Marketing Concepts 1                                                    • geographic domain                       Each obj...
leadership can be achieved by:           industry sales your company attains.             • differentiating the product  •...
• Personal selling                         • Which promotion is working?                   Cooperative expenditures should...
promotional piece to lapse in order      planned properly and presented well.             trade show will provide    to af...
leads. Several options include:        In-Store Demonstrations                          they will be. Talk to them about  ...
during a promotion that would                 and tabulated from retailer, retailer     Target pricing is where a companyo...
Used when                                      Contribution Analysis                         PVCM = selling price-variable...
Experience curves may be due to:6        retail price working back, rather than      processor must build in anticipated  ...
success and failure.                         Income levelsWhat Needs to be Done                          The marketing man...
and transportation investments.               producers need to understand the           of thousands of products, from lu...
different set of problems and cost           neighborhood stores, have a unique            required to convince consumers ...
can tell consumers what a product or            The marketing manager for a               Packagingservice can do for them...
Marketing
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Marketing

  1. 1. Marketing Concepts 1 • geographic domain Each objective should meet the Doing it Right • core technologies used following basic criteria: Marketing is a general term used to • commitment to survival, growth Suitable: Do they fit with the corpor- describe all the steps that lead to final and profitability ate mission? sales. It is the process of planning and • key parts of the company’s Measurable: What will happen executing pricing, promotion and philosophy and when? distribution to satisfy individual and • company self-concept Feasible: Are they possible to organizational needs. • company’s desired images achieve? From this definition it is easy to see Do not expect a mission statement to Acceptable: Do they fit with the values that marketing is more than just the be developed quickly. It generally takes of the company and the process of selling a product or service. various revisions before a complete employees? Marketing is an essential part of mission statement is written. Flexible: Can they be adapted and business, and without marketing, even changed should unforeseen the best products and services fail. Stage 2: Overall events arise? Companies constantly fail because Motivating: Are they neither too they do not know what is happening in Company Objectives Once a mission statement has been difficult nor too easy to achieve? the marketplace and as a result, they are Understanding: Are they stated created, the company can develop not fully meeting their customer’s simply? objectives. Objectives are specific goals needs. They mistakenly believe that Commitment: Are people committed to be achieved by the business. They with the proper amount of advertising, to doing what is necessary to are plans that will help a company customers will buy whatever they achieve them? move toward the mission statement. A are offered. Participation: Are the people business normally creates both one- and Marketing consists of making responsible for achieving the three-year objectives. Examples of decisions on the four P’s: objectives included in the company objectives are: • Product objective-setting process? • To earn at least 20% after-tax rate • Place/Distribution Companies need to ensure that they of return on our net investment • Promotion do not set too many objectives. When during this year • Pricing too many objectives are set, the • To make our cookies the best Before a business owner can make company runs the risk of having selling cookies in terms of units decisions on the four P’s, he/she must objectives contradict and interfere with sold in Kansas devise a plan. A plan provides a each other. business with guidance on making Types of Objectives decisions. This chapter includes 1. Profitability Stage 3: directions on how to devise a plan that • Net profit as a percent of sales will assist in making decisions about Competitive Strategies • Net profit as percent of Once a company has determined the four P’s. This type of plan is a six- total investment objectives a competitive strategy can stage process that is commonly referred • Net profit per share of be developed. A competitive strategy is to as strategic marketing; a strategic common stock developed so that a company can create marketing plan is an important part of a 2. Volume advantages over the competition. business plan. • Market share Examples of creating a competitive Stage 1: • Percentage growth in sales strategy include: • Sales rank in the market • offering buyers a standard product The Mission Statement • Production capacity utilization The first stage in strategic marketing at a lower price; or is the development of a mission 3. Stability • making the product different than statement. A mission statement is a • Variance in annual sales volume the competition on attributes con- brief description of a company, • Variance in seasonal sales volume sidered important to the customer. generally no more that a few lines, that • Variance in profitability Types of Competitive describes where the company is and where it wants to go. 4. Nonfinancial Strategies • Maintenance of family control Overall Cost Leadership A good mission statement • Improved corporate image This refers to being a low-cost should contain: • Enhancement of technology or manufacturer and should not be • target customers/markets quality of life confused with setting low prices. Cost • principal products/services1 Adapted from Reference Guide for Kansas Food Processors, Kansas StateUniversity and Kansas Department of Commerce & Housing, July 1998.
