Mnolta have state contract pricing systems The College of Business at UNT can buy a Xerox photocopier model nl 14 for considerably less than can the Boeing Company down in Corinth Texasiall else held constant Why It is because no restraint of trade exists for those transactions UNT does not compete with Boeing UNT educates students Boeing makes electronic parts Many companies have state contract prices buying group prices and trade group prices Still Xerox cannot vary from its state contract pricing between state agencieswtherwise price discrimination exists Gotcha F Where Marketing Fits into the Organization Marketing plays a role in any business organization There is a marketing function in a proprietorship There is a marketing function in a fifty thousand employee 38 billion gross revenue business Bot organizations must develop and distribute products to chosen target markets Both must address product pricing promotion and place for each target market Both must identify needs of target market members and satisfy those needs consistently Okay so where does marketing fit into an organizational structure A structure is a unit where two or more people work towards a common goal First consider that a business organization structure has two levels the corporate level and the functional or operational level The corporate level addresses decisions that involve the future and strategy of the organization e g mission goals strategies or plans and tactics The functional level carries out the business on a daytoday basis Functional departments make the product sell the product amass and provide information pertaining to the product account for sales and expenses involved in making and selling the product service the product hire and train employees to make sell service and account for the product Corporate level personnel respond to the needs of stockholders or ownership of the organization They clarify the mission of the organization its reason for existence Under the rubric of mission corporate planners develop goals A goal would be to be a leader in the fast food industry or to achieve five billion dollars in gross revenues by 2005 They develop strategies to help the organization achieve its goals and mission Some organizations seek to grow share in their industry Under a growth model the organization may enact a strategy of acquisition Other organizations seek to diversify their business risk through entering new industries or marketsithat may or may not complement their base business UPS purchased Mailboxes etc Mailboxes etc gives UPS an entre to the consumer shipping market Conversely Newell Rubbermaid may enter the power tools market Aside from its expertise in marketing consumer products Newell Rubbermaid has no brand equity in the power tools market They may buy an existing firm in the power tools industry Some companies look for ways to improve how they market their productsiseeking greater efficiency and cost effectiveness WalMart developed a cutting edge inventory control system That system allows WalMart to achieve phenomenally low inventory holding costs through a t iquot ti inventory v fem Tquot t iquot ti inventory control purchaser incentive programs reagent rental agreements and other ways to implement strategies are tactics Tactics are how a business carries out its strategies Functional level personnel carry out the strategies developed at the corporate level Functional personnel develop and enact tactics How are functional personnel organized Actually the structure of most schools and colleges of business re ects the functional aspects of business organizations Companies have a controlcontrollership accounting function They have a business information function information systems group As well firms have human resources training and development production purchasing administrative customer service sales marketing pricing and operations departments All of the preceding functions fall within the disciplines commonly found in business schools and colleges management marketing accounting information systems and finance As well firms have engineering design research inhouse advertising or creative and other areas depending on the nature of markets and industry Importantly each department contributes to the day to day output of the business in some form or fashion Without the functional or operational departments the business doesn t exist Conversely the business may go on for decades without effective corporate level decision making Look at Montgomery Wards and KMart No matter what the business size marketing and the other business functions must be carried out Sometimes companies outsource certain functions such as sales information systems inventory control billing and accounting or human resources Still the functions have to be executed Our concern rests with what the marketing function does in the organizational structure Someone titled marketing manager or vice president of marketing runs the marketing function Sometimes firms merge sales and marketing under a vp sales and marketing In a small business one person may handle marketing sales accounting and information systems In any case marketing decisions have to be made Marketing decisions are made under several premises First the marketing manager considers the goals the corporate level specified All marketing decisions must correspond with or be congruent with corporate goals It wouldn t be wise for Hunday to develop a luxury sports sedan to compete with Lexus would it That marketing mix runs counter to Huyndai s sp goals and mission chances are In that case Huyndai would miss its target market Second the marketing manager develops marketing objectives that correspond to corporate goals Let s say Grandy s marketing group in response to a corporate goal of increasing market share with in the 60 to 75 year old age group decides to grow Grandy s brand awareness with that segment and to increase its share of the segment by ten percent over the next fiscal year That is a marketing objective Now the marketing manager or marketing department at Grandy s has to look at opportunities that will allow them to achieve their marketing objective Let s say one of the marketing team suggests that Garndy s develop a line of low cholesterol breakfast entrees The heart smart line would correspond to Grandy s well known breakfast entrees Both the regular and the heart smart lines would be offered at Grandy s restaurants Okay So does Grandy s get to work developing a line of low cholesterol breakfast items Woah First the marketing group or marketing manager has to decide two things 1 Is the heart smart line consistent with the goals or objectives of the organization 2 Does Grandy s have a differential advantage for the heart smart opportunity That is does Grandy s possess the base competencies needed to carry out the heart smart product offering Distinctive or base competencies are things the company does well Competencies can be a strong position with a target market like McDonald s has with young children They can be engineering know how They can be retail location advantage A strong knowledgeable sales force can be a distinctive competency that confers a differential advantage What competencies would Grandy s need to attain a differential advantage for the heart smart market Let s say a reputation for providing food that appeals to the 60 to 75 year old market is a necessary competency Grandy s certainly fits that one Let s say that an ability to prepare breakfast food of consistent quality is needed to set for heart smart Grandy s fits that one Means to secure kitchen staff who can prepare heart smart meals is another needed competency Grandy s may fit that competency as well Another competency involves a credit line or cash necessary to secure the materials capital items and training necessary to enact a heart smart program Such items involve dietary skills ie dieticians who can develop the heart smart entrees funds to have an inventory of heart smart items prepared by food vendors capital needed to promote the heart smart program with the target market and perhaps the medical community who serve the target market is another asset based competency Grandy s will need It would be foolish for Grandy s to embark on the heart smart endeavor in an undercapitalized position You may think Hey This thing is awfully involved It is Deciding whether to introduce a new product line is tough Failures occur Sometimes the idea itself is great but the execution is slipshod That is the marketing manager failed to think out all the requirements for a solid marketing program In the heart smart example we have yet to mention exactly who is the target market Are all the 60 to 75 year olds who patronize Grandy s a target or are some of the 60 to 75 year olds a target The marketing staff has to segment the market using logical factors It could be that 6075 year olds on low cholesterol diets are the market Certainly Grandy s will have to segment the 60 to 75 year old market and ascertain just who they are targeting After segmenting the marketing staff must research the concept of a heart smart product line with the chosen segment Focus groups of target market members may be used to determine members attitudes towards their health dietary habits purchase behavior for home foods purchase behavior for dining out risk tolerance sources of dietary information used and intention to purchase heart smart products if offered by Grandy s Marketing staff will use the information gained to determine likelihood of initial purchase and repurchase of heart smart items They can also use the information to develop the product line itself and to figure out how to promote the product line to the target market Speaking of developing the heart smart line Grandy s must now do just that Marketing will have to work with the operations and dietary staff at Grandy s to determine what entrees to offer The entrees will have to be developed from the concept stage all the way through implementation at the store level So a product must be setup As well marketing and finance departments need to work out a pricing strategy The finance or accounting people have to help the marketing staff figure out costs for materials needed capital items price sensitivity of buyers all in pursuit of a reasonable return on investment for the heart smart offering A promotion strategy has to be developed Will the market respond well to an ad campaign aimed directly at them Are cutesy billboards showing a target market member enjoying a heart smart entree the ticket Or might it be wise to get the approval of a medical group eg the American Heart Association and use that advocacy to gain acceptance with target market members IIight it be wise to simply introduce the product through instore promotion without any hoopla Finally and most importantly how will the method cooking equipment preparation protocol merchandising system display or serving setup and inventory be distributed It would be embarrassing for Grandy s to promote heart smart only to have ready consumers be told that the items aren t available yet or even worse have products that fail to deliver the expected taste because of inadequate preparation And that s not all Keep in mind that the marketing staff must develop a mechanism for evaluating the marketing mix for heart smart once it is introduced The evaluation system allows Grandy s to set performance objectives for heart smart and then evaluate performance relative to objectives The objectives may include market share trial rate repurchase rate costtoserve sales volume All this stuff has to be done before the product is introduced in any form or fashion Indeed decisions have to be made as to how the product is introduced Should Grandy s roll out the product in all its outlets Should Grandy s test the product line in a single outlet some restaurants like Tony Roma s do Should Grandy s test the product line in a single region Each alternative has merits Grandy s management may rely on the marketing manager to determine what s the best way to release the product G Market Segmentation Target Marketing Product Differentiation Market Segmentation At this point you may think Wow I thought marketing would be fun Instead it s more of that anal compulsive analytical stuff Where s the fun Where s the creativity Guess what marketing is just a way to think about a business problem in a structured manner It really isn t creative per se Certainly identifying a buyer s need may be creative Designing a product to suit buyer needs may be creative Developing an advertisement to promote the way a product satisfies a buyer s need may be creative too However marketing people do not design products nor do they develop ads and seldom do they identify buyer needs Really marketing is an analytical function much akin to the Grandy s example just related Sorry Segmenting markets can be creative Indeed market segmentation is almost an art form It s a way of figuring out how people or organizations satisfy a need Think about Domino s The fellow who started Domino s may have thought There s a group of people out there who want tasty hot enjoyable finger food delivered to their home or workplace They will want a beverage as well They ll pay for the convenience of that food and beverage if it arrives hot tasty and within a short time period But how did that fellow come up with that notion He had to segment Segmentation means breaking up a market on the basis of characteristics shared by market members More simply put market segmentation is breaking up a market on the basis of shared characteristics It is a key part of a marketing strategy Marketing strategy in a nutshell comprises choosing a target market through segmentation and then developing a marketing mix for that target market Segm enting a market is step one towards arriving at a target market Without a segment the organization is just shooting in the dark hoping to hit the target Okay Jeff so how can someone segment markets Really any basis can be used However let s see if categories of factors exist for segmenting Geography is an easy start Perhaps the market for a product can be looked at geographically Road salt tends to sell better in the middlewest and northeast It snows there on a predictable basis Thongs the shoe not the panties sell well in semitropical environments As well geography helps one to organize a market Markets for homogenous products like brake pads oppy disks and bar soap can be analyzed more easily on a geographic basis Demographics are probably the most popular means to segment markets for consumer produces Demographics are population characteristics eg age income category gender religious preference education ethnic base race Demographics are descriptive They are measurable They adapt well to classification They are measured regularly by census and be company data collection Think about the data bases insurance companies universities municipalities school districts and military organizations manage Each data base contains demographic information for a huge number of people Even the warranty information or user information you provide to vendors or associations serves as demographic information for those organizations and for all the organizations they sell the data to Scary isn t it But consider how useful even warranty information can be Suppose you want to know who buys small power drills Let s say you believe men between the ages of 25 and 40 buy power drills What a nobrainer Wait Suppose you find out through scanner data that sixty percent of small power drills are purchased by women Wait This is getting kinky Why would a woman want a small power drill You look at the purchase date information Eighty percent of the power drill purchases are between November 28 and December 22 Right Women buy the man in their life boyfriend brother husband a power drill for Christmas or Hannaukah How can Black amp Decker use this information Well it could pay to advertise in Good Housekeeping It could pay to develop point of purchase displays that are attractive and informational for women See how useful demographic data gathered at point of purchase can be in terms of understanding how people buy productsiand maybe what implicit needs are satisfied Demographics are fun and accessible But demographics are purely descriptive That is no idea is gained about how or why the product is usediunless a specific question is asked to that effect Psychographics are a more robust way to look at a market Psychographics are combinations of activities interests and opinions that characterize a target market Some time ago a distiller ran a series of ads The ads asked Who drinks Dewars Scotch One ad featured a youngish lady in a wet suit She was standing on a tropical beach It looked as though she d just been scuba diving or snorkeling The ad went on to describe the lady Jane Doe Stanford graduate CPA enjoys surfing scuba and reading classic literature Jane drinks Dewars because it s smooth Yes Jane represents a lifestyle Much the same approach was used by Playboy magazine What kind of man reads Playboy The Man Show uses much the same approach Psychographics target people who really live the lifestyle people who aspire to the lifestyle and people who simply identify with the lifestyle ie the fifty year old happily married man who gets Playboy Psychographics bundle attitudes behaviors and beliefs They re complex and can like prescription medications have unintended side effects Identifying Dewars with successful women may drive off male drinkers Advertising a power drill on the Man Show iwhen women purchase the product as a gift could be a waste of money Maybe a Sears or Lowe s ad shown on Lifetime channel would be money better spent As well psychographics can mislead a buyer When sixteenl purchased Brut an after shave product The ad promised that Brut would draw females The bottle neglected to mention that after shave needed to be combined with patience a degree of charm and some degree of otherorientation to achieve optimal results What about looking at when or how people or organizations purchase products That is might it be wise to observe buyers behavior as they purchase or consume the product MampM Mars examined occasions when people purchased candy Presumably MampM found that people purchase candy on take a guess Valentine s Day Halloween Christmas and Easter What could be done to escalate purchase of MampM s candies Voila MampM issued the one pound bag of red and white MampM s in Januaryijust in time for Valentine s Day They issued the green and white pound bag around Thanksgivingito correspond with the holiday season Black and Decker indicates that sixty percent of their sales are during the holiday season Distribution and promotion correspond to the gift mode What about looking at how people buy Here s a tale for you Some time ago one of the big brewers decided to examine who drinks beer and what they want in a beer Booz Allen and Hamilton a consulting firm was asked to execute the study The study revealed that eighty percent of beer consumed was consumed by twenty percent of beer drinkers the 8020 principle That is a minority of beer drinkers were drinking most of the beer sold in the US Now most of you can guess who the minority that drink the majority of product are males aged 18 to 35 The primary occasion of consumption for the group was while watching an athletic event Booz Allen and Hamilton also determined that the drinkers viewed beers by weight heavy or light in body and taste and price lower priced and premium It turned out that these fellows wanted a premium beer that was less filling Voila Lite Beer from l ller was born Experience level is another variable to consider when marketing products Think about information systems installed in corporations Users often become disenchanted with information systems Upon query it becomes apparent that some users lack experience or base education in using information systems It isn t that the users often doctors or nurses are stupid Few nursing curricula include a class on using computers in business Instead it becomes apparent that systems are designed to suit nonclinical personnel eg programmers lab techs business office personnel As well consider that people who do not use automated equipment on a daily basis may want the easiest possible setup Too many options or too many screens can overcomplicate learning and actually spell doom for an information system Hence it is wise to build the system around user needs and user experience level first Purpose of use can also be helpful as one segments a market Look at cameras Suppose you want to take pictures at Disney World You do not own a camera Why would you want to go and spend fifty or sixty dollars for a good camera and additional funds for film You may not get the right speed film You ma use the camera improperly resulting in botched photos Suppose you could buy a disposable camera for six dollars You use the camera take it to a photocenter at Eckerd s or Walgreens and have decent pictures back in a couple of days The same idea goes for bicycles computers and any other equipment where purpose of use ranges from professional to aficionado to novice to recreational user Target Markets All right Given the idea of segments what is a target market A target market is a market segment for whom you develop a marketing mix It is a chosen segment Think about a fighter jet pilot The pilot scans a radar panel The pilot evaluates several targets The pilot chooses a target and then selects an array of armaments to shoot at the target You segment a market You evaluate the segments You select a segment You develop a product a pricing strategy a promotion mix and a place or distribution system You base each element of your marketing mix on the needs of the target market Pilots need to select proper targets So do businesses To be worthwhile a target market must fit certain rubrics First the target market must be identifiable Some monikers are clever but useless for target marketing The terms yuppy and generation Xer come to mind How reliably can you predict purchase behavior and attitude using such gross characterizations Much more focus is needed to allow accurate targeting The target market has to be substantial in number of buyers or profitability of buyers A US Air Force contract for training jets would be a single contract with a single customer However that contract may mean selling 750 trainer jets over ten years The planes the parts the mechanic training revenue and the support contract mean hundreds of millions if not several billion dollars in revenue for the vendor Conversely a subcompact car may have to have a target market of 500000 buyers if not more to be rated substantial Finally the market must be accessible for both communication and distribution One of my students invented an irrigation gate The gate was adaptable to automation It was more reliable and easier to operate than the industry standard He worked with an older fellow to get the item patented Now all he has to do is wait for the money to roll in39 Right So how can he communicate with the farmers and companies who use irrigation systems for crops How can he get the gates where farmers and irrigation companies can purchase them What about installation and service Without a way to communicate with the user and a way to get the product where the user can buy it a good product may fail I recently signed up for a radio classics web site The site allows me to download old radio programs to a pc It handles licensing I can download several hundred minutes of shows for 20 per month That s much less than I would pay to a catalog vendor However the technology available to download is cumbersome and time consuming It took me several hours just to get the proper version of Windows Media Player installed Then I had to learn about converting media player files to cd files The downloads are slow I probably will