  2. 2. leadership can be achieved by: industry sales your company attains. • differentiating the product • producing on a large scale For example, if a company sells 100 • serving a narrowly defined • designing products that are easy to units of product, but total consumption target market manufacture for the good is 100,000 units, the • flankers (new brands designed • accessing low-cost raw materials market share is 1% (100/100,000). to serve new segments) • predicting a broad range of products Stage 5: Stage 6: • pursuing cost reductions in Marketing Strategies Marketing Programs production, marketing, research Marketing strategies outline Marketing programs are the and development, customer exactly how marketing objectives will detailed approaches to the four P’s. service, and the avoidance of be achieved. For example, if the (products, place, promotion and marginal accounts marketing objective is to increase pricing). The approach for makingDifferentiation market share, the marketing strategy decisions for each of the four P’s Differentiation involves changing states exactly how the market share should closely follow the missionthe product so it is perceived as unique. increase will occur. A marketing statement, company objectives,Change can be based on: strategy is a way to give marketing competitive strategies, marketing • technical superiority orientation to a business by deciding to objectives and marketing strategies. • quality position a product or service in terms of buyer needs and wants. Inexperienced Types of Promotion • customer support services Promotion includes all activities • the appeal of more value for business people often make decisions based on what they like or want, designed to inform, persuade and the money influence people when they are making leaving the customer out of the picture.Niche Marketing A marketing orientation brings the the decision to buy. Promotion is made Niche marketing occurs when a customer into the center of the picture. up of:product is sold to a small number of The marketing objectives for profits, Advertisingtotal potential customers. The specialty cash flow and market share can be • non-personal communicationmarket is often referred to as niche achieved by increasing the number of transmitted through mass mediamarketing, since products are marketed users, increasing the rate of purchase,to a very small group of buyers. Niche retaining existing customers or Publicitymarketing requires the business owner acquiring new customers. The • free promotion through newsto identify customers with similar following are examples of various types stories in newsletters, newspapers,demands and serve their needs of marketing strategies. magazines and televisionextremely well. I. Increase the number of users by: Sales Promotion Niche marketing implies that a • building willingness to buy • all forms of communication notcompany will take a lower overall • increasing ability to buy found in advertising and personalmarket share, but possibly with higher II. Increase the rate of purchase by: selling, including direct mail,profits on the product. Higher profits • broadening usage occasions for coupons, volume discounts,may be achieved by having higher the product sampling, rebates, demonstrations,prices or producing at lower costs. • increasing level of consumption exhibits, sweepstakes, trade • increasing rate of replacement allowances, samples and point-of-Stage 4: III. Retain current customers by: purchase displaysMarketing Objectives • maintaining satisfaction In designing a promotional plan, Marketing objectives can only be • meeting what competition offers clearly spell out:developed after stages one through • developing or increasing • Which objectives to use. It isthree have been completed. Marketing relationship marketing possible to have more than oneobjectives are designed to help a IV. Acquire new customers by: objective, but it is recommendedcompany attain overall objectives. • line extensions (variations of that a company target its audience The five basic marketing existing products designed for or run the risk of losing focus.objectives are: existing markets) • What to say • to achieve a viable level of sales or • leaders (lower prices on certain • Who to say it to market share products to increase the sale of • Criteria used to measure success • to increase market share more expensive complements) • to maintain market share • bundling (selling products - Suggestions for • to maximize cash flow together, usually at a lower Inexpensive Promotion • to sustain profitability price than if bought separately) Some inexpensive, appropriate and Market share is a common term used • head-to-head market dominance effective methods of promotion for thein developing marketing objectives. It • head-to-head price/cost new food processor include advertisingrefers to the percentage of the total leadership through:
  3. 3. • Personal selling • Which promotion is working? Cooperative expenditures should be • Product demonstrations • Which promotion is not working? examined in the same way as other • Direct mail • What are the costs of the promo- advertising, public relations and • Business cards tion compared to the benefits? promotional plans. A program can be • Yellow Page listing considered weak if the focus is on • Seminars Various Forms of Advertising generating immediate store traffic • Newsletters Newspapers through markdown promotions and ads • Contests Advantages—flexibility, emphasizing savings that could damage • Flyers community prestige, intense coverage, the brands quality image. • Statement stuffers reader control of exposure, coordination Federated Cooperative’s program is • Window banners with national advertising, a good example of a cooperative • Greeting cards merchandising service program. In order to take advantage of • Sports team sponsor Disadvantages—short life span, their program, several criteria must be • Home parties hasty reading, poor reproduction met: • Ethnic services—languages spoken • The product must be sold in the Of course, one of the best free Radio Co-op storesmethods of promotion is good “word of Advantages—immediacy, low cost, • The company must be anmouth." practical audience selection, mobility established supplier Disadvantages—fragmentation, • The company must be able to ship temporary nature of message the product to all Co-op storesPromotion Objectives Magazines Although a cooperative advertising The promotion objectives need to Advantages—selectivity, quality program can be expensive to thebe clearly stated and measurable. They reproduction, long life, prestige producer, the benefits can also bemust be compatible with the objectives associated with some, extra services significant. Cooperative advertisingof the company, as well as the Disadvantages—lack of flexibility averages around 2 to 5 percent of thecompetitive and marketing strategies. invoice value. However, every productObjectives vary for different products Outdoor Advertising is different.and different situations. For example, Advantages—quick communication The value is put toward purchasingproducers must promote differently to of simple ideas, repetition, ability to newspaper ads together with thebrokers than to wholesalers. When promote products available for sale retailer. The