not renew the program It s too costly in terms of my time Access and communication are lacking I hope the developers can set up a more facile system Even if someone identifies a substantial and accessible target market what type of strategies can be used to reach it Well if the target market is broad that is the product has general appeal with little difference in use or appreciation across users a shotgun approach can be used That is for a product like Doublemint Chewing Gum the same message goes out to all users Double your pleasure Double your fun with Doublemint Gum Doublemint refreshes it brings a happy note to the day Much the same approach has been used with CocaCola Keep in mind that a shotgun strategy carries the same message to all target market members Suppose you are working with a market where differences exist across segments Think of all the products that are used differently by different users A young man wants a four by four pickup truck An older man wants a Cadillac Escalade SUV A small business wants to ship several cases of product to a customer by truck A large business wishes to ship several trailer loads of product to several customers Does General Motors send the same message to all truck or SUV buyers Does UPS send the same message to all industrial customers No General Motors and UPS segment their markets Both companies employ a multiple segment approach to the target market General Motors manufactures several lines of autos Chevrolet Pontiac Buick Oldsmobile Cadillac Saturn and GMC Trucks Each line of products has its own target market Chevrolet is middle class Pontiac is sporty Buick is conservative and perhaps upper middle class Oldsmobile is upper middle class yet sporty Cadillac symbolizes power and success Saturn is different and practical a nononsense car GMC Trucks are real trucks built GMC tough GM promotes each line separately They have for years At one time GM got in trouble because although they promoted the Chevrolet Monte Carlo the Olds Cutlass and the Buick Regal as distinct autos each set at a different price point a buyer of an Olds Cutlass may receive either a Chevrolet eight cylinder engine or the Olds Rocket 88 engine Cutlass buyers filed a class action law suit They bought their autos believing the Cutlass was a better auto than Monte Carlo with a better engine Truthfully GM produced Cutlass Regal and Monte Carlo in the late 1970 s and through the 1980 s with the same chassis much the same body and only cosmetic differences in the grille and tail assembly The Cutlass or Regal customer received whatever engine was available at the time of manufacture The class action lawsuit was upheld Sometimes marketing can backfire UPS offers several types of shipping for industrial customers The products are based on anticipated volume shipped clustering of destinations and the level of service the customer seeks to provide eg days in transit tracking options For example UPS allocates many feeder trucks tractortrailer rigs to JC Penney UPS does all of JC Penney s shipping to stores and to customers The same goes for Dell lbelieve However small shippers can use UPS as well Many gift shops and online retailers offer UPS shipping options same day shipping two day shipping A multiple segment approach or a shotgun approach are expensive ways to approach target markets In particular the multiple segment approach treats each target market separately using a different product different pricing system different promotional plan and different distribution system Consider again the General Motors example Each line of cars is produced promoted serviced priced and distributed separately although General Motors appears to be rethinking the multiple segment strategy What if an organization wishes to control its marketing expenses while still achieving success Some companies cater to a single target market They concentrate their efforts on a single segment Let s say your father owns a small plant that manufactures single cylinder gasoline engines The engines come in three horsepower ranges The engines are wellsuited to lawn care Rather than selling the engines to consumers your dad sells the engines to companies that contract manufacture lawn mowers for True Value and Craftsman The engines your dad s plant makes are a component in TrueValue and Craftsman lawn mowers The concentration approach allows your dad to earn a reasonable profit margin without the excessive marketing costs that he would experience were he to sell to contract manufacturers and to individuals What s the down side Suppose your dad loses one or both of his clients He goes from profit to loss in a single day You may have heard the term market niche What does it mean A market niche is a market segment that is unserved or underservedithe products or services available to buyers in the segment are inadequate or nonexistent Several years ago diners seeking tasty palatable low calorie entrees had little choice Grocery stores featured few dietetic items beyond cottage cheese Men and women who watched their intake had to make their own concoctions or eat tasteless meals Then Weight Watchers developed a line of products Soon other manufacturers discovered a substantial accessible identifiable group of buyers were purchasing Weight Watchers Today individuals can choose from a wide array of microwavable entrees under a range of labels The entrees are palatable and visually appealing The dietetic niche has grown into a multiple segment market Sometimes a market niche isn t served at all Let s say your grandmother lives alone She cannot drive anymore She cannot afford a fulltime nurse or companion How might your grandmother get to the doctor s office or shop Can she rely on you or your family Probably not You all have jobs or live far away Suppose several fellows purchase lift equipped vans and arrange with several elder organizations and home health organizations to promote a taxi service for elders For 100 per month grandma gets up to four rides per week It s hard to say whether the elder limo idea would work but you get the idea The fellows who take up the idea identified an unserved market They developed a product a pricing system a way to promote and a way to distribute the product to the target market Product Differentiation All the information on segmenting markets and approaching target markets sounds really good doesn t it However just how do organizations position a product or service as distinct and satisfying for a set of organizations or individuals in a target market In the case of products that are essentially identical to those sold or carried by competing organizations product differentiation is used Product differentiation is ascribing character to goods that are essentially identical across vendors Products that are differentiated include unleaded gasolines cigarettes beers soft drinks life insurance policies and oppy disks Of course lowend subcompact cars lingerie and lowend homes eg Pulte and Ryland beginner homes also come to mind The point is that the seller or manufacturer uses advertising to position the product in the buyer s mind At one time Gemcreft Homes used the slogan Setting the new standard to set its product in the buyers minds Chevrolet uses the American Pie musical theme to set its Cavalier with the target market Gemcraft and Cavalier are relatively homogenous goods little different from those of competing manufacturers Indeed advertising is the primary vehicle for differentiating homogenous goods H Market Research Market research is a process that provides data for marketing decision making First the marketing staff needs to decide what decision they are making Then they need to set the decision as a testable statement Afterwards they need to determine what degree of risk is associated with making the wrong decision ie the cost of failure If the cost of failure is high the organization needs to implement a very rigorous testing process for its testable statement If the cost of failure is lower the organization can afford to evaluate the decision in a more expeditious manner What types of data might one use to investigate a marketing research question Two general types of data are available for marketing research primary data and secondary data Primary data are decision specific That is primary data are gathered to solve a specific marketing question Let us say that 3M Corporation seeks to decide whether a market exists for a software package that takes audio information from cassette tape and converts it to digital images and then to text files They call the product Tape to Text The company may believe several possible markets exist for the product college students court reporters police executives and auditory impaired students However the company realizes Tape to Texts entails a substantial fixed investment so they decide to conduct a marketing research study before proceeding A decision specific marketing research study entails collecting primary data Primary data are decision specific They are usually expensive to collect On the other hand let s say Black amp Decker seeks to decide how to package their cordless power drill this holiday season Rather than commission an extensive study they go into buyer warranty records There Black amp Decker finds that most female respondents were satisfied with the package the drill came in Why change it then Black amp Decker used secondary existing data for its decision making Marketing research is a topic unto itself Numerous sources of secondary data exist within the organization or through trade groups or through data bases the researcher can access It is wise to evaluate secondary data sources before going on to primary data collection Primary data can be collected through several means focus group internet telephone or paper and pencil survey experiment direct observation or participant observer observation Many firms contract out marketing research because it is a very specific skill Section II Product and Price A Role of College Let s take a break from marketing for just awhile Chances are you ve just received a grade on your first marketing test Chances are that your expectations concerning your test grade are undermet You re probably disappointed in yourself and in this course That s good It isn t good to be complacent with yourself especially You may wonder whether the time and resources you are devoting to your university education are worthwhile Just what is the role of college anyway Guess what You are not in college to learn facts about marketing economics management history philosophy geology or anything else That s right You will forget ninety percent of the material you memorize for multiple choice tests anyway It s stored somewhere in the back side of the top end of your brain It will come out some time when you re under a general anesthetic Okay So why do you have to marketing mathematics economics finance history and all the other topic areas requisite for a college degree You study mathematics english finance marketing management and other college subjects to develop your ability to think and communicate You are enrolled in college to learn to think and communicate better That s it Why39 you ask World industry needs professional employees who can think and communicate People are needed who can look at business situations from a marketing perspective a financial perspective a human resources perspective a production or operational perspective and an information systems perspective Systems analysts financial analysts retail department managers human resources specialists fashion designers commercial artists freight forwarders logisticians operations researchers all these professionals have to know how to think in an organized fashion They have to know how to problem solve without help or supervision They have to be able to communicate effectively with team members subordinates customers superiors vendors and family Otherwise companies cannot function effectively Products will not be delivered on time to the right customers Prices will not cover materials labor and costs of doing business Too many mistakes will be made if college graduates cannot think and communicate effectively College is where you can develop thinking and communication abilities in a noharm atmosphere Doing poorly or making a mistake in a class has negative ramifications for you but not for your employer your customers your clients or your family hopefully How do you learn to think and communicate effectively Your first two english courses should have helped you learn to write effectively You probably prepared several five hundred word themes in those courses Your two finite mathematics courses were intended to help you reason or think using numbers Your history courses were supposed to help you analyze from a longer term perspective thinking in terms of how a situation evolved Your accounting courses should help you analyze financial decisions from the perspective of cashflow and profit Your micro and macro economics courses were supposed to help you understand how to look at business and international situations and systems from the perspectives of supply and demand from overall and firm viewpoints College is one big analytical exercise Maybe you ll mix in some socializing a bit of onthejob training Some of you will acquire a spouse B Product A product is a bundle of benefits It s benefits pertain to the needs it serves for the target market Aging men or women seek excitement youth and power Some of these 38 to 50 year olds purchase luxury sedans powered by 250 horsepower V6 engines Why else the Hummer The sedans make u for physical or emotional inadequaciesito some extent Other elders purchase Harley Davidson motorcycles so they can act like renegades on weekends You get the picture Autos and motorcycles go a long way beyond just providing transportation Think of how many makes and models of automobile there are What about you Why do some of you have rings in your navel Why do others have tattoos on their buttocks Is it because you re an exotic dancer Probably not so is it You are satisfying a need of some kind America stands as a culture where anybody has the opportunity to purchase a product or service to satisfy any of a vast array of needs Products that satisfy needs range from burgers and fries to trophy wivesi from tract homes to getaway weekends in Mexicoifrom corner barber shops to exclusive spas I recently viewed a televised interview with a model This lady earned over one million dollars a year selling time on her web site People paid to see photos of her and her friends They paid to watch her cavort with her husband It s absurd but where there is a need someone will pay to satisfy there is someone who will accept money to satisfy that need Keep in mind that most of the needs we and industry satisfy are less controversial than video porn Think about business need for security The property and casualty industry provides a range of products and services to assure security to business owners Think about professionals desire to assure a future for their families Insurance companies like Northwestern Mutual offer an array of products in the areas of life insurance financial planning college funding and disability insurance Three Classifications of Products How can we classify products anyway It s a tough question Years ago Leo Aspinwall developed a nice model for classifying products He grouped all products into three classes convenience goods shopping goods and specialty goods Convenience goods satisfy needs consistently They are lowinvolvement low risk need satisfiers My wife drinks caffine free sugar free Dr Pepper at breakfast lunch It satisfies her need for stability She anticipates the taste She knows it is palatable and pleasant to her I eat a power bar for lunch If I run out of power bars my afternoon is ruined I have to allocate time to selecting something else You get the idea All of us have an array of convenience goods we buy every day Convenience goods are such because they simplify our lives We pay for the convenience In light of their nature convenience goods are distributed everywhere possible ie intensively distributed They are branded Brands like CocaCola and Dr Pepper identify the product for users and preset qualities such as avor and taste Because of intensive distribution and heavy promotional expenses at the wholesale and retail level unit profit on convenience goods is low Thereby unit sales of convenience goods must be very substantial Shopping goods involve a buyer s engaging in comparison shopping A friend of mine is in the furniture business He told me that people usually buy furniture in the second store they stop at He owned an off price high service furniture store for several years He tried to get shoppers who had already priced the traditional furniture stores in the area The point is that shopping goods usually are not reliant on brands Buyers seldom purchase shopping goods often enough to develop a brand preferance A college senior goes out one afternoon to purchase an interview suit He goes first to Dillard s men s store He checks out types of suits and prices gets his basing point and heads for KG Men s Store or Men s Wearhouse The fellow may shop three men s stores at most He ll come home with one or two suits that evening We shop for cars houses suits lingerie shoes restaurants exterminators body shops The buyer bases purchase on what needs he seeks to satisfy with the purchase value price prestige proximity Specialty goods differ from convenience goods or shopping goods in that the buyer not the product determines what is a specialty good A specialty good is of particular importance to the buyer Let s say you are a fisherman On the bumper of your pickup you ve a sticker that proclaims I work so I can fish Let s say you are taking your six year old nephew on a weekend fishing trip soon You read up on rods and reels for children in your favorite fishing magazine You check out your favorite sporting goods store to locate the right rig Then you put together a tackle box for the nephew On the big day you take the nephew to your favorite bait spot and then off to a special spot where you know he ll get plenty of hits Were fishing tackle a shopping good you d have gone to Target and then to WalMart At one of the places you d purchase a rod and reel On the morning of the event you d pick up the nephew and head off to the nearest Corps of Engineers park Specialty goods are sold in specialty stores specialty catalogs and specialty web sites Victoria s Secret is a specialty store Victoria s Secret hires and trains specialized salespeople They offer a deep array 0 lingerie Men and women who shop at Victoria s Secret are concerned with enhancing their image or achieving a particular effect They believe the product helps them to project the image or to have the effect I buy auto muf ers from SLP industries SLP makes custom exhausts and other bolt on parts for Chevrolet Camaros and Corvettes and for several other types of GM cars I want a muffler that provides a free flow and that sounds just nasty enough If I weren t concerned with auto exhaust I would replace my muffler when it wears out at whatever shop gave me the best deal shopping good Brandi pg Brands are used to differentiate homogenous products A brand is a name a term a sign or a symbol used to identify an organization s product and differentiate it from other products DOS is a trade name used by Microsoft as is Windows98 The Nike check and the shell symbol used by Royal Dutch Shell are symbols The term Xerox copy is registered to Xerox Corporation Brands can be powerful symbols However brands can also become generic terms FedEx knows their corporate name may become a generic representation for document shipping Fedex it Aspirin used to be a brand name So if a brand becomes too successful or if a brand becomes associated with a process to the extent that is commonplace the language may just take it over There are several ways brands can be used by an organization Some companies employ an individual brand strategy Under an individual brand strategy a company uses different product lines A different brand name is used for each product line Consider the following products Pampers diapers Folgers Coffee Jif peanut butter Ivory Snow soap Crisco shortening What do these products have in common All of the products are manufactured by Procter and Gamble Procter amp Gamble follows an individual brand strategy Few people know of the wide variety of products PampG makes An individual brand strategy allows a company to position each product separately It lessens risk to the manufacturer in case of product failure However an individual brand strategy is expensive F rito Lay also follows an individual brand strategy Sometimes companies prefer to employ the goodwill attached to their name using a manufacturer s brand strategy Consider Kellogg s the cereal manufacturer Years ago Kellogg s used a jingle Ke double 1 0 double good Kellog s best to you Kellogg s is a breakfast food company Kelloggs makes Kellogg s CornFlakes Kellogg s Sugar Frosted Flakes Kellogg s Fruit Loops Kellogg s Pop Tarts Kellogg s Product 19 and a variety of other breakfast products Think about how much goodwill Kellogg s holds with its market Kellogg s can introduce any breakfast food product with greater assurance of success than can Procter amp Gamble As well Kellogg s can spend less when introducing a new product However any market failure or negative event associated with a Kelloggs cereal transcends to the company as a whole That s a risk of using a manufacturer s brand strategy As well it will be difficult for Kellogg s to branch into any product area aside from breakfast foods Suppose Kellogg s wanted to open a chain of fast food restaurants What would target market members and others automatically assume Chances are people would believe the restaurants served only breakfast Stores carry brands called middleman brands Pep Boys O Reilly s Auto Parts IGA Stores Ace Hardware all carry their own lines of products AampP Supermarkets carry Anne Page canned goods Albertson s carries their own lines of canned goods Why Store brands can be sold for a bit less money than national brands They give the shopper a choice but provide greater quality indication than do off brands or generic brands As well little or no advertising or sales promotion cost is associated with store brands So the store makes more profit on its own brands than it may on national brands The retailer has no coupon expense Keep in mind that processing coupons costs the retailer As well manufacturers do not pay for the double side of double coupons How are store brands made Retailers or wholesalers may contract with a brand name manufacturer to produce a store brand There are manufacturing companies that make nothing but store brands I used to buy peanut butter from a Dallasbased company that made a number of store brands of peanut butter It s time for another story from way back when The latter half of the 1970s were times of great inflation Prices on consumer goods went up about one percent each month I recall buying soft drinks from a 20 vending machine for ten cents one week fifteen cents the next week twenty cents the next week twenty five cents the next week People s wages weren t keeping up with in ation in retail prices While upper middle class people were able to cope with in ation those at the low end or the earnings spectrum were having great difficulty Society began to question the motivations of brand name manufacturers People asked why prices had to escalate so rapidly In 1979 or thereabouts a new trend started Some retail stores like HEB a Texas grocery chain based in San Antonio began featuring nonbranded or generic products The products were packaged in yellow or white On the container was a product name eg Oatmeal Cookies and the obligatory ingredients and fat content listing Generics were grouped on an aisle Consumers could buy many staples peanut butter crackers oatmeal cookies beer sugar salt The products were priced twentyfive to fifty percent lower than branded products Generics took America by storm By 1981 sales of generic grocery products reached twenty percent of total grocery sales Not only were lower income people buying generics middle class housewives were buying generics Huzzah Procter and Gamble Kellogg s General 1Lills Hormel Quaker and other manufacturers were concerned Should the branded manufacturers lower price they would be admitting price gouging If they maintained their do nothing approach their share and market power would erode So manufacturers issued coupons With coupons shoppers could save from twentyfive cents to a dollar 1f the store doubled the coupon the price of the branded product would be approximately the same as that of the generic It worked Sales of generics dropped to zero in all but a few locations However when manufacturers attempted to remove the stimulus ie employ operant conditioning shoppers returned to buying store brands or generics Look at the Sunday or Wednesday newspaper A good part of the Sunday newspaper is comprised of coupons Product Life Cycle The concept of life cycle is old hat All of us know humans have a life cycle One allegory says what crawls has three legs then stands on two legs goes back to three legs and crawlsa human being We have a life cycle Many of you watch as your grandparents go from maturity stage to decline stage The life cycle concept is a useful metaphor for products Products go through a series of stages from infancy to old age Some products like Crisco or Ford Mustang have been around forever Other products like the Furbee have abbreviated life cycles Either way the product life cycle model gives marketers a way to analyze the lifespan of a product in advance With each stage of the life cycle come different tasks and srtuatrons As you read about product life cycle look over the powerpoint slides Here are points to note about each stage introduction growth maturity and decline Consider first that the upper curve in the PLC model represents sales revenue while the lower curve represents profit Note that profit is negative at the beginning of the introductory stage Why You probably guessed it Product development costs a fixed expense eat up any profit associated with sales at the beginning of the product life cycle The pharmaceutical industry in particular experiences the effect of product development and testing It often takes ten years from initiation of a patent until an ethical drug reaches consumers Think of the millions or billions of dollars that go into developing some of our ethical drug products As well keep in mind that promotion of a truly new product involves informing the target market about what the product does Think about the difficulty auto manufacturers experienced with antilock brakes Several people died because they tried to pump their new antilock brakes as they did normal hydraulic brakes wrong You simply stand on antilock brakeswtherwise the computer cannot adjust braking Automakers had to develop ads and special interest programs to tell consumers how to use antilock brakes They also had to train auto salespeople to train drivers in use of antilock brakes Pharmaceutical sales reps inform target market doctors about what new ethical drug products do Doctors have specific questions that relate to their served population eg elders infants children expecting mothers diabetics cancer patients Distribution of new products is limited Manufacturers often allocate new products or roll them out gradually to geographic markets By allocation or rollout the manufacturer can more easily service the product and avoid stocking out Usually there are no direct competitors for a product in the introduction stage Many products never leave the introduction stage Most situation comedies last about three episodesi that s all the production company makes Think about products youlve tried that you were unable to locate when you sought them Remember the breakfast product that premixed cereal and milk The Osborne 21 Company made the original personal computer The unit hooked up to a black and white tv There was no monitor There was no DOS or Windows Sales of the Osborne were brisk A second model was planned Stores were opened Then IBM introduced the pc IBM and the clones used an easier operating system DOS The pcs were easier to use than Osborne By 1983 Osborne no longer made computers If a product s sales escalate sufficiently such that it is retained in production and distribution it moves into the growth stage Given growth in revenue distribution of the product expandsiit is rolled out to new markets or carried in greater volume by existing distributors retail or wholesale Users know what benefits the product provides therefore promotional efforts seek to reinforce the buyers behavior Price is stable Competitors begin to enter the market Profit peaks at the conclusion of the growth stage signaling onset of the maturity stage The maturity stage of the product life cycle can last for some time Camel cigarettes have been in the maturity stage since about 1920 The Ford Mustang automobile has been in the maturity stage of the ProductLife Cycle since 1967 In the maturity stage supply exceeds demand That is vendors provide a more than sufficient supply of product To combat the Mustang General Motors developed Camaro and Firebird models Chrysler developed the Plymouth Roadrunner and the Dodge Dart Mercury developed the Cougar By 1969 there were more than enough domestic sports cars to sate American drivers Much the same type of market saturation has happened with table top pcs fast food restaurants and long distance telephone companies In the maturity stage manufacturers slug it out Attempts are made to lure buyers from one brand to another McDonalds now sells a ninetynine cents breakfast so does Burger King Dominos Pizza Hut and Poppa Johns all offer special deals MCI now offers a one price call plan local and long distance Price is the most comm on tactic for luring buyers from one brand to another Sometimes manufacturers bundle features to lure buyers from one brand to another Look at the Best Buy and CompUSA ads in the Sunday paper You can buy an HP table top computer with monitor 256 meg of ram Pentium IV chip and a at screen monitor for under 1000 You can buy a Dell system with 256 meg ram a 25 gigabyte hard drive cd burner and upgraded sound system for under 1000 Dell may throw in an HP inkjet printer for 50 It s easy to see why profit drops in the maturity stage Cost of selling products escalates greatly Because of lowered profits and even declining demand some brands drop out of the market in the maturity stage General Motors concludes manufacture of Camaro and Firebird in 2003 The plant where the two muscle cars were manufactured has closed Ford pulled the Cougar several years ago Now only the Mustang remains as the premier American affordable muscle car In 1918 there were nearly 200 automakers in the US Today there are two automakers Ford and G1I DiamlerBenz bought Chrysler Wow At some point sales of a product decline markedly for several quarters four business quarters comprise a fiscalinot physicaliyear Just like grandpa s kidneys or heart the product just isn tproviding enough revenue to cover its existence It is time to rejuvenate the product or to just let it die I d love to save the Camaro but I can only afford two of them I shopped at KMart but they still pulled out of Texas It s hard to save a product that s lost its market Arm amp Hammer pulled it off though Arm amp Hammer was on the ropes Sales of baking soda were dropping precipitously Women were entering the fulltime labor force en masse39 they weren t baking anymore Arm amp Hammer marketing staff considered all the uses of baking soda deodorizing ash trays deodorizing carpets controlling odors in refrigerators freshening laundry cleaning auto batteries cleaning teeth The company televised advertisements and ran magazine ads informing consumers of all the uses of baking soda Arm amp Hammer sales rose The product returned to the maturity stage Today Arm amp Hammer manufactures baking soda detergent tooth paste and other cleaning and freshening products After gaining permission American armaments manufacturers market missiles fighter jets and field arms that are past cutting edge technology to allied or neutral nations The practice keeps the products in the maturity stage longer allowing a greater return on investment Up until 1972 Spain employed WWII era German fighter aircraft manufactured under license Product Adoption Process You may wonder about how products move through the introduction stage of the life cycle During the Marshall Plan for the rebuilding of post World War II Europe theorists developed an appreciation for how buyers adopt new ideas and new products Farmers in the Netherlands were hesitant to use synthetic 22 fertilizer They believed in organic fertilizer cow or horse manure Agricultural experts including some Aggies knew that the synthetic fertilizers would provide the great yields Europe needed to feed the many malnourished residents Experts learned over time how farmers decided to adopt fertilizers Using the pattern of buyer behavior observed communications theorists developed a model of product adoption see the powerpoint figure Innovators are the first to try a new product Innovators are product or product category specific You may have friends who drive for many miles to see a screening of a new movie They are innovators for cinema Other people are innovators for energy saving devices Perhaps you know someone who bought one of the hybrid cars when they first came out Innovators comprise about one half of one percent of a market While they are essential to product acceptance adoption of a new product by innovators does not signify success Early adopters five percent of the market observe innovators Early adopters will risk error but are not willing to break in the new product A colleague of mine is a techno innovator He bought a palm pilot six yearsagoiwell before the product was accepted Sony s betamax video tape playerrecorder was adopted by early adopters It never got past the early adopter group To be ruled successful a new productmust make it to the early majority The early majority comprises thirty to forty percent of a target market Once a solid proportion of the market adopts a product it enters the growth stage Breakeven occurs profits from the new product cover development costs Many consumer products never reach the early majority In 1985 I bought an 8086 clone personal computer One of the UNT ancillaries had purchased a few Texas Instruments personal computers in 1984 early adopter Iborrowed one of the TI pcs After using the TI pc I was pretty sure pcs were going to be around for awhile The late majority are much more risk averse than the early adopters or the early majority Late majority members may wait awhile before adoption The late majority may not value the product as much as do the earlier adopters They may wait for price to drop My wife and I didn t get a home internet carrier until 2000 We did not see the value of spending 30 per month for something we could use at work As well we were hesitant to run the risk of introducing viruses to the home pcs M parents signed up for cable television in 1994 They were hesitant to spend 40 per month for something they d gotten for free for so long Laggards are very uninvolved in a product You may have a friend who has no cell telephone a personal communications laggard You may have a friend who hasn t subscribed to cable tv ever a video entertainment laggard The New Product Development Process It is time to discuss how organizations develop new products First we will review the rationale for new products Then we will define what is a new product from the organization s standpoint We will review why truly new products are few We will discuss what types of decisions need to be made before new product development can occur Finally we will step through a nine stage new product development model Just take your time and try to understand the logic underlying each step The process seeks to eliminate rather than include ideas It is a conservative model There are at least three reasons to develop new products New products satisfy new needs New products may be developed in response to competitors new products Financially speaking a new product may be released in order to close a planning gap A planning gap exists when anticipated revenue growth falls below desired or forecasted sales growth You may believe you re going to have a 28 overall gpr at the beginning of the semester After your first round of tests your expectation may be a 25 overall gpr You have a planning gap of 3 At first the notion of a new product sounds exciting almost romantic Images of the Ford Mustang or the IBM pc come to mind As defined new products are much more mundane A new product is a product that is new in any way for the company involved A fifteen pack of Dr Pepper is a new product new package A standardized telephone plan local and long distance for one price like MCI now offers is a 23 new product new pricing structure Aquafresh toothpaste now with enhanced whiteners is a new product new formulation or ingredient You can see that although a consumer m ay not see a product as revolutionary it is still viewed as new by the marketing organization Keep in mind that products that are truly revolutionary may actually inhibit buyers The Northrop ying wing was ahead of its time in 1949 The idea reemerged in 1980 as the stealth bomber The Tucker automobile was ahead of its timetoo far ahead In other cases such as the mp3 existing technology or manufacturing service and utilization schemes may be incompatible with a new product There has to be buy in or commitment at all levels manufacturing distribution servicing and user Compact disks were sold to consumers by education at the retail level by introduction at the radio station level and by a commitment by the companies who market and press albums Had any of the levels failed to promote the new technology it would have failed or taken much longer to be accepted New products require new technologies Truly new technologies are rare Much of today s technology rests with the laser Laser has been around since before the second world war Transistors and microchips have been around for some time as well That s why many new products are cross applications from military or scientific use to consumer use or from use in industry to consumer use Many of today s light yet insulated fabrics came from NASA or military designs Videotaping and personal computers emerged from the realm of industrial application Truly new technologies take time to transfer because industry seeks to gain a solid return on investment from old technology As well society may resist certain types of new technology Several years ago the food stamp program was going to employ a card system people could use to purchase food products The system would track users and also allow only certain products to be purchased The system would facilitate analysis of purchase patterns and shopping migration It never got off the ground Americans saw the card as an invasion of privacy Today in light of terrorism such a system may be viewed more favorably Some type of growth plan or strategy is helpful for organizations to use for developing new products Strategies allow firms to grow and develop along a line of thought or pursuit That way the organization avoids haphazard growth and lessens the likelihood of squandering resources Black amp Decker decided a few years ago to concentrate on power tools for consumers and for industrial use They licensed their name for appliances They strategically acquired Price Pfister a maker of quality bathroom faucets to enhance their presence in the home improvement business The promoted their DeWalt line of professional power tools by using swarm teams to visit job sites Sales representatives in the swarm teams educated professional users on the benefits of DeWalt power tools New products can be costly So a budget plan has to be developed for developing new products One budget plan derives new product spending as a proportion of sales revenue Another plan bases new product spending on what is spent by competitors Another plan bases new product spending on need If the company is about to go out of patent on a leading product such as a pharmaceutical manufacturer might then as much as possible or whatever it takes is spent on releasing new products Companies employ different structures to administer new product development Some companies set up new product departments The new product department competes with established product departments for marketing engineering financial and other resources Unfortunately a new product is a cost center rather than a revenue center It is more difficult to justify spending for a cost center A committee structure can be used to evaluate new product ideas Under a committee setup representatives from different functional areas gather to evaluate new product ideas and procedures The committee approach is economical It requires no new employees As well the committee members know the expertise of the organization However committee members only work on new product ideas part time They are biased towards what the company already does Finally an organization can use venture teams or project teams to develop new products A project team involves a full complement of experts assigned fulltime to a new product Engineers accountants marketing staff production experts scientists and others work together full time on the new product The project team or venture team is the most effective approach for developing new products It is a also the most costly approach 24 Okay Look over the nine step process for new product development As you review the process think about a funnel The wide end to the funnel is upwards New product ideas go into the wide end of the funnel and a new product hopefully emerges through the narrow spout at the bottom of the funnel As new product ideas pass through levels in the funnel many are eliminated That is how the nine stage model works Decisions are made at points within the process Stage one involves generating new product ideas Ideas come from many sources inventors employees of the company customers of the company and other companies Sometimes synthetic approaches are used to generate new product ideas Brainstorming is a synthetic approach For brainstorming a small group of nonexpert personnel or volunteers is gathered The group is presented with a specific problem and asked to generate as many ideas as possible to solve the problem A period of less than one hour is allowed for the process Group members are asked not to criticize or evaluate the ideas The goal of brainstorming is to generate as many ideas as possible Suppose a group of commuters were asked to develop ideas for how to get people in and out of metro Dallas One commuter may suggest a pneumatic tube system Another commuter may suggest a monorail Another may suggest using special busses Attribute listing is another way to generate new product ideas Under attribute listing a group lists the advantages of a particular product Then the group suggests features or ways to enhance the utility of the product Take a ball point clip pen The clip attaches the pen to a pocket Perhaps a comfortable grip could be added to reduce writers fatigue Maybe the pen cold be sold with extra ink cartridges Maybe a pepper cartridge version of the pen could be sold for those who work in dangerous environments A pool of new product ideas exists at stage one In stage two the marketing or new product group evaluates each idea in terms of two factors 1 does the idea fit the company s objectives 2 does the i e effectively utilize the firm s resources or competencies A new product idea may differ too much from what a company seeks to do The pepper cartridge pen may fall outside the scope of a manufacturer of writing implements Even if an idea fits a company s objectives the idea may require resources or expertise the company lacks Suppose an engineer comes to KIA the automaker with a patent for an internal combustion engine that runs on water The engine may fall within KIA s objectives However KIA may lack the financial resources and engineering expertise necessary to design test implement and market the new engine Ideally the organization should have a differential advantage for the idea That is the firm s competencies what it does well should lend themselves to the idea Let s say an idea makes it through the screening stage stage two In stage three developers refine the idea into a concept or concepts The developers esh out the idea Who will use the product What benefits will the product provide When would the product be used How often will the product be used Where would the product be used Why might the product be used instead of an existing product Are there several variants of the product that might be offered based on target markets or user needs Consider a software developer The developer contemplates manufacturing and marketing a product that would take magnetic files off or audio tapes and transfer them into a text processor such as Microsoft Word or WordPerfect The tape to text product could be used by students executives salespeople court reporters policemen news reporters It could be used to supplement handwritten notes or even to replace handwritten notes The product would allow the user to concentrate on listening or on performing other needed tasks aside from note taking Suppose the software developer s marketing group comes up with concepts for a student version of tape to text a business version of tape to text and a courtroom version of tape to text Next the concepts have to be evaluated stage four It might help the developers to have target market members discuss the concepts A focus group format could be used to learn how target market members take notes what aspects of note taking are important to the them and whether a product that allows exact note taking would be useful to them Participants could raise questions and concerns that developers may well overlook At the end of the 25 evaluation stage the developers need to determine which concepts are viableiworth moving to the next In stage five a strategy is developed for the new product Developers refine and detail the profile of the target market The product s position relative to competing products is ascertained The product s life cycle is estimated A pricing strategy is developed along with a distribution plan General ideas are developed as to the product s features and promotion Stage six involves developing the business aspect of the product Analysts generate sales projections Pro forma income statements and balance sheets are produced Accountants and marketing staff arrive at costs estimates for producing and distributing the new product Using pricing information analysts develop breakeven projections for different pricing and sales scenarios The out thrust of the analyses is a decision as to the feasibility of the concepts from a business perspective Let s say only the executive and student versions of tape to text survive the business analysis Next the development team moves into the prototype stage In the prototype stage stage seven the product moves from concept to physical reality tangible state Up to now all thought has been focused on the concept its feasibility and its contribution to the business objectives of the organization Now concern moves to the appearance and utility of the concept in product form The tape to text software has to be developed tested and packaged Software and audio experts have to make sure the product fits existing and future computer systems and that the product transfers