ads are usually finalized inpromoting to a broker, the producer nearby December for the following year. Bemust promote what he/she wishes the Disadvantages—brevity of the sure to stipulate that the feature pricebroker to present to the wholesaler. message, public concern over esthetics will be set six weeks prior to the date ofWhen promoting to a wholesaler, the Television the promotion. Consider an averageproducer simply wants the wholesaler Advantages—impact mass price reduction of 10 percent in theto purchase the product. coverage, repetition, flexibility, prestige form of an off-invoice case allowance There are five general promotional Disadvantages—temporary nature timed to coincide with the cooperativeobjectives to choose from. The five of message, high cost, high mortality advertising feature.2types of objectives for promotionalactivities are1: rate for commercials, evidence of Media Rates • to provide information public distrust, lack of selectivity Promotional and media costs are the • to increase demand Direct Mail most difficult to allocate because their • to differentiate the product Advantages—selectivity and speed, effectiveness is hard to measure in a • to accentuate the value of intense coverage, flexibility of format, concrete manner. Before looking at the the product complete information, personalization dollar costs of different promotional • to stabilize sales Disadvantages—high cost per media, it should be decided: person, dependency on quality of • which media are most likely toPromotional Strategy mailing list, consumer resistance reach the target audience Once the producer has reviewed all • which media suit the product Cooperative Advertising imagethe possible promotional tools, he/she Cooperative advertising should bemust devise a promotional strategy. A • whether any product-specific looked at as a way to enhance consumer features make one medium morepromotional strategy should address the awareness of a product (or brand) in afollowing issues: appropriate than another (i.e., is a local market under both the brand and visual demonstration necessary?) • What is the goal of the promotion? the retailer’s name. Think of • What types of promotion should • what the promotional budget is cooperative advertising as retailers Common errors to avoid are: be used? helping to sell a product by paying part • What effect should the promotion • trying to focus efforts on too broad of the expense to promote the product a market have on the customer? in their local market. • allowing the quality of a
  4. 4. promotional piece to lapse in order planned properly and presented well. trade show will provide to afford more distribution, or lack Several months to a year may be information. Additional materials of planning and coordination required to obtain a well located booth and information that should be • no measurement of effectiveness and prepare the appropriate materials requested (if not offered) include: • relying on one source of media and displays. • a floor plan (preferably with other exhibitors indicated) so aSetting Promotional Expenditures Choosing the Trade Show high traffic area can be chosen. Market share—A company that has 1. List several trade shows that would Note: Do not hesitate to paya higher market share generally has to be suitable extra for a good location; thespend more on advertising to maintain Various directories are available that whole point is exposureits share. contain a complete index of trade • booth specifications, including Sales from new products—If a shows listed chronologically, dimensions, lighting, tables,company has a high percentage of its geographically and by subject. Each chairs, skirting and any displaysales from new products, it has to spend listing has a phone number of the trade or sample restrictionsmore on advertising compared to show contact. Two sources of Trade • information on all servicescompanies with established products. Show listings are: being offered, such as Market growth—Companies accommodations, equipmentcompeting in fast-growing markets USDA, Foreign Agricultural Service rental, assistance with set up,should spend comparatively more Washington, DC 20250 tear down or packing storage.on advertising. Phone: (202) 720-7115 Note: It is a good idea to exploit Plant capacity—If a company has a Fax: (202) 720-1727 the services being offered onlot of unused plant capacity, it should http://www.fas.usda.gov site, as there are many details tospend more on advertising to stimulate The FAS home page on the be concerned with at a tradesales of product. Internet’s World Wide Web is a direct show event. Product price—Both very high- link to information on U.S. agriculturalpriced (or premium) products and very trade and export programs, including a Preparationlow-priced (or discount) products list of upcoming trade shows. • Set clearly defined goals for therequire higher ad expenditures because, trade show. This will help inin both cases, price is an important Trade Show Week development of the presentationfactor in the buying decision. The buyer 12233 West Olympic Blvd., strategy and display.has to be convinced (through Suite 236 • Set a budget allowing for enoughadvertising) that the product is a good Los Angeles, California 90064–9956 personnel, accommodations,value. Phone: (310) 826-5696 product and travel. If the trade Product quality—Higher quality Fax: (310) 826-2039 show is out of the country, allowproducts require greater advertising for insurance costs, and plan toeffort because of the need to convince “Trade Show Week” contains a spend a day in the host countrythe consumer that the product is unique. listing of trade shows in the United before and after the trade show. Breadth of product line— States, Canada and Mexico (in its • It is advisable to chooseCompanies with a broad line of Domestic Edition) and other countries professional design and marketingproducts have to spend more on (in its International Edition). consultants to help prepare theadvertising compared to companies materials for the booth. Effective 2. From the list of potential tradewith specialized lines. material can also be prepared by shows, choose to participate in the the company – just remember theTrade Shows one(s) that: target audience and the image you Budgeting for a trade show, and • attract the most appropriate wish to project. Materials willincluding this venue in the overall customers, not necessarily the include:marketing plan is a highly focused way largest volume of customers • a high-impact display to attractto: • will draw an audience from the the audience • establish a presence in geographic area the company is • professionally prepared infor- the marketplace prepared to serve mation handouts (Remember, • gain an overview of the industry • are well supported by others in the people attending are coming at present the industry (i.e., if the to gather knowledge.) • obtain a list of serious buyers more competition never misses it, • samples of the product quickly than would be possible there could be a reason) 4. Prepare the sales presentation. with a traditional sales approach • are well organized and Exhibit selling must be polished, Although trade shows are relatively promoted brief and convey information. Ifexpensive, they are widely used in the 3. Obtain all information needed to the presentation lacks impact, thefood industry. They offer the potential begin preparing for the trade audience will quickly move on.for a high return in sales and contacts if show(s). The contact person for the 5. Prepare a system for recording