words spoken in classrooms and work environments accurately to a written format The product must also fit main line word processing software As well the software and hardware necessary to use the product have to be easy for someone without tremendous technical knowledge to install Instructions for use must be understandable Most importantly the product has to work and work time after time after time Its reliability and durability have to be high Not only should the product be tested at the plant but it should be tested by target market membersiexecutives and students The goal of rigorously testing the prototype is to determine whether it lives up to the initial concept Does tape to text do what it was intended to do If so it moves on to market testing and perhaps to commercialization If not the process of new product development should stop The product should be dropped or its development reset to an earlier stage Why might a product be commercialized although it fails to live up to the initial concept It may be that the organization is desperate to release a new product It may be that an idea champion pushes the product through to release An idea champion is someone who is in love with the concept The champion over rules or overcomes naysayers What can happen if new product goes to market despite a lack of fit with the concept intended Consider the Pontiac Fiero The Fiero was supposed to be an affordable mid engine sports car It was targeted to younger peopleiand intended to increase visibility and interest in Pontiac automobiles The body of Fiero was to be made of a plastic material instead of sheet metal Int e prototype stage Fiero developers were told that they would have to use existing chassis and power plants The budget for the project was restricted Sadly Pontiac lacked the chassis engine and performance enhancements necessary to make F iero an affordable sports car What emerged as Fiero was an under powered and unappealing auto Sales and reports were disappointing In 1986 General Motors poured 30 million into redeveloping Fireo A larger body and a six cylinder engine made a more appealing car However General Motors then pulled the car from its Pontiac line If the product fails to re ect the concept drop it Ideally the product destined for market should be test marketed stage eight Sales in the test market need to be monitored Snafus in distribution and support of the product can be rectified as well Companies sometimes fail to test market A business cycle may preclude test marketing The company may fear that test marketing gives competitors time to respond with a similar product Sometimes competitors may even bias test market results to send a wrong signal to the developer Commercialization is the last stage of new product development Commercialization involves releasing the product through the channel of distribution so that it gets to where it can be purchased by buyers Implementation is the key aspect of commercialization The marketing plan for the product has to be executed effectively Place time and method of sale have to be achieved Product has to be sold through 26 each level of decision maker For tape to text to be successful it would have to be sold to college bookstore chain buyers at a national bookstore show or on individual sales calls Once sold to the bookstore chains salespeople would have to sell tape to text to individual bookstore managers so they order sufficient product to have in the stores at the right time for students to purchase the product probably early September All this selling would have to take place well before September The process might begin as early as January Purchase incentives for students and other types of promotional activities would have to be timed to facilitate sales in the bookstores in September To assure effective commercialization of a marketing mix companies sometimes roll out a product in phases That is a product may appear in one geographic area well before it appears in other geographic areas Such restricted release allows the company to keep supply and demand apace C Pricing Pricing involves placing a value on a product or a service Our approach to pricing involves three parts 1 a review of the economics of pricing 2 a discussion of pricing strategies 3 examples of pricing mechanics ie how to set price Economics of Pricing Pricing is applied economics A chief assumption of a marketer is that the demand curve determines priceiholding supply of product constant Demand can be price sensitive relatively elastic or it can be relatively insensitive to price change relatively inelastic The notion of elasticity of demand implies that we understand demand itself Why does a marketing organization need to understand the concept of demand Because the demand curve summarizes how target members behave in terms of price It tells you what value buyers place on the product at different prices A demand curve represents actual behavior actual buying Demand for a product can be charted or tabularized If we list a set of prices taken from historical data and the corresponding level of units sold for those prices we ve tabularized demand If we then chart each price and corresponding demand on a two axis grid price on the vertical axis quantity sold on the horizontal axis we have the demand curve for the product The demand curve summarizes how much of a product the market will buy at particular prices Look at the powerpoint slide that shows the demand curve At Pl we sell 1000 units At P2 4 each we sell 2000 units twice as many At P3 3 each we sell 6000 units twice as many as at 4 So what can we conclude Doesn t it appear that the market for this unknown product is sensitive to unit price So would you sell the product at Pl 5 or P3 3 Come on how do you tell what price to set assuming you want to maximize sales revenue at a particular price Five dollars times 1000 units equals 5000 sales Three dollars times 6000 units equals 18000 sales It appears the target market members are very oriented towards price The demand curve is relatively elastic Perhaps the product is homogenous like regular unleaded gasoline In the previous example we discern that a demand curve can provide valuable information about how sensitive buyers are to price The example depicts how an analyst can move along a demand curve to ascertain price sensitivity We calculated total revenue under different prices Suppose the market bought only 1500 units at 3 per unit Then total revenue would be 4500 It would be wise to consider keeping price at 5 because buyers are not sensitive to price or maybe their sensitivity is obverse opposite to expectations Either way the demand curve is relatively insensitive to price changeirelatively inelastic Okay So far we ve dealt with a single demand curve for a product The curve charts prices and quantities sold at those prices What if we want to see what a major change in pricing system product how the product is promoted or how the product is distributed will affect demand It is possible that changing the way a product is promoted by using a celebrity spokesperson might actually change the entire set of prices and corresponding quantities sold That is using a famous athlete like lLichael Jordan may actually move the demand curve out See the powerpoint attached Moving the demand curve out means that different 27 quantities of product will sell at different prices If you recall Nike actually effected such a shifting of its demand curve for basketball shoes by taking on Michael Jordan as a spokesperson More shoes were sold at each price point than were ever sold before Mchael Jordan represented Nike to the market So it may be possible to shift a demand curve out sell more product at each price point or in sell less product at each price point by changing any aspect of the marketing mix for that product and target market product price promotion or distribution If you wonder why an organization might want to shift a curve in remember the tobacco industry situation As well some companies want to move users from an old release of a product to a new release They provide incentives such as free installation bargainpriced upgrades and other benefits to get users to move to newer units In that sense the organization tries to demarket its old product shifting its demand curve in So far we have assumed that the higher the price of a product the less of that product buyers will purchase The concept of buyers buying less product as price escalates is called the law of diminishing demand In general the law of diminishing demand holds In some cases increasing price can actually escalate demand Years ago the people who make Steubenware Corning Glassworks were confronted with a problem Demand for Steubenware an exclusive hand blown glass product exceeded supply Corning employs a limited number of skilled artisans The marketing manager to lessen demand for the product by raising priceimoving upwards along the demand curve Instead of lessening orders for Steubenware increased It had become more exclusive among the target market Go figure Earlier we related how changing price relates to change in units sold We mentioned sensitivity of demand to changes in price That concept the sensitivity of demand for a pro duct to change in price of the product is called elasticity Elasticity relates percentage change in quantity demanded for a product to percentage change in price for that product It s a ratioione thing relative to another Suppose Shell Oil raises the price of regular gasoline by ten percent and demand for Shell regular unleaded drops by twentyfive percent Elasticity for that product is 25 percent change in quantity demanded divided by ten percent change in price at absolute value no plusses or minuses 25 lO 25 Elasticity coefficient for the situation is 25 An elasticity coefficient in excess of one means that change in quantity demanded outstrips change in price An elasticity coefficient in excess of one signals that a relatively elastic demand curve exists for the product Suppose Shell Oil wants to know what will happen if they raise the price of super unleaded gas by ten percent In reviewing records the market analyst determines that a ten percent increase in price for super unleaded gas should be associated with a 25 percent decline in quantity demanded 25 lO 25 Elasticity coefficient for the situation involving unleaded gas is 25 Buyers of super unleaded gas are relatively insensitive to price change You can see that calculating elasticity would be an essential step to take before effecting a price increase or decrease You want to know how sensitive your buyers are to price What if you have an elasticity coefficient of zero That is you sell the same amount of product despite price change For what type of product would buyers behave that way Well buyers of heroin or other illegal narcotics might just try to pay whatever the market will bear But there certainly may be substitute goods for heroin What about insulin Diabetics must have insulin There s no substitute is there Okay you might wonder what goal a marketing group might have for pricing Well start out by thinking that it is dangerous to work with a market where buyers are very sensitive to price changes Why No vendor controls price in an elastic situation As we can see from the hamburger industry the airline industry the dialup internet service provider industry and the long distance telephone industry one or more vendors will continue lowering price until somebody falls out If you re thinking shake out in the maturity stage of the product life cycle you re on target So what would be a goal for pricing A goal for marketing to consider in terms of price is to have differentiated your product with the market such that it is seen as uniqueinot comparable with other products In effect you have your own demand curve for the product Lexus achieved a unique demand curve shortly after it came into being Lexus was seen by its market as different from BMW Mercedes Cadillac and Lincoln While Mercedes and the other vendors were lowering price to increase sales Lexus increased or maintained its premium price Lexus created a thriving preowned vehicle segment to create future buyers for its new cars So effective product differentiation can remove a product from the commodity category and move it onto its own demand curve Dell Computers achieved much the same type of situation through its unique service and delivery system 28 Pricing Strategies Price can be used in different ways depending on the company s objectives for a target market The way a firm employs price with a target market depends on the situation it faces Before we discuss pricing strategies the way a firm employs price with a target market let s review when price comes to the fore Companies look at price under three general conditions First a company looks at price when it is going to introduce a new product Mazda had to look at price when it first introduced Miata At that time no basing point existed for Mazda to use in pricing 1Liataithat is there was no direct competitor for the auto Mazda produced a limited run of Matas the first time around Miata was first priced at 12500 It sold for 15000 at many dealers Mazda Motor Company had underpriced the Miata Second a company looks at price when its competitors change price Look at an intersection where there are gas stations or convenience stores on two or three corners One station raises or lowers price How soon do the other stations respond 1f Burger King comes out with a 199 full meal deal how long will it take McDonald s or Jack in the Box to offer a similar product for a similar price The same idea holds for a number of homogenous products table top computers tract homes SUVs Third a company looks at price when a the price of a base component rises When the price of memory rises the price of computers rises all else held constant When the price of sugar rises the price of candy bars risesior they get smaller When the price of wheat rises the price of bread and cereal rises When the price of petroleum rises the price of gasoline plastic bags Styrofoam products and anything else where petroleum is a base ingredient rises Okay What are some common pricing strategies One approach to pricing is to price so as to maximize profit per unit sold or profit maximization pricing To use profit maximization pricing the firm must know exactly its demand curveihow much product can it sell at each price There should be no reasonable substitutes for the product with the target market Under those conditions the organization can price where Average total revenue is maximally divergent from average total cost or where marginal cost of an additional unit produced equals marginal revenue of an additional unit produced You may wonder what type of industry satisfies these conditions A power company might suit these conditions In many areas there is only one source of electricity and one source of natural gas The company that provides basic telephone or basic cable television to a market also suits the conditions for profit maximization pricing Of course basic telephone basic cable television electricity and natural gas are all regulated at the state level So although monopolies face a set of conditions that facilitate profit maximization pricing legal constraints preclude the practice Penetration pricing is a second strategy Under penetration pricing a company introduces a quality product at or below a competitor s price Then the company reduces the price of the product one or more times The idea is to gain market share and then harvest profit over the long run The strategy was employed by Texas Instruments to dominate the hand held calculator business in the mid 1970 s Japanese automakers used penetration pricing to break into the US auto market Today Korean automakers are doing the same thing with KlA They offer a much lower price more or the same features as the Japanese autos and a 100000 mile warranty Some of the arms manufacturers use penetration pricing to break into an international market Penetration pricing can work under certain conditions First the market must be sensitive to price a relatively elastic demand curve exists for the product Second the manufacturer should benefit from economies of scale in production or from much lower labor and materials costs Economies of scale means the more product the manufacturer produces the lower is the cost of production per unit Finally the organization should be reasonably sure that its low selling cost should serve as a barrier to other companies seeking to enter the market Some companies sell a product at a low cost and subsidize losses on the sale through profits gained in other markets The low price may even drive other companies out of the market Some believe that the Japanese once dumped electronic products in the American market to gain market share ie sold products below cost to gain share in the US Penetration pricing is helpful in markets where buyers view goods as relatively hom ogenous such that elasticity of demand exists What about markets where buyers see items as distinct Lexus was mentioned earlier as having its own demand curve Rollex watches and Steubenware both are seen as high quality products that should cost more because they deliver more benefit to the buyer Under conditions where 29 buyers are insensitive to price change and where price and quality are seen as corresponding a skimming strategy may be used Under skimming price is set higher The higher price differentiates the product As other companies attempt to duplicate the situation the skimmer must get buyers to trade up Dell Computer offers a base model It skims its market by offering packages with above average memory or at screen monitors or cd burners or extended warranties Toyota competes wth Lexus Nissan and Honda by offering Avalon A skimming strategy can extend to other types of product used by members of the target market Corvette licensed its logo to makers of quality leather goods and sportswear In some cases price can be used to stimulate cash ow Suppose a manufacturer has amassed a tremendous inventory of product and cannot pay its debts Such a situation happened to Chrysler Corporation in the early 1980 s Chrysler had been a weak sister to General Motors and Ford for years With the advent of Toyota Nissan and Honda Chrysler lost even more market share Chrysler had a reputation for making wellengineered yet ugly cars Anyway by 1983 Chrysler was looking at bankruptcy Lee lacocca CEO of Chrysler asked Congress for a loan of 6 billion No major manufacturer had ever asked the government for a loan However the government feared that should Chrysler go defunct the residual effect on the U S economy would be great With the loan in hand Lee lacocca enacted a current revenue pricing strategy Chrysler ran ads that offered a new car for 4000 or financing at one percent apr In some cases Chrysler sold cars for 4000 with a 1000 rebate This was the first time an auto manufacturer had offered such lucrative deals to consumers Chrysler made it possible for many Americans to buy their first new car ever Now the cars were the very ugly KCar model basically a granny car or government car Still people were buying new cars for low prices Iacocca paid the government back its loan within record time The inventory of ugly cars vanished Chrysler used the capital to develop and release a series of very successful autos Dodge and Plymouth minivans the Omni a coop with Mitsubishi the Dodge Stealth another Mitsubishi auto the Dodge Ram Pickup and others Essentially lacocca and Chrysler banked on the current revenue pricing approach to establish sufficient cashflow to pay back Uncle and to rebuild Chrysler It worked A couple of pricing tactics need to be mentioned Tactics are simply behaviors that are intended to generate sales You may have heard of using a loss leader to build traffic or stimulate sales of a product Both retailers and industrial sellers use loss leaders A retailer will promote Dr Pepper twelve packs for 250 You see the ad and go to the grocery store While en route to the DP you get a bag or two of taco chips hot sauce a People magazine some mozzarella cheese to make nachos with the chips a can of refried beans two rolls of paper towels to clean up the mess you ll make and some Pepto Bismol to handle the aftereffects of your feast So you save money on the DP and spend money on all the other stuff Grocers refer to your behavior as the market basket effect Think about times you have gone into the store for one thing and come out with ten or fifteen things Loss leaders stimulate patronage Auto retailers used to offer a particular model at a low price to get you on the lot Once you were on the lot the salesman would convince you that the bait model was too lean It did not have an air conditioner Or it had only an am radio You were traded up to a slightly more expensive model that better fit your needs automatic transmission cdcassette playerradio air conditioning antilock brakes six cylinder engine towing package A business forms company used to sell its sleeving machines to customers at cost Sleeving machines insert a custom document inside a mailing envelope sleeve When you receive the document you rip off one end at a perforation and remove the document The forms company made no money on the sleeving machine However the customer had to buy its sleeves from the forms company Once the machine was in place it was difficult to switch Prestiege pricing involves pricing a range of related product lines at a premium STP originally was an oil treatment It achieved fame at Indianapolis in 1969 Later STP was applied to a line of oil filters car care products and fuel additives STP products are priced above many others Buyers pay for the name STP and the prestige it confers Pricing Mechanics Pricing mechanics refers to methods used to set price We will discuss only a couple of the ways price can be set However by understanding basic applications for setting price you can learn other systems more easily Our discussion covers markup break even pricing and discounts Markup is an amount added to cost to arrive at selling price Markup is used when an organization has to price many items Auto parts groceries replacement parts and other items that cannot be priced easily are often marked up For example a grocer may mark up branded frozen foods by fifteen percent The fifteen percent markup helps cover the cost of storing frozen food at a distribution center transporting it and storing it in the grocer s freezer The grocer may markup branded canned goods by eight percent Store brand canned goods may be marked up by five percent Markup and markdown can be calculated several ways An easy way to arrive at markup is to cipher selling price cost 1 7 markup percentage It s algebra remember Suppose an item costs seventyfive cents It s a branded canned item You want to mark the item up by eight percent Selling price equals seventy five cents divided by the quantity one minus eight percent That s seventyfive cents divided by ninetytwo percent Seventyfive cents is ninety two percent of what amount You should get eightyone cents All you have to remember about markup is that your cost is a proportion of selling price In the example cost is ninetytwo percent of selling price There are other ways to determine markup We chose to markup on cost We could have marked up on selling price Think about how a markup system is implemented A systems analyst or programmer develops a markup algorithm The algorithm reads a bar code determines what markup percentage is tied to the bar code The algorithm then draws in the cost per unit and calculates the selling price Often the system produces a sticker telling the store manager what cost and markup are That way items can be scanned into the store s computer system As well each time an item is sold it is deducted from the system Breakeven pricing serves a different purpose than markup