  5. 5. leads. Several options include: In-Store Demonstrations they will be. Talk to them about • lead sheets for sales staff Demonstrations, sometimes referred two weeks prior to the demonstra- • a business card exchange to as product samplings, are an tions, so they will have the product system effective and inexpensive means to on hand and on the shelves. • sign up sheet for promote a new or existing product. • Be prepared to work the whole more information weekend, not just peak hours. The • a guest book Types of Demonstrations normal run of a demonstration is 6. Ensure everyone at your booth is There are three types of in-store during store hours on Thursday, well-informed about your demonstrations: Friday and Saturday. company, its product, prices and • Live demonstrations • The store may want incentives terms of sale • Mobile demonstrations from you, such as cost cuts on the • Static display product. If possible, get the storeAt the Trade Show Live Demonstrations include a to offer special treatment for your Staff will be presenting the product staffed area with activity, such as product during the demonstration.and working with customers the entire simple preparation. They are best with a Be prepared to pay for thistime they are in the booth. Ensure that new product that requires information opportunity.adequate breaks are given so the quality or answers to questions, or for a pro- • Try to place the demonstration areaof presentations remains consistent. duct that requires special preparation. where the product is stocked. It is important that the customer One advantage of a live demonstration • During the demonstration, hand outrelate the product to their situation. is that you can encourage the customer simple information on the productSales staff should encourage customers to purchase the product. and any coupons.to handle the product and talk about Mobile Demonstration is a form of • Be unique. Try new ideas, astheir situation so the most relevant live demonstration that occurs when a you must stand out from thepoints about the product can be demonstrator walks through a store competition.presented. Encourage customers to take offering samples. The demonstrator • Know the competition, but do notinformation and samples: Just because usually has a base operation near the downgrade them during thethe materials are there does not mean product sales display. Not all stores demonstration.they will be examined. allow for this type of demonstration. • Demonstrations normally do notFollow up Static Display provide access to a very wide Be sure to prepare a plan for follow- Includes an area displaying the market and, consequently, are onlyup before the trade show, with product and offering unattended used as one segment of a marketingdeadlines for re-contacting interested samples. One advantage of a static and promotional package.parties. Follow-up should be display is that they are cost effective.immediate, and it is best to let Coupons One disadvantage is that there is nocustomers know in advance when and Coupons can be an effective way to control on how much sample is used orhow they can expect to be re-contacted. increase sales and profits, but there are on the purchasing decision. This type of certain costs to consider: demonstration requires consumer • costs of physical distribution, familiarity with the product.Publicity mailing, placing advertisements Publicity provides free advertising Steps in Planning Demonstrations and paying the retailer a handlingfor the producer through news stories in • Determine what type of charge for redeeming the coupons.newsletters, newspapers, magazines and demonstration you are going to • reduced contribution marginstelevision. Publicity can be attained by use. associated with the fact thatsending a media release to radio, • Decide which stores you are going coupons are price reductions.television, newspaper and magazine to target. • coupons will be used by newoffices. A media release is a one-page • Choose a store that stocks customers as well as existingletter identifying a newsworthy event your product. customers who would have boughtand outlining the who, what, when, • Find out the store policy on setting the product at the regular price.where and why of the story. A media up in-store demonstrations. Every Any printer can print coupons.release is appropriate to announce the store has different policies. Managers must estimate variousstart-up of a new business, introduction • Decide if you wish to hire a rates to determine the effectiveness of aof a new product, or any other success demonstration company or if you coupon promotion. The estimationsstory related to the company. The will do it yourself. Consider time, could be based on past performance ormedia will publish or announce the energy, ease of demonstration and on experiments that run coupons in onestory as a news item and, consequently, budget when making this decision. city or in one part of a city. These ratesthere is no expense for the processor. • Talk to the store managers. The include:Publicity is one of the most effective better the relationship you have Redemption rates: the percentageand least costly means of advertising. with them and the better they know of buyers responding to the incentive. your product, the more cooperative Displacement sales: sales made
  6. 6. during a promotion that would and tabulated from retailer, retailer Target pricing is where a companyotherwise have been made to regular clearing house, or billing agent. studies the competition and thebuyers at the regular rate. • Verifies retailer, checks coupons customer to identify a point where the Acquisition rates: non-regular and reimburses retailer or retailer product must be priced to bebuyers who purchase the product during clearing house. competitive. Once the target price isthe promotion. • Sends coupon redemption report to identified, the company identifies a Stock-up rates: sales made during manufacturer with invoice. desired profit and works backward toa promotion that are borrowed from Provides complete audit of moneys calculate cost at which the product mustfuture periods because the customer received from manufacturers and be produced to meet the profit andstocks up on the product at the paid to retailers. target price. These calculations mustdiscounted price. take into account the target profit Retailer Clearing House Conversion rates: the conversion of margin, price reductions for retailers, • Performs coupon accountingnonregular buyers into regular buyers. costs of promotion and future service for retailer’s account- To estimate the effect on distribution costs. ing department.profitability, one must: This is the reason that pricing is the • Receives, unsorted and uncounted, • estimate the increased contribution last of the four P’s to be covered. To all coupons accepted by retailer. from incremental sales to properly calculate the costs incurred by • Sorts, counts, and tabulates. new buyers a company, include present and planned • Bills out to applicable manufac- • estimate the reduced contribution activities for distribution, promotion turers or agents. from displaced and stock-up sales and product development. • Reimburses retailer, deducting • subtract the direct costs of the service fee per coupon, plus any Pricing Strategies sales promotion shipment adjustments. Pricing strategies specify the roleCoupon Distribution Retailer Billing Agent of price in implementing marketing Coupons can be distributed in a • Performs coupon accounting strategy. It states what the companyvariety of ways. The most common service for retailers. wants to achieve by setting a particularvehicles for issuing coupons are:3 • Receives, unsorted and uncounted, price. Pricing strategies are not all coupons accepted by retailer. necessarily mutually exclusive.Products: • Sorts, counts and tabulates. Price strategies should be • In- or on-package self • Bills out to applicable manufac- determined for each marketing strategy • In- or on-package cross turers or agents in the name of set by the company and must be • Instantly redeemable the retailer. consistent with distribution andMedia: • Invoice retailer service fee promotion strategies. • Newspaper per coupon. • Free standing insert Pricing Programs • Flyers Value Pricing Pricing strategies are arrived at • Magazine Pricing is much easier with one through various pricing programs • Direct mail (solo, co-op or product than with multi-products. such as: selective) When a single good is being produced, Penetration Pricing all fixed costs associated with the • a low price to stimulate demand.In-store: business are applicable to that one • Shelf pads (or shelf dispensers) Used when product. When several products are • Handout (with product • lower prices result in overall produced, fixed costs must be applied demonstration) increased growth in the market or proportionately to the various goods • Entrance (crew handout or self- increased demand for the according to use. serve dispenser) company’s product Many companies want to have both • Cash register (bag stuffers, cash • the company sells higher margin extensive marketing programs and the register tapes) complementary products that are lowest price. In most cases this is not • Electronic coupons printed in-store being pulled along with the sale feasible. The money for the marketing There are three organizations that of lower priced products programs must come from the con-can help the handling of coupons. The • the company enjoys economies sumer and this is not always possiblefollowing is an outline of the services of scale with low prices.performed by redemption agents, • competitors have high- Traditionally, companies have usedclearing houses and billing agents. cost structures. costs as the basis for setting prices, withManufacturer’s Redemption Agent no regard as to the value a customer Parity Pricing • Performs coupon redemption places on a product or how competitors • setting the price near or at service for manufacturer’s are pricing. A market-driven company competitive levels, and using marketing department. will “price on value, knowing costs.”4 other marketing variables to • Receives coupons sorted, counted, This is known as target pricing. implement strategies
  7. 7. Used when Contribution Analysis PVCM = selling price-variable costs • total market volume will not grow Contribution analysis studies how selling price with lower prices the final selling price will contribute to • competitors can easily match any fixed costs. Ideally, a product would PVCM shows which products price decrease cover all the fixed costs and contribute contribute the greatest amount to a new profit, but this does not always overhead and profit for each additionalPremium Pricing dollar spent to increase sales. happen. Many products in a company’s • setting a price above competi- business only cover their variable costs Setting Prices tive levels and part of the fixed costs. A company Two tools that are important forUsed when must decide if these products are worth setting prices are: • a company can differentiate a continuing (i.e., whether the product is • break-even analysis product in terms of higher quality necessary to the product line). Fixed • cost-volume relationships or special features costs exist whether the product is • a company has little excess produced or not. The question that must Break-even Analysis capacity and where it is difficult be answered: "Is it better to produce a Break-even analysis can be used as for competitors to enter the product that pays for itself and part of a tool for initially setting a product’s industry the overhead, or do nothing (i.e., not price or for calculating the effects of a produce it) and cover none of the price change. It helps the owner/-Monitoring Costs overhead?” manager understand that for certain A multi-product company cannot get If a company has excess capacity, it prices, different levels of production arethe information it requires from the would be better to keep the products required to break even (i.e., covering allconventional profit and loss statement. that are covering only part of the costs. variable and fixed costs).Instead, it needs to track costs for the If capacity is full, selling a product with The break-even point is where totalcompany and for each product. Without low or negative total contribution may revenue equals total cost. Below break-product-specific information, it cannot not be advisable. If resources and sales even, losses are incurred. Above break-tell which products are doing well and are going to the low-contribution even, profits are realized.which need additional marketing product instead of higher contribution “Sunk” costs, such as research andsupport. products, a company is not maximiz- development, should be ignored. Use To gather all the relevant ing profitability. equipment depreciation, rather thaninformation, a company needs to track Salaries can be split according to deducting full equipment costs.two types of costs: hours spent on a product or some other Cost-Volume-Profit Relationships • Variable costs (direct costs of reasonable basis. Rent and utilities can Economies of scale measure the manufacturing): costs specific to be split on the basis of volume impact of changes in volume on fixed the manufacturing of the particular allocation. costs. In many cases, a company’s good or service under scrutiny (i.e., Company advertising and general ability to increase the volume of output labor, raw materials and supplies) and administrative overhead cannot be allows them to decrease the per unit • Fixed costs: ongoing costs that allocated to specific products, so are cost. occur whether a business is shut non-traceable fixed costs. The experience curve effect is where down for a period of time or in full Determining which products should variable costs decline as volume production (i.e., depreciation, receive additional support becomes increases. This can cause better results insurance, taxes, selling and clearer after we calculate the percentage from increasing the volume of products. administration costs, utilities, and variable contribution margin.5 other costs) Table 1: Break-Even Analysis The following table shows an example of a break-even analysis for five different prices of one product. Unit Selling Price $21.95 $23.95 $25.95 $27.95 $29.95 Unit Variable Cost $ 7.95 $ 7.95 $ 7.95 $ 7.95 $ 7.95 Unit Contribution(A) $14.00 $16.00 $18.00 $20.00 $22.00 Estimated Sales 27,500 27,500 25,000 20,000 18,000 Revenue $603,625 $646,650 $648,750 $559,000 $539,100 Fixed Costs(B) $400,000 $400,000 $400,000 $400,000 $400,000 Variable Costs $218,625 $214,650 $198,750 $159,000 $143,100 Profit (loss) ($15,000) $ 32,000 $ 50,000 $0 ($4,000) Break-even (units)(C) $28,571 $ 25,000 $ 22,222 $ 20,000 $ 18,182