Breakeven helps the analyst determine how many units of product must be sold at a price to cover fixed costs of doing business Let s say you borrow 100000 to open a Mexican restaurant You want to know how many meals you ll have to sell at an average price per meal in order to cover your fixed costs In this case let s assume 100000 is your fixed cost In reality you have the loan payments for the loan period your building lease your cooks wages credit card processing fees insurance So there are many fixed costs that go along with running a restaurant Remember that fixed costs are incurred no matter how many units of product are sold Think about your fixed costs student loans auto insurance apartment rent association or fraternity membership cable tv payment cell telephone fees Now You want to know how many meals need to be sold at various prices to cover 100000 Suppose you decide to price the average meal at 700 Costs for the meal are 400 Costs are variable in that they depend on how much inventory and other consumables you order and how much food customers order So you now divide your 100000 fixed cost by seven dollars selling price minus four dollars meal cost The seven dollars less four dollars amount three dollars is a contribution to your fixed cost Okay 100000 300 33333 meals If you anticipate selling an average of 150 meals per night it would take how many nights to cover your fixed costs 33 333 meals divided by 150 meals per night is a bit over 222 nights Suppose you re open 250 nights per year It will take nearly a year to pay off the 100000 You now have an educated guess as to how long it will be until you see actual profit Once you have sold 33333 meals you realize 300 per meal as profit You might try running the breakeven model with a selling price of 10 per meal You will find a lower number of meals to breakeven 16 667 meals 1fyou sell an average of 100 meals per night at 10 per meal it will take you 167 nights to break even You can see that breakeven analysis can be used for any venture that involves a fixed cost You can use the item for bids on systems for new product analysis for determining the feasibility of an enterprise A discount is a reduction in list price granted to a buyer for performing some function List price is the price a vendor publishes What types of functions can a customer perform that are tied to discounts There a quantity discounts If a customer purchases a certain number of items of the same kind that custom er may be granted a percentage discount Sometimes customers receive what are called cash discounts Cash discounts occur when the customer pays off an invoice within a specified time period Suppose you order food for your Mexican restaurant from Ben E Keith Foodservice You always pay Ben E within fifteen days because you then receive a three percent discount off list Some customers receive promotional discounts A vendor may want outlets to stock additional inventory to suit a particular season eg back to school In that case the vendor offers a promotional price or discount to stimulate sales to the vendor The promotional price may be re ected on the invoice or it may be granted through promotional monies issued to the customer Hormel and other consumer products companies use promotional pricing or promotional discounts to stimulate sales of specific product items Discounts are sometimes cumulative That is the buyer receives a discount pending purchase of a certain volume of product Let s say Payne Tire receives a price of 40 per tire from its distributors for certain popular sizes of steel belted radial passenger car tires The discount predicates on sale of 500 tires per month by Payne Suppose Payne tire sells only 400 tires per month To avert such problems some manufacturers try to get buyers to purchase a certain volume of product to gain a discountia noncumulative discount Or the buyer receives a retroactive discount based on sales of a product Under the retroactive discount or rebate system Payne tire would have received a certain rebate for selling 400 steel belted radial passenger car tires per month Freight discounts are commonplace If freight comprises a substantial proportion of the cost of inventory companies need to consider how they pay for it For example some products are sold with a uniform amount included for freight no matter how far the product is shippediuniform delivered pricing If you buy software from a distributor and pay five dollars per box for shipping anywhere in the US and you re located seventyfive miles from the shipperare you getting a good deal No The company located seventeen hundred miles away from the shipper is getting a good deal You are paying what s referred to as phantom freight You re paying for freight you do not receive You might think hey I can fix that Why not set up freight zones Charge a different fee per case depending on zone The farther away a customer is from the shipper the more that customer pays Zone pricing systems eliminate phantom freight However price zones can impede a company s ability to compete in distant markets One solution to the freight pricing problem is FOB pricing Under FOB the customer designates who pays for freight If a customer chooses to handle freight they designate FOB shipper s dock That designation tells the vendor that the buyer makes arrangements to transport the product so the seller assesses no freight charge Sometimes companies have their own truck eet or their own preferred carrier If the customer designates otherwise the vendor arranges for shipping and bills accordingly Today companies use third party logistics companies like CH Robinson to arrange optimal shipping plans Robinson works with large firms like Pilgrim s Pride chicken to ship product at affordable rates Section 1H Promotion and Place Distribution Where We re Going So far we have covered general concepts of marketing a good bit on product types of products product life cycle new product development and a small amount on pricing importance of elasticity of demand pricing strategies We haven t discussed promotion or place the balance of the marketing mix For the balance of the treatise we will talk a bit about promotion mostly publicity and personal selling a good bit about organizations used to distribute products distribution channels types of wholesalers agents brokers retailers and a small amount about physical distribution the how aspect of distribution order processing inventory control distribution centers and transportation Organizations today place great focus on physical distribution or logistics It is an area where cost savings can be effected Promotion A The Promotion lLix Promotion is the communication aspect of marketing Marketing staff develop a promotion plan for approaching a target market The promotion plan entails how the organization will communicate with the target market and the organizations involved in distributing and selling the product to the target market about what benefits the product provides to each For example a grocer wants to know why it should provide floor space to shippers in aisle displays of Hormel s Kid s Kitchen microwaveable meals The grocery chain buyer wants to know what is the market position of the product what is the sales history of the product visavis other products in the category who will buy the product why they will buy the product what enticements will be used to get the customer to buy the product what profit margin the grocer will yield from the product under a pricing plan The store manager wants to know how fast the product will sell why floor space needs to be allocated to the product what promotional incentives go with the product and what other complementary products might be promoted with the product perhaps for a back to school promotion The buyer a parent or guardian of the child wants to know whether the child will eat the product how easy the product is for the child or teacher to prepare what is the nutritional benefit of the product how the value of the product compares with that of other products targeted to children eg Lunchables The marketing staff have to decide how to best communicate with grocery store buyers and managers about the benefits of Kid s Kitchen and also how to best communicate with parents of youngsters about the product The staff have to recommend to Hormel what mix of promotional methods to use ie advertising sales promotion personal selling publicity Let s carry on the example using the four elements of the promotional mix advertising personal selling sales promotion and publicity The promotional strategy or plan for KK Kids Kitchen would include some if not all of the elements depending on whether the retail buyer consumer the retail store manager or the retail chain buyer is the target of communication Advertising is a paid form of nonpersonal communication KK could be promoted to parents through newspaper ads accompanied by cents off coupons advertising plus sales promotionithe coupon The ads might be run in both the Wednesday and the Sunday papers the week before children start back to school early August Parents will bring the coupon to the grocery store a pull strategy The ads have a second benefit they draw customers into the grocery store remember the market basket effect Hence there s the obvious benefit of increased traffic and the veiled threat of stocking out That is what if the grocer fails to place sufficient Kids Kitchen in stock to satisfy demand The chain store buyer needs to be sold one onone by a trained salesperson Companies like Alberto Culver Proline Black amp Decker Hormel Quaker Smithcline Beecham and Procter amp Gamble employ hundreds of trade salespeople The salespeople call on regional buying offices for large grocers like Kroger s and Albertsons They also call on headquarters buyers for WalMart and for large wholesalers like Fleming Salespeople provide the chain buyer with marketing information about the product They explain the present profit picture for the category of product each grocery product goes into a category39 Kids Kitchen is a microwave mealinon frozen Companies like General Mills employ online realtime data systems to show chain buyers present sales of a product across the chain itself relative to competing grocery chains and relative to other products in the category The buyer wants to know what will be the impact on chain revenue and profit if the vendor receives a shelf facing a permanent slot on the shelf or a space in a promotional area of aisle Salespeople who sell to large chain stores like WalMart have to be well versed on the customer the industry and know how to present financial information Few buyers at WalMart or Kroger have the time or inclination to engage in good old boy behavior In fact many employers preclude buyers from taking any sort of gift even a seasonal turkey Remember that buyers at the chain level are evaluated on profit and revenue generated just as are the salespeople who sell to them By the way companies like Black amp Decker Hormel and General Mills recruit entry level salespeople right off the college campus To sell the retail store manager on ordering several KK shippers the area Hormel sales representative uses some market information much less than the person who sold to the chain buyer and a deal sheet The deal sheet contains a financial proposition The proposition shows the store manager how much profit the store will make on KK at a suggested price It also explains how the couponing program affects the store Keep in mind that the store may pick up the back half of a double coupon program Sometimes the sales rep uses advertising money to entice the store manager to order a certain amount of KK That is the store may receive 10 per shipper for advertising money As well the sales rep may set up a sales contest among the store managers in the sales area The manager of the store that sells the most KK may win a golf outing or tickets to a ball game or even a trip to the Bahama Rama Islands Each salesperson manages a promotion budget that may run into the hundreds of thousands of dollars per year Pretty good stuff for a recent college graduate eh Coupon programs advertising monies and contests are all sales promotion vehicles Many organizations use sales promotion to in uence industrial and retail chain buyers Remember the promotional plans have to be within the limits of what lawthe Robinson Patman Act gotchal Okay we have covered advertising personal selling and sales promotion using the K example Suppose a Hormel sales rep takes part in the Susan G Komen WalkRun that takes place each fall across the US The Susan Komen program raises millions of dollars each year The funds help researchers fight breast cancer Suppose the sales rep contributes money to the local Komen walk as a sponsor and also offers Hormel lunch meats to help feed the Komen volunteers In return Hormel s logo appears on the sponsor list and perhaps on the banner that stretches across the finish line and maybe even on the tshirt participants receive Such efforts are classed as publicity Publicity is free promotion Although Hormel contributed monies and some product to the Komen event no formal advertising is guaranteed The value of the funds and product is viewed I believe as a contribution So what s the benefit to Hormel Thousands of moms see that Hormel cares enough to support the Komen program Now there is no guarantee that the moms run out and buy KK is there But believe it or not more moms consciously see the Hormel logo at the event than may perceive the KK ad in the Sunday paper All this stuff sounds great Publicity generates a good warm feeling for the buyerisort of like an accidental loss of bladder control Not so fast Publicity is free promotion It can be positive or negative Suppose a child finds a razor blade or a rat tail in a KK container Heaven forbid such an event should occur particularly the razor blade But think about the negative impact of such a find on KK sales and to a lesser extent on Hormel The event will be noted on the local news the national news the Letterman and Leno shows perhaps Certame it will have a lagged effect on sales of Hormel s other products So publicity can be bad or good in nature The point is that Hormel and any other company whose products or services are consumed at the retail level from biscuits to education must have a contingency plan for publicity Think about airlines If a jet liner crashes on take offwhat does the airline say and do Who does the speaking To whom does the airline representative speak What exactly does the airline representative say to the media to the families of those on board the airliner In summary what process does the airline follow in the event of a negative event Organizations need a contingency plan for publicity They need to employ a professional spokespersonisomeone who knows how to communicate with professional media people Some of you may be in the role of public relations spokesperson for Hormel or Culver Proline some day You ll be charged with handling the fun stuff like Susan Komen events and with managing the negative stuff like labor unrest queries about your products ingredients and effects Hopefully you ll never have to handle a product tampering case It seems like such tough jobs go to the public relations majors or RTVF majors Good luck BPersonal Selling My best estimate is that about twenty percent of marketing graduates go into some type of sales job upon graduationwhether or not they initially wanted to The types of position range from selling copiers faxes and supplies for Xerox or Compudata to selling copiers for Datamax or lLinolta to selling beer wine and spirits for Glazers Distributors Selling is an entry port for marketing So is retailing Students often ask me Hey Dr Sager what canl do with a degree in marketing Well I say You can drive a school bus or be a bartender That sounds harsh doesn t it I have three degrees in marketing a bba an mba and a phd With each degree my skills become more obscure less defined relative to those of a systems analyst a cpa a medical technologist You see marketing is not in itself a recognized certified trade or skill Your degree in marketing opens to you a wide spectrum of jobs just as it does to the fellow who gets a degree in strategic management or finance So what types of opportunities are there for marketing graduates Several career fields come to mind sales representative retail management trainee marketing staff member entry level marketing researcher assistant to the assistant brand manager A few students get into the brand management marketing staff and assistant brand manager jobs There just aren t that many marketing staff jobs out there In some organizations the marketing staff people come up from the sales force In other organizations marketing staff are hired from consulting firms or from a few key universities Some organizations may require an mba or significant industry experience for someone to enter brand or product management A few graduates go into marketing research Again there are few positions open in that field The bigger firms hire from a few schools and they may require an advanced degree and pretty substantial quantitative skills You may wonder about how retail firms like 1C Penney s hire buyers It seems as though buyers come up through retail management programsunless they have experience gained with another chain store or really focused degree training in fashion merchandising or fashion design Purdue University has a wellknown program in fashion merchandising The program requires an internship in New York City Again a few schools have an edge on the retail buying and design side So marketing itself boils down mostly to retail management positions with WalMart K Mart Target Kroger Bank One Wells Fargo and other firms There are also opportunities for marketing graduates in the area of professional selling If your mind conjures up images of a fellow going door to door with a Kirby vacuum cleaner that s certainly a possibility Selling financial products for IDS American Express or Northwestern Mutual is another possibility Selling business solutions for Xerox or Mnolta is another possibility Selling business forms to hospitals for Standard Register or Wallace is another possibility Demonstrating DeWalt electric jack hammers to building demolition contractors is another possibility that s how Black amp Decker salespeople sometimes start out You could even be selling Gallo and Taylor wines to grocery and convenience stores for Glazer s a large regional distributor of beer wine and spirits or selling food products to restaurants for Ameriserve or Sysco Wow what a longwinded and perhaps scary answer Why can t I get a job with an advertising agency Hey I heard pharmaceutical sales is cool How do I get into that job Let s start with advertising It s soooo glamorous Is it Have you actually looked into what ad agencies do and who does it Have you checked into what types of degree programs people who go into advertising come out of Well get your head out of your anus and do it Universities like University of North Texas have specialized programs that cater to the advertising industry Those programs cover many technical and tactical aspects of advertising laws sales planning advertising campaigns and internships Some ad agencies expect students to intern for free that s right for free It s wise to check out how hiring is done in any industry you target particularly the smaller industries like advertising The same thing goes for pharmaceutical sales Pharmaceutical firms go through fads At one time they hired primarily pharmaceutical school grads Later some of the pharmaceutical firms targeted mba graduates Today many pharmaceutical firms hire salespeople from other sales areas like business machines and business forms Why Hiring experienced people increases the likelihood of retention and success plus they offer faster startup Young people from the business machine and business form industry already know how to sell They can take rejection and they are willing to be almost abused or insulted by a buyer They have requisite patience and a realistic perspective The average pharmaceutical sales call lasts from two to five minutes Hey though you get a company car The moral here is to look into what the job really entails Try to get out in the field with someone who does the job Do not go on what the movies or textbooks say Find out for yourself Personal selling is persuading and individual or an organization to take an action that is beneficial to both parties The chief aspects of the definition are that selling is persuading and that for a sale to occur both parties must see benefit Today s cliche would say that the sale has to be a winwin proposition Salespeople are revenue generating assets for an organization To be worthwhile a sales force must generate revenue and profits in excess of its cost Other means of selling products exist that may be more economical than a sales force sales agents or manufacturer s reps internet telemarketers and catalogs all allow a company to sell to a market Salespeople become important to companies when much boundary spanning must be done Boundag spanning involves the salesperson representing a company to its customers and also representing customers to the company A salesperson sees first hand what customers need and want The salesperson also sees how customers and company actually behave Salespeople can protect customers from abuse by companies Sometimes companies seek to unload old stocks before issuing a new product A good salesperson can alert customers who would be harmed through such action Customers sometimes take advantage of promotional pricing so they can divert excess product to other customers at a profit Salespeople can alert a company of such practices In some situations salespeople add value to a marketing mix Customers sometimes lack knowledge about how to satisfy a need Take the need for financial assurance or security Let s say a young cpa wants to determine what type of financial arrangement will provide for her children s education and also pay off her home should she become disabled and unable to pursue her trade A salesperson from Northwestern Mutual Financial Services finds out what are the cpa s goals for her family What revenue does she generate each year What are her assets and liabilities What is her cashflow How much money per month would she need to get her two children through college and pay off her house and car When does she want to retire Using the information the prospect provides the salesperson develops a long term financial plan for the cpa She will take out a disability insurance policy She will set up 529 college accounts for both children She will take out a 15 million life insurance policy to cover her debts and provide for the children The Northwestern sales rep adds value by helping the young cpa work towards financial security for her family Because salespeople represent the company to customers on a boundary they have to possess several key traits The sales job takes time to learn In many cases the learning curve is steep It can take one to two years for someone to become reasonably proficient in selling financial products New salespeople may work fifty to sixty hours per week learning and prospecting That is it takes time to build a base of clients As well salespeople much possess both common sense and creativity or smarts A salesperson has to use time efficiently Someone with smarts will when making a cold call on a potential customer gain as much information as possible from gatekeepers receptionists personal assistants administrative assistants Information that can be helpful to salespersons includes things like who makes the actual purchasin decision what types of problems have occurred with the product or system in place what expectations does the client have of a new vendor The salesperson uses the information gained from gatekeepers and