  8. 8. Experience curves may be due to:6 retail price working back, rather than processor must build in anticipated • more efficient production from the cost working up. As a rule of costs, which will be invoiced to the processes thumb, retailers’ margins average company at year-end for the rebate, • higher discounts due to greater around 30% with distributors’ margins based on the processor’s total sales to volumes of purchases being as high as 30%, depending on the food service distributors. • workers becoming more efficient what services are being provided. The processor should not jump intoCalculating Mark-Ups The approach is similar when a volume rebate schedule without first dealing with food service distributors calculating the impact of the increased When setting prices, companies such as Associated Food Distributors, volumes in the form of lower per-unitmust take into account their own costs but with allowances made for volume costs. Many processors offer a volumeas well as the various mark-ups rebates. Volume rebate schedules are rebate schedule that reduces profitrequired as a product moves toward the stepped with higher volumes, which ability because the volume rebate isconsumer. In the food business, mark- means a higher percentage volume greater than the cost savings of theups are usually calculated from the rebate is payable by the processor. The increased output.Table 2: Cost-Volume Relationships Product 1 2000 Units 4000 Units Unit Variable Cost $40 $40 Total Variable Cost 80,000 160,000 Break-Even Total Fixed Costs (B) Total Traceable Fixed Costs 240,000 240,000 ═ Total Direct Cost 320,000 400,000 Point (C) Unit Contribution (A) Divided by Volume 2000 4000 Average Unit Cost $160/unit $100/unitIncreases in volume have the greatest impact on products with high PVCM becausemost of the costs are fixed for these products. Other features of the marketing 4. Floor stock protection is a Referencesprogram to consider when setting contentious area whereby the storeprices: asks that any downward adjustment 1. Beckman, M. Dale, David 1. A minimum delivery size is set to in price apply to the whole- L.Kurtz, and Louis E. Boone. capitalize on freight. Minimum saler’s/retailer’s inventory of a Foundations of Marketing. Fifth Order Size for freight prepaid product. Most processors do not Canadian Edition. Dryden Canada. shipments is 2300 pounds or more. offer floor stock protection in the Toronto, On. 1992. p. 480) An industry standard for minimum belief that it is up to the store to 2. Alberta Agriculture. Marketing order size is 30% contribution.. control its inventory. Food In Alberta: An Access 2. New Store opening. In the case of 5.Some businesses charge prices Directory. p. 43. a new store or a change of according to “rules of thumb,” 3. An Industry Guide to Couponing ownership, 15% off invoice for a such as price is twice labor plus Practices. FCPMC and CCGD. period of seven days, with a case materials, or price is materials and January, 1991. p. 5. allotment of 15 cases per checkout. labor plus 20% for fixed costs and 4. “Pricing-Think Value Not Cost”, 3. “Deal prices.” It is important to 25% for profit. These methods for The Best Readings from Business - recognize that “deal” periods are setting prices are not Marketing—Views from the set by retailers in December, so the recommended, as calculating actual Trenches, PWS–Kent Publishing processor has to have the year’s costs is the only sure means of Company: Boston, MA. p. 225. promotion program agreed to by ensuring that prices cover costs. 5. Guiltinan, Joseph and Gordon the store prior to December 31 for Paul. Marketing Management, - the following 12 months. Most Strategies and Programs, Fourth processors have some type of Edition. McGraw–Hill; Toronto, maximum order volume to avoid Ontario. p. 226. the wholesaler/retailer stocking up on the product while “on deal.”
  9. 9. success and failure. Income levelsWhat Needs to be Done The marketing manager should Different customers have different Marketing is the transferring of concentrate on marketing plans that will income levels, tastes and preferencesgoods from producers to consumers. best serve the company and reach the for products. Some may considerMarketing a new product may seem most consumers, because these are the a product essential, others,simple, but actually finding consumers centerpieces of the marketing process. conspicuous consumption.to buy the product and getting it to A good marketing plan should identifythem requires marketing managers to problems or hurdles to overcome and Number of market outletsovercome many hurdles. Some of these collect the kind of information needed The number of market outlets is thehurdles, such as the market structure, to solve them. number of places consumers cancannot be changed but must be purchase the product, whether in oneunderstood; others simply require time Marketing Structure large store, many small ones, roadsideand hard work to overcome. A successful study of the marketing stands or mail order. One of the first issues managers or structure must include a marketing planowners must decide is which area is specific to the product and the marketbest suited to their interests, share goal. A market cost feasibility Participants in theexperiences and expertise. analysis should be formulated. This information should be used to Marketing ProcessProduction determine production practices, Many firms are involved in the Production is developing new changes in the products, if needed, and marketing process. This section focusesproducts or modifying existing ones, where products should be sold for the on who is involved. There are a varietyorganizing production schedules, and greatest return. of middlemen and organizations whokeeping equipment operational. It An assessment of the current specialize in performing variousincludes buying decisions about business environment also is required. marketing functions. There are noequipment, whether to buy new or used, Although the business environment limits as to how they are organized.and what equipment is actually needed of a particular area may be beyond the There are several types of middlemen:to produce the products. control of local managers, it needs to be Wholesalers understood, because it often influences Wholesalers sell to retailers, otherMarketing the type of marketing organization wholesalers and industrial users, but do Marketing involves collecting required for success. not sell in significant amounts toinformation, analyzing alternative An understanding of customer ultimate consumers. There are twomarket outlets, developing different requirements, including the following, main kinds of wholesalers.product forms, pricing products to is needed.compete in the marketplace, deciding Agent wholesalersthe scope