other sources to identify the client s needs and develop a proposal that identifies those needs and shows how a particular solution may suit the needs To identify needs the salesperson must possess empathyian ability to understand the customer s situation and problems To succeed the salesperson must be mature able to learn from failures and to go on to another situation In particular salespeople who sell to businesses must be dependable Customers depend on the products salespeople sell to run their operations If orders are held up or incorrect customers may be unable to operate If a customer cannot produce a product or serve their own clients thousands of dollars per hour can be lost The customer counts on the salesperson to make sure product is available Industrial salespeople spend a good amount of their time scrambling to meet orders or delivery dates Salespeople have to learn to observe and ask good questions of customers and prospects In other words a salesperson who sells health insurance claims filing software to medical offices and hospitals does not have to be able to program The salesperson has to be able to determine what needs the medical practice or hospital business office staff have in terms of filing software and also to elucidate their concerns Today many sales organizations seek to build long run relationships with a buyer particularly with a larger buyer A long run relationship entails some type of buying arrangement with a single customer UPS provides all of IC Penney s shipping in and out of its stores and to JC Penney s mail order customers In exchange for a longrun contract UPS offers Penney s a good price on shipping Other companies work with buying groups Healthtrust Buying Group serves all the Columbia Corporation Hospitals alt HCA along with those of several other companies Vendors try to get on the Healthtrust buying list By becoming an exclusive vendor or one of a few exclusive vendors to a large customer or buying group a company assures itself of a substantial base of sales To attain such a setup an organization must sell to the highest level of a customer company Much of the negotiating at the upper level has to do with pricing cash ow and purchasing compliance By setting up a longterm buying arrangement a customer can chart cash ow for several years out Of course exclusive buying arrangements or sales contracts have a down side Large customers expect considerable service By taking on a large customer a company may have to alter service to smaller clients Three types of sales jobs can be identified A missionary type of sales job involves convincing someone who has never used a product to buy it Selling financial planning or life insurance and other financial products typifies the missionary sales job The metaphor of a missionary involves educating someone about an idea or concept and convincing them to have faith in that concept lIissionary salespeople usually receive some type of incentive based compensation The more product the missionary salesperson sells the more money they make The obverse is true as well Missionary salespeople can be among the highest paid employees in a corporation In some companies the top salesperson out earns the chief executive officer A detail sales job involves providing information to a decision maker Detail salespeople are most often seen in the pharmaceutical industry They provide pharmacists and physicians with information specific to particular ethical drugs The detail salesperson must be able to convey critical information to a physician in two to five minutes time The physician prescribes the medication or drug The insurance company or patient pays for the product In this case the buyer and the decision maker are different Salespeople who sell college textbooks might also be classified as detail salespeople A student purchases an assigned textbook The professor or a committee of professors chooses the book for the course A trade sales job involves gaining additional distribution of a product through a retail sales channel Trade salespeople represent manufacturers of consumer products such as Procter and Gamble General Mills Black amp Decker Hormel Russell Stover and other companies The trade salesperson persuades retail chain store buyers to allocate shelf space to particular products Usually allocating shelf space to a new product means the chain store must pull another product off of the shelf Trade salespeople also sell retail store managers on placing shippers in store aisles and on allowing end cap or end aisle displays of a product to be setup Everything the trade salesperson does corresponds to the company s marketing plan for a particular product line or product The salesperson s goal is to achieve a certain level of distribution for a product in a sales territory Distribution Place Channels of Distribution To this point we have discussed product price and promotion Now it is time to discuss distribution or placing the product To address distribution it is a good idea to discuss channels of distribution and physical distribution as well First channels of distribution will be discussed A channel of distribution is an external contactual organization that is managed to achieve distribution objectives The company sets up a channel of distribution to get the product where buyers can purchase it The channel of distribution makes the product accessible to the target market It is intended to satisfy time and place utilityito get the product where the buyer wants it when the buyer wants it there In many cases the channel extends outside the company Other organizations become involved in distributing the product To get the product where the buyer can access it means that the company must make contacts with other organizations in the channel A manufacturer may sell to a retailer eg Black ampDecker sells battery powered drills to Lowe and Home Depot A manufacturer may sell to a distributor who sells to an industrial buyer Price Fister sells to a wholesale plumbers supply The plumbers supply sells to plumbers A manufacturer may sell through a manufacturer s representative to various retail chain stores Morrison Milling sells through sales agents to Drug Emporium Albertsons Krogers and WalMart In each example the manufacturer makes a market contact either with a retailer or with another type of channel member So the product is sold once twice maybe three times before the ultimate buyer purchases it Why You wonder Wouldn t it be easier for everybody to purchase directly from the manufacturer Sometimes direct distribution works Dell Computer uses it Other times it is necessary to set up a more elaborate channel Let s talk about why other types of channel exist A Distribution Objectives One reason for existence of different types of channel of distribution setups is that companies have different objectives for distribution For a convenience item like candy a manufacturer may want to saturate the market MampM Mars wants its candy products available wherever there is a vending machine or candy rackiwherever someone may expect to find candy To achieve that goal MampM Mars uses an intensive distribution strategy at both the wholesale and the retail level Every grocery and convenience goods wholesaler carries MampM Mars products Every large retail chain carries MampM Mars products in its distribution centers Vending companies a type of wholesaler carry MampM Mars products Every retail store that sells candy carries MampM Mars productsusually at several points in the store e g in the candy aisle at the check out and maybe in some type of seasonal shipper Some manufacturers set up channels to minimize the cost of distribution Dell Computer has vendors back up trailer loads of components at one side of its manufacturing facility On the other side UPS has feeder trucks ready to take finished pcs to buyers Dell seeks to minimize its cost of inventory held Dell does not begin assembling a computer until it is ordered and paid for by the buyer Once the buyer orders the product Dell takes title to the components As soon as the pc is assembled and packaged it is shipped to the buyer Once the buyer receives the item title changes So Dell holds very little inventory They force their component vendors to hold product until Dell has made a sale Automobile manufacturers try to move their product down the channel to auto dealers Again the manufacturer wants to lessen inventory holding cost and to generate revenue from money it lends to auto dealers to buy inventory Essentially the auto dealer pays interest on the new cars as they sit on the lot In the case of automobiles it s a game of hot potato Other organizations set up a distribution channel to achieve a certain level of service to customers Mnolta Business Solutions operates under a branch office system Each branch office holds a sales staff and a field service staff The branch sells and services only Minolta equipment Mnolta wants to be sure its new products can be serviced once they re installed B Channel Length Width and Composition Essentially a channel of distribution serves as a conduit from the point of manufacture or inception for a product through to the targetmarket The channel varies in length width and composition depending on what are the characteristics of the target market The product may be held at a certain level in the channel It can be altered sold applied or installed at different levels in the channel Channels of distribution can be described in terms of length width or intensity and composition Length is th number o evels in a channel of distribution A manufacturer to industrial buyer channel has a length of oneidirect distribution A channel that runs from manufacturer to sales agent to distributor to industrial buyer has a length of three Several considerations govern channel length The value of the product being marketed influences length Products of lower unit value e g cereal gasket sealant floppy disks often involve the use of sales agents or distributors Products classed as capital items are often of greater unit value Such products often require installation maintenance and upgrades It is more common to have a manufacturer s service arrangement Coulter manufactures blood count analyzers Their product is installed in many hospitals Coulter services their product through company field engineers The company generates revenue through service contracts and leases Minolta Business Solutions follows a similar arrangement Glazer s Distributors represents several large vintners distilleries and brewers in specific geographic markets The vintners distilleries and brewers cannot sell direct to retail stores bars and restaurants Glazer s serves as a wholesaler to those retail outlets licensed to sell alcoholic beverages off premise and onpremise The same can be said for beer distributors like Ben E Keith and Golden Coors Most of the products that are distributed through wholesalers are standardized beer candy cereals office supply items The products require little modification or usage instructions Standardized products can be distributed through longer channels of distribution Products like the Coulter diagnostic analyzer require servicing upgrades and troubleshooting Such products are often distributed through a companyowned system or through exclusive distributors The longer the channel of distribution gets the less control the manufacturer has over how the product is marketed and serviced A channel of distribution has a width at each level eg agent level wholesaler level retail level Width refers to the intensity of distribution at any one level in the channel Intensities range from very intense market saturation to exclusive single outlet per geographic area For an item like MampMs plain candies the manufacturer probably desires intensive distribution at both wholesale and retail levels The product should be available everywhere candy is sold vending machines candy racks in truck stops and convenience stores store shelves restaurants To gain such market saturation the product needs to be carried by all wholesale level organizations that sell candy vending companies independent wholesalers like Houston Grocers Supply Company and Flemming and corporate distribution centers Other items are selectively distributed Think about products that require separate display or stocking Hoover manufactures vacuum cleaners belts and bags Let s say Hoover requires that any retailer that carries its products carry one of each type of Hoover product carpet vacuum canister vacuum stick vacuum carpet cleaning system and also carry a standard array of bags and belts to fit Hoover products Okay What s the reason for the requirement Hoover wants to be sure that when somebody buys a carpet vacuum they can easily purchase belts and bags for that product However this selective form of distribution means that the retailer must carry an inventory of bags belts and products That inventory ties up credit display space and storage space for the retailer In some cases a manufacturer wants to have great control over how its products are displayed sold and serviced Companies like Peterbilt BMW and McDonaldls build special relationships with their buyers Doing so mandates maintaining a level of service to customers To assure a consistent and high level of service these manufacturers use an exclusive level of distribution at both retail and wholesale levels One outlet services each geographic target market One BMW dealer Autosports Limited services Tarrant County One Porsche dealer services Dallas County The manufacturer dictates location size of outlet number of service technicians employed amount of parts inventory carried types of complementary products carried and amount and type of inventory carried The distributor has legal rights to sale of the product BMW Porsche Peterbilt for that geographic area A contract exists between the manufacturer and the distributor As you may realize by now the way a manufacturer composes a channel of distribution depends on what are its objectives for distribution The distribution objectives depend on the marketing objectives the manufacturer has for its target market The length of the channel of distribution and the width or intensity at each level depend on what type of service level the manufacturer wants to provide to buyers Service level ranges from little or none as with bagged candy to very high as with a Peterbilt truck or a Porsche automobile To gain a fuller appreciation of what types of channel members and arrangements exist lets go a bit further C Types of Channels and Tasks Performed in Channels Channels of distribution can be classified roughly into two groups traditional channels of distribution and vertical marketing systems VMS A traditional channel of distribution emerges over time as a transactional entity A manufacturer say General Mills sells to a retail chain store say Albertson s Albertson s can terminate the relationship at any time General lLills can raise its price or change the terms of sale at any time The two organizations work on an invoice by invoice basis A traditional channel of distribution offers both parties exibility However such arrangements lessen stability and control for the manufacturer and for the retailer as well Other noncereal products may take shelf space in Albertson s away from General Mlls Conversely General lLills may raise its prices or lessen promotional allowances to Albertson s Vertical Marketing Systems are planned channels of distribution By policy or by implication each channel member in a VMS plays a certain role Longevity and terms 0 relationship between the channel members are preestablished VMS provides control and stability to members but lack exibility Channels of distribution exist because certain tasks must be performed before a buyer can buy a product and after that product is purchased The tasks to be performed include holding inventory stocking inventory selling product shipping products installing and servicing products consulting as to how products are installed handling damaged and defective products The tasks have to be performed at some level in the channel Certainly one alternative is that the manufacturer performs all the functions Dell performs all the tasks mentioned Compaq on the other hand performs some of the functions but handles selling shipping stocking and holding inventory through authorized retail distributors such as CompUSA Why do Compaq and Dell differ in how their channels of distribution are setup The marketing strategies the two companies use have different ways of handling what are called discrepancy of quantity an discrepancy of assortment Discrepancy of quantity relates to the paradox of manufacturing Products like personal computers are manufactured in bulk but are consumed in small sized units of one or two Somewhere the long manufacturing run necessary to achieve economies of scale has to be broken down into more consumable portions Compaq uses CompUSA and its corporate sales division to break down bulk That way Compaq canmake a long run of central processing units pair the units with keyboards and monitors and ship out to retail stores and corporate clients So Compaq follows a semicustomized manufacturing and distribution process Dell as mentioned earlier takes orders on a unit by unit basis Dell handles sale to consumers and industrial customers Products are assembled and shipped once they ve been sold Dell handles sale shipping maintenance and upgrades Dell took on a greater fixed cost of personnel It hired people to sell and service Dell Products over the telephone But Dell set up a unique manufacturing system that allowed it to lessen greatly the costs of holding inventory Dell also gained greater control over pricing and sales practices by handling all the tasks of distribution Compaq must count on its authorized distributors to sell its products The distributors can alter the price of sale to move merchandise or they can sell competitors brands such as Hewlett Packard lIBM and PackardBell Discrepancy of assortment refers to the idea that buyers consume products in related bundles When a business or a consumer buys a table top personal computer they may also want a mouse mouse pad at screen monitor readwrite compact disk expandable sound card ancillaries like copierfaxprinterscanner not to mention special software packages for word processing spreadsheet analysis database management statistical analysis bookkeeping territory management customer records management and supply items like cds dvds oppy disks and paper Compaq partnered with CompUSA partly because the retailer offers an assortment of products and services relating to personal computers CompUSA offers buyers all the products and supplies just listed Compaq does not have to carry all the products associated with personal computers Dell offers a range of models that incorporate many of the features mentioned at screen monitor expanded memory cd readwrite and software array However Dell must then arrange to carry printers monitors software and other products at their assembly sites Dell also has to maintain a sophisticated web site and also to send out a catalog to target market consumers in order to communicate their marketing mix The Richards Group develops Dell s catalog It s no small task Aside from discrepancies of quantity and assortment companies confront the cost of selling products to industrial buyers and consumers Dell certainly achieved a remarkable coup in melding the manufacture sale shipping and servicing of personal computers into a single network However many other manufacturers lack the base skill scope or desire to set up such a system Remember Dell successfully differentiated its product from competing brands in the mind of target market custom ers Consider small companies that manufacture automobile belts auto brake pads auto batteries and auto hoses Each company sells to auto parts distributors large and small Let s take a single geographic area where ten auto parts distributors and industrial customers are located If each of the four companies employs a salesperson who calls on the ten customers once a week and each call costs 200 to cover the salesperson s salary benefits car support network and other business expenses how much does each manufacturer spend per week to cover that territory Ten customers multiplied by one sales call per week at 200 per sales call equals 10 x 200 2000 per week in sales expenses Assuming a fifty week business year the company spends 50 weeks times 2000 per week to cover the sales territory That s 100000 per year in selling expenses for a single sales territory Pretty expensive isn t it Even if the belts hoses brake pads or batteries have a thirty percent profit margin the firms have to subtract the selling cost before arriving at pretax profits If the ten customers only buy enough product to provide 100000 in gross margin revenue less cost of goods sold then the companies are not even covering fixed costs in that market What can be done Suppose the four manufacturers decide to sell to their industrial customers and auto parts distributors in the selected territory using a wholesaler The wholesaler s salespeople call on the ten customers each week So it costs the manufacturers 200 per week to call on the wholesaler plus whatever margin the wholesaler gets from the manufacturer Selling costs for each manufacturer go from 2000 per week to 200 per week The wholesaler represents all four products to the auto parts distributors and commercial customers in the territory Using a wholesaler or manufacturers representative allows a manufacturer to lessen the level of negotiation or selling costs necessary to sell a product Companies like Hormel have gone to using brokers in remote markets like Lubbock Texas to lessen their cost of selling products D Vertical Marketing Systems A VMS is a planned deliberate channel of distribution VMS occurs when one of the channel members seeks stability and control over the channelibeyond what occurs in a traditional transactionbased channel of distribution VMS is based on some type of agreement implicit or contractual We ll discuss three types of VMS One type of VMS the coggorate VMS provides the greatest amount of control to the manufacturer Sherwin Williams manufactures paint39 it stores paint in distribution centers and it sells paint and related products to target market customers through a chain of retail stores Sherwin Williams owns its entire channel of distribution from the point raw materials enter the factory through point of sale to industrial customers and consumers So what s the tradeoff for a corporate VMS like Sherwin Williams maintains If you believe that the cost of labor property and funds tied up in inventory must be tremendous you re right Control and stability comes at a price 40 Another type of VMS the administered VMS exists when one channel member dominates its channel of distribution Think about retail stores what organization comes to mind as dominant in several categories of retail trade For almost twenty years WalMart has been a major player if not the major player in American retailing Indeed several towns inNew England sought to legislate WalMart out The chain holds a powerful almost mystical grasp on the bulk of consumers WalMart sells to consumers to small businesses on a large scale eg Sam s Club and now on a neighborhood scale with its area markets Okay what asset does WalMart possess that many manufacturers need to sustain business Cash No Is it a need for product No Not really The manufacturers need WalMart more than WalMart needs them on an individual basis WalMart has miles and miles of shelf and display space Manufacturers like Procter and Gamble Frito Lay Hormel MampM Mars Hershey s Sara Lee Newell Rubbermaid SmithklineBeecham and a host of others need to have a presence on WalMart s shelves Without a presence in WalMart the manufacturer of consumer products misses at least twenty percent of its target market in many cases As WalMart ekes away market share from KMart Kroger s Safeway Albertson s and other mainline discount stores and supermarkets its ability to administer inform ally a channel of distribution will grow The scale of operations WalMart manages allows the retailer to set its own discount category with manufacturers Procter and Gamble is attempting to set up direct store delivery for certain high volume items toilet paper to WalMart stores When major vendors like Procter and Gamble strive to service an account in such a direct manner that account holds great value Dell has a similar hold over personal computer parts suppliers eg Intel Hewlett Packard Still all power is implicit in the administered channel WalMart or Dell can do more harm to their suppliers than vice versa The contractual VMS involves a written agreement between the channel members A franchisor grants the rights to a process or a product to a franchisee for a particular geographic market A manufacturer grants the rights to distribute its product and service its accounts in a specific area to a distributorship A wholesaler recruits independent retailers of a certain type to join its distribution and marketing system Each of these descriptions relates a type of contractual VMS A contractual VMS is more balanced than an administered channel The parties manufacturer and retailers or wholesaler and retailers need each other IGA a large wholesaler of groceries needs retailers so that it can gain the scale necessary to make a profit in the wholesale grocery industry The independent retailers who belong to the IGA voluntary chain ie a wholesaler sponsored voluntag chain need the purchasing power IGA provides its promotional system its lines of store brands and the planogram and inventory control system IGA provides To gain such benefits the independent retailers agree to purchase a solid percentage of their grocery items through IGA maybe sixty or seventy percent at least IGA in turn must follow through with pricing competitive with what Kroger runs through its distribution centers with promotional vehicles and with inventory control and servicing comparable to what the large chain stores offer their outlets A franchise is another type of contractual VMS Under a franchise system a franchisor grants the rights to a process or a product to a franchisee The franchisee obtains those rights for one or more geographic areas Ben E Keith holds the right to distribute Annheuser Busch products for several counties in Texas Five Star Corporation owns a number of Burger King franchises throughout Texas and the Southeastern Gulf states So why do franchises work Franchises allow an individual or a corporation to enter a business venture with a higher probability of success than would otherwise be the case If your grandparents buy a LaQuinta Motor Inn they will receive guidance as to location hiring of staff access to a computerized registration system a 1800 telephone reservation system discounts on linen service and hotel supplies training systems for reservationists and perhaps a contract with plumbing and mechanical contractors for heavy maintenance Should your grandparents try to start a motel from scratch they will have to go through an extensive learning curve and also finance the operation with a local lending institution LaQuinta probably has some type of capital program or arrangement with GE Capital or another large financial vendor Also LaQuinta is a known product with travelers The sign implies a safe standardized lodging system Mom and Pop motels are fun sometimes Even the Patel family a lodging family from India cannot offer the name or assurance a LaQuinta can offer The Patel motels rely on low price and a family run environment Franchises also offer a moderately wealthy professional eg a surgeon or successful lawyer a business that will pay reasonable returns in the future How do franchises succeed Franchises succeed through strict tight contracts with franchisees The franchise contract should specify compliance in all major aspects of business ie vendor selection product offerings quality of service cleanliness of facility dress and manner of employees location of franchise management of 41 franchise Why does a franchise contract have to be tight Keep in mind that the value of a franchise rests on the assurance of product the consumer perceives Say you see the golden arches as you are blitzing down lH45 towards Houston You can already taste that quarter pounder with cheese and the coke you ll have with it You know the restroom will be pretty clean You know you ll be in and out of Mac Shack within twenty minutes So dining a tMcDonald s is a low risk decision and it is a low involvement decision Suppose McDonald s had few strictures with its franchisees Menu items and raw materials could be gained wherever the franchisee desired Managers could staff and run the facility any way they see fit Employees could wear whatever they want to work Chances are that some McDonald s outlets would improve The food would be better The place would be cleaner However other outlets would be well below customer s expectations in quality of food speed of delivery cleanliness of dining area cleanliness of restrooms and appearance of facility You see Kentucky Fried Chicken the original mega franchise Yes there really was a Colonel Sanders nearly went out of business because of inconsistencies between its facilities KFC sold franchises to large companies like Heublin The companies made little effort to hire good management staff the facilities effectively train employees secure solid foodservice vendors So the quality of KFC restaurants in the 1970 s and into the 1980 s fell way below what it had been under the Colonel Colonel Sanders trained Dave Thomas Wendy s founder and several other fellows who went on to build their own franchise empires E Wholesalers Think about all the products that go into providing services and product on a local level For example you go to an Italian restaurant Where does the restauranteur get pasta or sauce or pizza crusts or mozzarella cheese or any number of condiments supply items silverware A toilet at your home or apartment backs up It turns out that the main drain line running from your home to the street is clogged with roots Your plumber has to get pvc and many specialized fittings He also has to rent a trencher to dig a new drain line Where does the plumber get all the supply items Chances are the WalMart Lowe s or Home Depot may not have all the materials the plumber needs The plumber and the restauranteur need supply points that carry thousands of esoteric items on a consistent basis Otherwise how would the restauranteur be able to spice your favorite entree the way you want it How would the plumber be able to fix your aged plumbing system Every type of industry and service we use entails a substantial set of items that cover products old and new Plumbers and restauranteurs cannot afford to carry or store thousands of items They cannot afford the time or expense of dealing directly with manufacturers of the items So the restauranteur and the plumber both patronize wholesalers or distributors Wholesalers sell to those who buy for resale ie merchants or retailers or industrial use like the plumber Wholesalers can be found in the foodservice industry eg Sysco Ben E Keith the convenience store industry eg McLane s the grocery industry eg Flemming the heating and cooling industry eg Weathertrol the electric parts industry eg Dealer s Electric the construction industry e g Foxworth and Gailbraith the beverage industry e g Glazer s Distributors and literally hundreds of other categories of business and industry Wow So what Well you re right It does little good to talk about wholesalers without providing some type of framework that we can use to understand how wholesalers function Perhaps such a framework may help you when you are trying to help an organization build a channel of distribution It might also help you when you are selling product or working for an organization that transports products in and out of wholesale operations Here we go First off there are two basic types of wholesalers full service wholesalers and limited service wholesalers Full service wholesalers provide many of the services discussed earlier They store inventory grant credit to buyers deliver product consult with buyers warranty parts and products order parts and supplies install product service equipment in some cases Limited service wholesalers perform a restricted range of functionsithey re very specialized Look at the powerpoint that relates full service wholesalers Note that full service wholesalers work with merchants and industrial buyers Merchant wholesalers sell to retailers We mentioned McLane and Flemming a bit ago Both of these wholesalers sell thousands of stock keeping units skus found in grocery and convenience stores McLane sells everything you d find in the Qvickee Mart except beer and magazines They re general merchandise wholesalers McLane is owned by Wal Mart WalMart bought McLane for its efficient grocery distribution system about the same time Sam s came into being Some wholesalers like Glazer s Distributors carry a limited range of product classes 42 Glazers carries several lines of wines fine beers and spirits booze I think is the technical term Glazers sells to onpremise and offpremise vendors examples would be hotel and restaurant bars and convenience stores respectively To buy from Glazer s a customer must have a liquor license in Texas from the TABC Candy and tobacco wholesalers also fit into the classification of limited line wholesalers as well Some full service wholesalers sell only a part of a product category such as fresh produce or fresh fish These specialty wholesalers fill a specific need for clientele One of my students was moving into the sales manager role for his grandad s company Grandad s company sells fresh produce largely to school districts This specialty wholesaler offers prime produce stocks the produce for the districts and rotates out the bad stuff Industrial distributors are full service wholesalers who sell to industrial buyers Industrial buyers purchase products used in the manufacture of other products or in the performance of services for industrial customers or consumers The plumbing supply example we ve used corresponds to an industrial distributor Many types of industrial distributors existiso many that Texas AampM offers a degree program in industrial distribution through its College of Engineering Suffice to say that industrial distributors are full service wholesalers One way to view industrial distributors is in three categories MRO distributors sell products used to maintain facilities MRO refers to maintenance repair and operating supplies The cleaner UNT custodians use to keep carpets looking good is an MRO item The solution used to clean glass doors and windows at UNT is an MRO item Materials used to remove scum from fountains gum from floors and desks and the antibacterial product used to keep commercial air conditioning drip trays from producing the bacteria that cause sick building syndrome are all MRO items WH Grainger is a huge MRO distributor Grainger will set up and maintain an inventory of MRO items for a customer Their system includes and electronic inventory control and replenishment system OEM distributors are another type of industrial distributor OEM stands for original equipment of manufacturer Some types of capital equipment require that replacement parts be manufacturer specific in order for the equipment to function properly Examples of such equipment include large copy systems presses and trucks and automobiles used for industrial purposes AC Delco is General Motors OEM brand MOPAR is DiamlerChrysler s OEM brand John Deere and other manufacturers have their own brands as does Mnolta Many manufacturers will void their warranties if a customer employs aftermarket or non oem parts An equipment distributor sells oem parts and equipment as well A John Deere dealer carries OEM parts and sells John Deere tractors and other types of farm and off the road equipment A Hobart dealer sells Hobart s commercial kitchen equipment eg diswashers carries Hobart parts and services Hobart equipment Peterbilt sells through equipment distributors as does Kenworth and Caterpillar Limited service wholesalers are anomalies Come on What s an anomaly An anomaly is an oddity or under out application an oddball type of organization Limited service wholesalers perform very specific tasks The tasks performed are limited in range much more limited than those performed by full service wholesalers Take the cash and carry wholesaler A cash and carry wholesaler offers a limited array of a commodity product such as plywood and other cuts used to build tract homes The cash and carm wholesaler operates out of a rented lot near building sites The wholesaler sells product for cash or certified check no credit The wholesaler may not deliver The wholesaler may be in business for a limited period Cash and carry wholesalers operate in the commercial flower business as well The wholesaler imports refrigerated containers of flowers from South and Central America The wholesaler sells to orists and chain stores like Albertson s Again no credit is granted and there is little chance of delivery or order taking A truck wholesaler sells perishable product on a route system The Pepperidge Farm dealer is a truck wholesaler The Pepperidge Farm dealer buys product from the manufacturer baker and delivers it to grocery and convenience stores Truck wholesalers operate with all types of perishable snack items A drop shipper or desk jobber takes title to a product but never sees it Why Drop shippers deal in commodity items such as decorative stone granite marble slate and fresh produce Drop shippers take an order from a customer and then source the product arrange shipping and take title to the product while it s in transit How does the desk jobber make money The desk jobber charges a premium for its services and for taking risk on the product while it is in shipment Think about a commercial architect in charge of restoring the Fed Building in Dallas Let s say the project is on schedule until one of the vendors indicates that it cannot locate the marble facings that need to be place on the building The architect has no idea where to source marble The architect must get the marble to Dallas within two weeks or she ll be penalized She calls a desk jobber The desk jobber works out of his home inHighland Park He gets on 43 the telephone to his sources In four hours he s located a qualified vendor in Tennessee He contacts the architect in Dallas and finalizes the deal Then the desk jobber orders the marble The will be shipped by special convoy from Tennessee to the Fed site in Dallas as arranged by CH Robinson the third party logistics firm The desk jobber takes responsibility for the shipment until it reaches the Fed lot and is inspected Desk jobber is a metaphor All one needs to do the job is a telephone Rack jobbers sell items on consignment in retail stores Consignmentmeans that the jobber retains title to the merchandise until the consumer purchases it The retailer receives a percentage of the sales price in exchange for use of the retail selling space What types of products are sold on consignment Many nongrocery items you see in Kroger and Albertson are sold on consignment Harlequin romance novels magazines toys and automotive items perfumes and colognes and newspapers Periodically the rack jobber sends an employee into the store to restock and settle up with the retailer A rack jobber is the only wholesaler who sells directly to consumers Divertng is a problem that occurs at the wholesale level Sometimes manufacturers maintain a type of sales policy that precludes sale of premium product lines through discount channels Black amp Decker sells its DeWalt line through industrial distributors and home centers like Lowe s and Home Depot DeWalt is a premium professional product Sam s Club and other membership discounters want to sell the DeWalt line but Black amp Decker will not assent In some cases DeWalt products end up in Sam s How does this happen Suppose an industrial distributor purchases a large order of DeWalt from Black amp Decker The distributor gets a quantity discount or other type of allowance Then the wholesaler turns around and sells a good part of the order to Sam simaking money on the margin Diverting occurred in the grocery industry as well Large grocery wholesalers used regional discounts they received to spur sales in weak markets as a way to generate revenue by selling to retailers in other regions Let s say a Mississippibased wholesaler purchases 10000 cases of Hormel Chili with beans for 15 a case Using an internet forum the wholesaler sells to a wholesaler in LasCruces for 17 per case two dollars a case cheaper than the Las Cruces wholesaler would have paid to Hormel The Mssissippi wholesaler has one trailer load shipped to Las Cruces and the other to Jackson MS Hormel will see a sales spurt in Mississippi and a drop in sales in New Mexico Hormel loses 5000 cases times 2 per case in the New Mexico market F Agents and Brokers Agents and brokers are intermediaries who do not take title Indeed agents and brokers really do only one thing they make a transaction happen for a client They do not store inventory grant credit install product or transport product The only reason someone uses an agent or a broker is because they do not want to have to sell a product or service themselves Suppose a manufacturer of frozen Mexican entrees decides to try doing business in New England The manufacturer has its own sales force The sales force covers the western part of the US the southwestern U S the southeast including Florida and urban parts of the middle west Chicago Detroit Cleveland The company s marketing manager determines it would cost 250000 to open a one person sales office inNew England At a margin of 50 per entree the company would have to sell 500000 meals to break even It would take at least eighteen months to reach the 500000 units sold mark The Mexican food maker has no market contacts in New England The company a small entity cannot take on that much financial risk right now The marketing manager meets a fellow from Friske Foods Friske fictional is a manufacturer s rep firm that sells ethnic foods in the Northeastern States and New England The company represents fine lines of ItalianFoods Jewish entrees Chinese food and other direct store delivery items The marketing manager sets up a two month contract with Friske Foods to represent the Mexican entrees to grocers in the New England area The contract allows a five percent commission on any amount sold The Mexican food maker was compelled to use Friske because the firm has represented specialty foods in the New England market for over fifty years Friends in the Chinese food business spoke highly of the manufacturers rep firm A manufacturers rep firm promotes complementary lines of product in a related area to a specific group of buyers Rep firms are usually regional The firms operate on a one month contract Compensation is usually from two to five percent commission on sales Suppose a small company wants to sell its product over a large geographic area such as North America Canada Mexico continental US and Alaska How could a small firm lacking a sales force cover the North American market It would be difficult to locate manufacturers rep firms and set up contracts with 44 each one wouldn t it It would A master broker could be used A master broker would act as a national sales manager for the firm The master broker would set up contracts with manufacturers rep firms across North America The master broker would interface between the manufacturer and the agent sales force Okay So an agent is an intermediary that works for a manufacturer over a contract period The agent represents the manufacturer to target market members The agent acts as a salesperson The agent receives a commission on units sold The contract with the agent is renewable if both parties agree What is a broker A broker sells on a one shot deal You and your spouse own a home inDenton Your spouse gets a job with Pfizer Pharmaceutical in Atlanta She moves up to Atlanta You have to sell the house and get on up to Atlanta You ask your friends who would be a good realtor You decide to go with Karen Seligman Karen provides you with references and with a market survey of homes sold in your neighborhood She walks through the house with you and suggests several options for you to follow You list with Karen Once Karen sells your home you will never see her again It s a one shot deal The same goes if you re a truck farmer selling a crop of tomatoes You work with a produce broker You count on the broker to get you market price A broker works with you for a single transaction A broker provides insight on price and terms of sale I Retailers Retailers sell to the ultimate consumer You and l are consumers right We buy for ourselves or our families Many UNT students work for retailers restaurants such as Olive Garden Outback Chili s upscale discount stores such as Target and Kohl s specialty stores such as Victoria s Secret financial retailers such as Bank One Washington Mutual Wells Fargo and CitiCorp We are only going to visit for a bit about retailing It s a pretty intense subject If you re interested in retailing it is well worth your time to take the retailing class offered at UNT Retailing is rough business The retailer deals with the ultimate consumer Consumers are seldom fanatically loyal to retailers A friend in the restaurant business told me that a regular customer will put up with one or two bad visits That s all Since I was in college American retailing has changed greatly While lwas in college Woolco and WT Grant went out of business Woolco was a discount chain owned by the FW Woolworth dime store chain WT Grant was a dime store chain Later T GampY and Gibsons both regional discount stores went out of business A couple of years ago Montgomery Wards went out of business KMart recently closed over 300 stores across the south and southwest Many of the stores were superstoresiand had been open for only a few years Whenl moved to Denton in 1986 there were four Piggly Wiggly stores Today there are two Piggly Wiggly Stores Why is this so Consumers want the best deal the best selection reasonable service no hassle Whatever store delivers gets the business If a store fails to deliver or only delivers to a small group it perishes You may remember Gibson s Stores Gibson s were located in towns running from five to fifteen thousand in population Gibson s were small crowded stores with marginal selection Usually there was a Gibson s brand and one national brand The stores offered a reasonable price relative to say Western Auto another retailer gone byby Gibson s did okay because there was no nearby competition About 1978 WalMart stores began to appear in towns like Cameron TX Lewisville TX Waco TX Conroe TX WalMart would open a store within a quarter mile of Gibson s Gibson s was gone within three months Why WalMart stores were large welllighted attractively designed with friendly and helpful employees WalMart carried a variety of brands and they took part in the community Later WalMart took on the urban areas like Houston Dallas Fort Worth and San Antonio They opened WalMarts and Sam s Clubs often within a mile or two of each other Many people including me thought WalMart would flop in the city It prospered WalMart knows its markets and it knows its competition WalMart can tell you how many white Canon wash cloths will sell at its Denton store every week They can tell you how many white Canon wash cloths will sell at its Waco Super Center every week It s scary There are many successful retailers aside from WalMart particularly in the area of