of the proposed market area Market territory Agent wholesalers can act asand meeting consumers’ needs at the The physical locations where the representatives of their clients. Theyright prices. product is going to be sold must be also can provide access to market decided. It must be determined territories that would be available onlyProcurement whether it is local, national or if the producer expended additional Procurement is contracting with somewhere between. time and cost. This activity requires asellers of inputs, maintaining an great deal of specialization, and theyadequate supply for production and Population concentrations charge fees for these services. For thisscheduling deliveries to the local plant. There have to be enough people fee, however, they can help locate within a market who will buy theLabor management alternative buyers, locations, prices, product on a timely basis. It is easier to Labor managers hire and supervise products, and various retail market sell a given level of productionemployees to obtain optimum outlets. In addition, some may throughout the year in urban areasproduction and maintain good specialize in a certain kind of product, where there are many different types ofworking relationships. in different market locations, or in a consumers. In rural areas, a greater It is difficult for one person to large number of different products. percentage of people will have to buysatisfactorily do everything, such as the product in order to sell the same Merchant wholesalersmaking decisions concerning Merchant wholesalers buy and sell amount. A major factor in sellingproduction, marketing, procurement for their own gain based on their products is how many times a year theand labor management. Without knowledge of the market situation. For product will be purchased: once a day,concerted effort and attention to all example, they buy directly from week, month, or year. The fewer timesdetails, the chances of success are processors and sell products to retailers, a product is purchased by a specificlowered. A management decision to other wholesalers, and industrial users. consumer per year, the more buyersorganize production and separate They usually specialize in similar types needed.marketing activities for each new of products in which they have storageproduct is often the difference between
  10. 10. and transportation investments. producers need to understand the of thousands of products, from luxury pitfalls of producing too few or too items to basic necessities. They haveBrokers many products. many different traditions and tastes, Brokers act only as representatives ranging from ethnic to genericfor their clients. Brokers’ incomes are Surplus products. Consumers affect productionfrom fees and commissions and are Too many products at a given price decisions every day.payments for their knowledge of market in a certain market location are called Consumers are the final buyers andoutlets and contacts. Brokers do not surplus and will lower income users of products. The intent of anyassume physical control of the potential. Consumers may consider business is to make and sell a product.products. They follow directions of buying the surplus at a lower “sale” The manager must do the following.each principal and have less discre- price. This is a signal to producers to • Make it in the form thattionary power in price negotiation. send fewer products to that location. consumers want.Commission people Shortage • Make it when consumers want it. Commission people usually control There is a shortage when consumers • Sell it in places where consumersthe physical handling of the product, want to purchase more products than want it.moving it from one location to another. are available at specific locations. • Sell it at prices consumers areThey arrange for the terms of sale and When this happens, consumers who willing to pay.collect money from the buyer for the want the products are usually willing to Managers have to get marketsale of the products. They deduct pay higher prices to get them. This will information in order to make thepredetermined fees and send the result in local retail managers offering following day-to-day decisions.balance to the processor. higher prices to wholesalers to get • What quantity of a product are additional volume. When these consumers willing to purchase?Speculative middlemen additional prices are offered to pro- • Who is making those products, Speculative middlemen take title to cessors, it is a signal to move more and who is competing forthe products. They buy products based products to that location. This infor- those consumers?on their knowledge of the possibility of mation is valuable. Information from all • What prices are consumers willingselling at a higher price. Their goal is to locations should be combined to decide to pay?make a profit from price differences in whether or not to expand production. • What is the speed with whichvarious locations. products and information travel Organizing to Sell through the channels ofRetailers distribution? Retailers buy from many processors New Products • How long does it take for a priceand wholesalers to develop a product When selling new products, increase to reach the producer?mix that will attract consumers to their managers are faced with problem areas • Based on this information,stores. They rely on consistent quality that are unique for each product. should production be increasedand availability of products. They buy Products have to be delivered to or decreased?and sell for their own gain. locations where consumers will be able Managers need to decide what kind to buy them. For some products this is Food Ingredients—of a market territory they want to serve complicated, but for others theand how they can use any or all of the marketing process is fairly straight- Availability andparticipants in the marketing process. forward. In any case, managers should SeasonalityTheir selection will depend on different gather the kind of information needed Ingredients are one of the morepopulation concentrations, income to fully understand and be able to important factors in maintaining alevels, number of competitive products choose the most profitable alternative. consistent quality, especially in foodand number of market outlets. All these To start this process, managers must products. The producer must knowshould be used to develop the type of have enough information in all of the where to locate ingredients at differentmarket organization that will best serve following problem areas. times of the year, especially if they areconsumers and sell the product. seasonal. Proper storage and handlingIf these data are too difficult to Consumers— should be considered, as well aspersonally collect, they can be Convincing Them to Buy transportation and packaging. Costs ofpurchased from various marketing ingredients that change frequently can Identify consumers create problems when estimatingconsultants and middlemen. Who will most likely buy the production costs. This may requirePitfalls to Avoid When product, how often will they buy it, contracting for future delivery what price they are willing to pay, and (discussed later). Seasonality of someDevising a Marketing Plan where will they be buying it? Care must be taken when devising produce will require purchases in Consumers have specific wants and different locations during the year. Pro-a marketing plan. The buying public, needs. Their incomes vary from high tounfortunately, is very choosy, and ducts that require special handling, such middle or low. They are given choices as fresh meat or vegetables, present a