specialty stores Think about Radio Shack Radio Shack works neighborhoods They train their sales personnel well I recall taking a Verizon cell phone to a Verizon Phone Mart I told the clerk that the phone was malfunctioning 45 and asked if it were possible to upgrade The clerk seemed apprehensive and told me I d have to drive to a store inLewisville The clerk could not even access my account No way lremembered that Radio Shack carried Verizon cell phones At Radio Shack the clerk inquired about my need He telephoned Verizon and conveyed my account number and information He then sold me a better telephone Wow Awesome work I was glad to pay extra for help Radio Shack is a specialty store sort of the same way Victoria s Secret is a specialty store Both stores use knowledgeable salespeople to sell a wide array of merchandise in a special area electronics and components or lingerie and foundations WalMart will not take on Radio Shack or Victoria However keep in mind that a knowledgeable buyer may seek the same types of product on the internet or through catalogs Summit Racing sells high performance auto parts cam shafts heads ignition kits low restriction exhaust systems You can buy from Summit through their web site or you can call them and deal with a welltrained salesperson Radio Shack Victoria s Secret and Summit Racing charge more than discounters but they offer a greater assortment of products in their area and a higher level of service A major retailing tradeoff involves price and service If a retailer chooses low price then it will have to offer less service Consider the service you get at Pancho s Mexican Restaurant a favorite place of mine versus the service you get at Don Pablo s or El Matador Pancho s is a bit cheaper than Don Pablo s or El Matador But Pancho s waitstaff cover more tables and Pancho s offers fewer entrees than either Don Pablo s or El Matador The principle of discounting is another retail concept If a retailer wants to key on low price and value the store has to sell a high number of items Jerry s Chevrolet in Weatherford TX draws customers from the Fort Worth market Jerry s beats most deals buyers can get on Chevrolet cars and trucks inFort Worth However Jerry s makes less on each car sold than will a Chevrolet dealer in Fort Worth Dallas or the mid cities Several years ago a friend in the new car business told me his dealership made about 150 on each subcompact it sold So retailers that choose to key on discount prices need to be able to sell a great volume of product in order to be profitable As well note that retailers normally have to secure a good location Restaurant chains like Brinker have location teams The team scopes out a market They determine how people get from work to home They determine traffic pattern They ascertain what similar and complementary restaurants are located where They may even get into negotiations with a city or county as to controlled access traffic signals The goal is to locate the outlet so it is easy for customers to access The same idea goes for a webbased shopping site It should be easy to access and easy to use Chances are you know of several retail sites that have had multiple clients over a period of two or three years Another concept peculiar to retailing concerns retail trade area A retail trade area is the geographic zone from where a retailer believes ninety percent of its business will come The retailer needs to determine whether the trade area will support a business Suppose you seek to determine whether an outlet mall should be located north of Denton You would determine what are competing retail businesses for the outlet mall Has the trade area been saturated Are there enough target market members in the trade area to support the outlet mall and competing businesses Does growth pattern suggest that enough additional customers will move into the trade area to support the outlet mall That is can the outlet mall attract enough trade to break even within two years Physical Distribution Physical distribution entails the activities involved in moving goods and services from raw material state to the consumer So physical distribution or logistics covers the pre production side of the equation the production side and postproduction It involves order processing inventory control warehousing and transportation The four elements comprise a physical distribution system The goal of a physical distribution system is to provide a specified level of customer service Suppose a grocer like HEB seeks to maintain a ninety percent instock rate for all grocery items in its stores Operationally speaking HE B guarantees it will have the correct item in stock for a custom er at least nine times in ten That means HEB has to source product from its vendors store the product in its distribution center or have it direct shipped to stores and monitor stock level for all 40000 grocery items As items in stores reach reorder point HEB s inventory control system must flag the items The items are picked at the DC palletized 46 and shipped to the appropriate stores onHEB vehicles Turnaround time may be less than twelve hours Consider that stores like HE B may be open 18 to 24 hours per day The same type of system is used for any setup where there are a large number of skus stock keeping units O Reilly s Auto Parts uses a similar system WalMart employs the same general type of physical distribution system Let s talk about each element in a physical distribution system order processing inventory control warehousing and transportation Keep in mind that costs are associated with each element and that the costs must be balanced with the objectives of the system You may have wondered why HEB did not set a 100 percent in stock rate for customers Doing so entails inventory costs and storage costs beyond what HEB could tolerate Keep in mind that profit margin on grocery items is pretty slim A break point may occur at say 95 percent in stock rate Of course physical distribution system objectives depend on context Certain types of product or service must be instock or on time nearly 100 percent of the time laboratory reagents certain types of parts for diesel trucks items that go with large commercial air conditioning systems for hospitals universities and large retail stores Consider settings where a day of down time may mean hundreds of thousands of dollars or more of business lost or great inconvenience as when a hospital climate control system fails Order Processing An order process is the sequence of activities that occurs from when a buyer places an order until it is received Suppose you go to see a doctor because your throat has been very sore for several days After a few minutes the doctor prescribes an antibiotic and gives you an order for a throat culture You are to take the order to a nearby hospital laboratory Personnel at the laboratory are supposed to take a sample a glop from your throat and culture it see what grows You get to the laboratory There you find out that the there are several types of throat culture they need to know the kind of culture the doctor wants what kinds of sensitivity or bug does the doctor suspect Or it could be that the hospital needs to know whether the doctor wants to send out the culture necessitating an order from a reference laboratory that honors your insurance or whether the test is to be done inhouse necessitating a payment on the part of the doctor s office Hey W39hy wasn t this mess straightened out in advance You waste time and effort Who is responsible for the errors the doctor the doctor s office staff the laboratory or you It s hard to say without further information Chances are that no set order processing scheme has been established and maintained You might wonder why your order could not have been transmitted to the laboratory through an information system That s a good question The bottom line is that an order processing system needs to be formalized tested and maintained Order processing systems have several stages Each stage involves activities and hence each stage inheres error The first stage is order entry The buyer controls the order entry stage In the example you or the doctor both of you really put data into the order The doctor specifies the type of lab test to be ordered You have to provide payment information eg an insurance card and the doctor s office needs to determine what type of laboratory work your carrier will allow given the diagnostic code Yes there s plenty of room for messups And plenty of messups occur when doctor s offices order lab tests The idea is to have a goof proof system that will not work unless all the components jibe At the same time the system needs to be easy for a doctor or office staff person to use It should be set up so a seventh grader could fill it out seriously Stage two of the process involves account processing Suppose your insurance carrier will not pay for a throat swab at the local hospital but your doctor wants it done there Well somebody has to pay If the system works right you re going to have to fork over some amount to either the doctor s office or the hospital Otherwise the lab test is charged to the hospital The system needs to handle such items Hospitals and doctors cannot do free workieven if they want to regulatory agencies get upset when free stuff is done Stage three involves order picking Order picking is the part where the hospital lab takes the specimen All kinds of errors can occur in order picking First the lab tech or phlebotomist may use the wrong kit or test assuming the doctor ordered the right test That means the doctor will not get the type of data needed to diagnose your bug In that case you ll probably have to go back and have the sample taken again As well you or your insurance company may be billed for two tests You may have to spend time working that one out Or the lab tech or phlebotomist may get inadequate specimen not enough glop for the test to provide reliable results Guess what You have to go back and be swabbed again Yukko Another possibility is that the sample may sit around the laboratory too long to be cultured or it may even be lost Guess what You will make another trip to the lab Point is that order picking is a critical stage Some mechanism needs to be in place to increase the likelihood that what is ordered is sampled analyzed documented and reported Again a good information system goes a long way towards keeping track of 47 specimens and their status However human errors can and very much do still impede the system Stage four involves shipping or transmitting the result to the doctor s office Doctor s offices love faxing You andl know that faxing is not all that reliable Faxing is a labor intensive systemiunless it is automated Faxes sometimes do not go through or they run together or someone mixes a couple of faxes together or the fax machine runs out of paper All of those errors occur in the medical arena You might wonder why the laboratory doesn t just call the doctor s office and report the result To whom do they report Chances are that the person who can take the result is busy or isn t there Okay What if the result is shipped electronically so that the doctor or a physician s assistant could access it That is a great alternative But that alternative necessitates a workable medical information system and it assumes users will employ it The final stage in order processing is receiving Receiving means that the doctor or doctor s agent confirms receipt of the lab result for your throat culture You have trilobites Chances are that you mixed cold beer and hot jalapenos Oh well There needs to be a reliable way for the hospital laboratory to know your doctor has received and accepts the lab result lnventog Control Remember the HEB example How does HEB determine how much of each sku stock keeping unit to keep on hand at its distribution center to meet its stores demands Good question Consider that there are 40000 or more skus HEB stores carry Keep in mind that each store sells different combinations and quantities of skus daily As well be mindful that grocery stores have little storage space Take a look some day Almost all space in a grocery store goes for display The idea is to have the space selling to consumers So you just keep a bunch of inventory at the distribution center for items that tend to run out toilet paper paper towels tomato sauce cereal what Well what happens if HEB keeps too much inventory on hand at its DC First they run out of space Remember each square foot of DC has to be paid for heated protected and insured Second HEB has to tie up money at the DC It borrows money to pay for inventory The longer the money sits the longer the money is tied up Remember the problem Chrysler had in the early 1980 s It would be inadvisable for HEB to keep too much inventory on hand at its DC As well it would be unwise for HEB to keep too little inventory on hand at its DC Why If you go to HEB to buy groceries and cannot obtain much of what you desire will you go back Probably not KMart experienced this type of problem with its grocery setup With inventory control the organization has to balance the cost of holding inventory with the cost of stocking out running out of a particular sku Dell and WalMart try to push the burden of balancing off stocking out and inventory holding onto vendors That is the vendors supply the store directly or they set inventory at the Dell site until it is needed for assembly Most retailers lack the clout to push holding costs off onto vendors beyond just shipping items back A solution to the dilemma is to calculate Economic Order Quantity Economic Order Quantity EOQ optimizes the cost of stocking out given a level of demand with the cost of holding inventory It s a quadratic function ie it involves a square root Look at the powerpoint transparency that involves cases of beans Note how the EOQ sets up The idea is to have valid information for units ordered per period stockout cost entailing cost of rush shipment from store to store or from a vendor and percentage holding cost Holding cost is an estimate of what it costs per period to keep a case of product sku in stock EOQ tells HEB how many cases of a product to order from a vendor so as to ameliorate demand and inventory holding costs Keep in mind that EOQ must be calculated for each sku What can go wrong Some items are seasonal Some items may sell in only a few stores maybe they could be direct delivered How does one assess holding cost see the accounting and finance people Hey there are plenty of problems But EOQ is a good start towards balancing stocking out with holding costs WalMart and Lowe s do a good job with EOQ KMart and Home Depot have problems Wait That s not all What about reordering How does the DC know when to order EOQ If we assume instantaneous delivery as with DelliEOQ isn t needed on the buyer s side The vendor takes care of EOQ However if the organization has to order from a vendor a replenishment system has to be in place at the DC and at the store level Suppose HEB orders DelMonte 8 oz tomato sauce in lots of 1000 cases EOQ Including order time it takes six days to get the sauce from DelMonte s DC What do we need to know Well how many cases does the HEB DC ship out to the stores each day Say 100 cases ship from DC to stores each day Now what do we know Think If it takes six days to get the sauce from order point and HEB DC ships 100 cs per day then we ought to reorder at six days times 100 cs 600 cases That is when were down to 600 cases say that s twelve 50 case pallets we the system should auto order 1000 cases of sauce from Delllonte or whoever supplies the Delllonte product So 600 cases is the reorder point of Dellonte tomato sauce 8 oz sku 782290321 Hey what about products where 48 erratic demand exists like Charmin toilet paper Some DCs keep a safety stock of so many cases of product to cover demand Let s summarize a simple reorder system Know demand for an sku stockout cost holding cost39 Calculate EOQ39 Know lead time from supplier for an sku39 Know sales of product per day lead time maybe you can get from demand Using lead time and sales per day calculate reorder point39 Determine any necessary safety stock39 Have the system develop a contingency statement If in stock for sku 782290321 le 600 order qil 00 SQEJ HeP NE Consider that step seven occurs each day at the distribution center Chances are that the stores dump orders at say nine pm By eleven pm the DC knows what s ordered By midnight the DC has run item seven for all items and autoordered from its standard vendors Certainly there will be an exception report if a stock has fallen well below reorder point That s how the DC knows to reevaluate its data Warehousing or Distribution Centers A warehouse is a storage place Stuff sits there Maybe you ve warehoused a bunch of your stuff at UHaul It sits and you pay You know that a warehouse would not work for the type of inventory control system we attributed to HEB HEB uses a distribution center DC A distribution center is a warehouse that emphasizes product flow The idea at the DC is to keep just enough inventory on hand to meet demand and avoid excessive inventory holding cost That s why a reorder system must be in place for each sku However a DC also has to be set up so as to make it easy to assemble orders and to protect inventory Frozen foods need to be kept in a locker Pharmaceuticals and ethical drugs must be locked up and accounted for Items that move quickly and in volume need to be accessible As well the setup has to minimize product handling Why Keep in mind that it costs each time an employee moves inventory Ideally inventory moves into the DC and out That s two handles As well inventory must be packaged so it is easy to get into and out of the truck Palletization has been adopted by many large grocery operations Finally the inventory has to be loaded so that it can be unloaded optimally If the first HEB store the truck stops at is 123 in South Temple TX the pallet for that store should be set in the trailer last Right Otherwise the driver has to of oad and than reload Then the driver is off schedule Then groceries get to other stores later Then groceries won t be on the shelf when customers come into the store Distribution centers are complex entities UPS has its hubs designed by industrial engineers WalMart is known for its highly organized and efficient distribution centers The idea is to maximize flow an minimize handling for each sku Keep in mind though that order picking has to be accurate and safe Really heavy items cannot be stored twenty feet up without risk of injury Another consideration is where to locate a distribution center What do we consider real estate cost available labor force access to highways rail and air transport maybe pipeline or water transport What about location of customers or stores Transportation There are many ways to ship stuff electronically by air by sea by pigeon by pneumatic tube by truck by train by ship by bus by motor courier by barge by pipeline by data cable by telephone by foot by conveyor belt from one facility to an adjacent one Hey Before shipping think about what needs to be shipped Sometimes components can be shipped separately and assembled at a later point Okay Whats the best way to ship Most people may say that it s the cheapest way Well water borne goods are the cheapest to ship Other people may say it s the way with the greatest access Well trucks go anywhere there s a road or trail UPS can get to more places than USPS Some people believe that speed is essential Air is the fastest way to ship Still other people are concerned with keeping the product intact and keeping it away from hazards Pipeline is a secure and safe way to transport uids and gasses What about capacity Rail and water barge and ship can carry items that are bulky heavy or just plain stinky 49 like guano and fertilizer If you go down by the Texas coast e g Victoria Wharton Refugio you ll see cotton being bailed and hauled to rail heads Now Suppose you have an item that needs to be shipped economically but also needs to get to a specific destination that is not adjacent to a waterway airport or railhead Okay No problem You can use a container or some variant thereof UPS has bundled shipping products as does FedEX What s a container A container is a ribbed box See powerpoint It can be affixed to a chassis and driven It can be stacked on a rail car or on a container ship or in the fuselage of a large transport aircraft Containers minimize handling and they meld low cost of water and rail transport with the flexibility of truck How about an example Let s say you work at the Justin boot outlet You receive an order from Andre LeBoeuf a fashion designer in Paris Andre decided that redneck is chique He heard about the Justin outlet He orders one thousand assorted pairs of ladies boots You are at a loss It would cost a great deal to send the boots by air charter Andre is not in a hurry and he wants to keep the shipment a secret You call Pegasus Trans Air The sales rep informs you that the easiest way to ship to Andre is by sea borne container She arranges the shipping system and sets up a preapproved customs plan At nine am on Wednesday a container truck arrives at Justin You load the truck with cases of boots You and the driver seal the container with a lead seal It should not be opened during transit except by Sparky the drug dog The container is hauled to a rail yard in Fort Worth From Fort Worth the container goes to the Port of Houston In Houston a crane operator drops the container on the deck of a container ship The ship heads into the Gulf and off into the Atlantic Ocean At Marsailles France the container is offloaded onto a truck chassis It goes to Monsieur Andre s studio in Paris Andre takes out his trusty pliers and snips off the lead seal Voila Were time more of a factor you could have shipped the boots by UPS or FedEX container Both companies use eets of container aircraft Containers have revolutionized shipping They lessen handling and product loss They offer flexibility to shippers Take a drive over to Justin some afternoon about 3 pm You ll see a BNSF container train heading north and or south In toto the train will have over one hundred container stacked one atop the other four per car It may also have several truck trailers secured to at cars This piggyback approach allows shorter hauls for items going from city to city What types of companies set up transport for people like Andre Certainly UPS and FedEX are available Freight brokers remember our earlier discussion often handle spot shipments Third party logistics firms like CH Robinson and Pegasus Trans Air also handle shipping for clients large and small CH Robinson ships chickens for Pilgrim s Pride cement culverts for other clients fruits and vegetables for produce growers consumer goods for Procter and Gamble You name it Robinson will handle all a company s shipping needs A number of UNT graduates go to work for third party logistics firms such as CH Robinson and Pegasus Others go to work for FedEX or UPS Others work for BNSF or American Airlines Physical distribution logistics has become a major career area for UNT students If you re interested check out the program Dear Student Listen Thank you for purchasing this text If you read this far you re a solid student I wrote this book so you would have a general grasp of marketing concepts but also grasp many specifics All the examples are drawn from real stuff UNT graduates and business people have shared It s real Sorry there aren t any glossy pictures However what you re going into is black and white stuff It s not meant to be colorful or entertaining Rather you re going to be expected to get things done correctly and efficiently I hope this book has helped you in some way this semester More importantly I hope something you learn in class will help you distinguish yourself in the workplace over the next few years Good luck to you Best regards I eff Sager