  11. 11. different set of problems and cost neighborhood stores, have a unique required to convince consumers to buyfactors. Also, shelf life of ingredients clientele. Again, the products must their products.needs to be considered. match the clientele and image of the A good way to begin test marketing One very important thing should be specialty store. is to take samples to store managers andnoted: The only way to maintain convince them the products will sellconsistent-quality products is to buy Roadside stands and make them money. Samples shouldconsistent-quality ingredients. This A roadside stand may be an be ready for consumers to test. Sellingcannot be emphasized enough. People alternative for fresh products or other them at reduced prices or giving themmight be willing to buy the product seasonal products, such as jams, jellies away is a good way to entice consumersonce, and if it is of good quality, they or pickles. These are open for part of to try new products. It is important towill continue to buy it. However, if the year at a time when consumers are seek immediate feedback about whatthey notice a difference in quality each willing to drive to a specific stand to consumers think of the products andtime they purchase it, they will cease to buy them. any suggestions they may have forbuy the product, and it will be almost Mail-order sales improvement.impossible to get them to buy the When using mail-order outlets, sales When doing test marketing, it isproduct again. volume can be controlled by the important to determine how the number and type of catalogs sent. When products are competing with other using mail-order catalogs, it is im- brands. Count the number of competingAlternative Retail Outlets portant to know the number distributed brands in the stores. Buy some and There are many ways to distribute compare them. and the characteristics of the readers. If,products once they have been produced. Do not forget that location within for example, 400,000 people receive theThese marketing channels need to be any store is very important. Certain catalog, and 1 percent of them order theset up before production, not after. locations have “higher traffic” than product, that means there will be 4,000These include large chain stores, mail- others. This means more consumers orders. If 5 percent of them order theorder sales, neighborhood stores, will see products in those areas and will product, there will be 20,000 orders.roadside stands, and door-to-door sales. be more likely to buy. The highest Producers need to understand and beAlternative retail outlets can help exposure for new products in stores is prepared for the potential volume ofproducers reach a specific consumer at the ends of the aisles or at the mail orders. Conversely, there could begroup with income levels suitable to the checkout counter. There is a preferred very few sales, and there could beproduct, ethnic preferences that match height on store shelves where people products left over.the products, and lifestyles that are can see your product without lookingserved by the products. Different retail Government contracts up or down.outlets that will be able to sell products Government contracts cover suchshould be considered. outlets as prisons, military bases and Advertising government cafeterias. Contracts with Advertising is controlledLarge chain stores communication about a product. various government purchasing These stores can provide an Through symbols and language, it tells agencies can provide salesopportunity for a larger number of what a product or service can do for the opportunities as long as governmentconsumers than a local store. They offer consumer. specifications are met.thousands of choices of different Advertising, when properly When formulating distribution plans,products from which consumers must understood, is a powerful tool for be sure to inquire about terms of sales.decide to spend their money. Large management. It can be most effective Some large discount chains andchain stores usually require large with products that can be differentiated government procurers do not pay withinquantities of a product delivered at from similar products based on 30 days. In fact, sometimes payment isspecific times to specific places at consumer-accepted quality differences. not received for at least 60 days.predetermined prices. Getting shelf Consumer information is gathered by Marketers must take this intospace can require substantial fees. giving small samples to consumers in consideration when planning cash flowNeighborhood stores statements and making marketing plans. stores or retail businesses. This These stores often work with local information can give a direct consumerproducers if the managers feel the Test Marketing response to a new product for thatproducts will be accepted by their Regardless of the outlet chosen, test location.clientele. Each store has developed a marketing a product in potential sales Regardless of the quality of aclientele unique to that store, and new areas is essential. This is especially true product’s advertising, it is important toproducts have to be a part of that image. if the product is new or different from remember a product has to compete on what is already on the market. its own. Brand preference cannot beSpecialty stores Producers must work with retail established if the product fails to meet Specialty stores are often single-line managers to decide how much consumer expectations. A wellstores or discount houses that, like advertising and promotion will be developed overall advertising program
  12. 12. can tell consumers what a product or The marketing manager for a Packagingservice can do for them compared to product must find a price that satisfies The purpose of a package is tosimilar products on the market. If both consumers and producers. protect the product from spoiling andconsumers are convinced, they will buy Consumers are always willing to pay keep it clean until it is opened by thethe products. lower prices for any product. Producers consumer. Many producers overlook “Business is built best which are always willing to offer products for the importance of product packaging,attracts the kind of customer and only sale at higher prices. A market price for but this is the first thing consumers see.the kind of customer it can best serve. long-term production is established When the package is appealing, con-Every business is qualified by its when the price of any product is equal sumers are more likely to buy it. Asmanagement’s beliefs to serve a to or above the average total cost of long as the anticipated quality is there,particular segment of the total market, production and at a price consumers consumers will be satisfied. They willand by reflecting its essential character, will pay. buy the product in the package theyits advertising can most effectively like and will not buy it in one they doreach this segment and keep it a long Frequency of not like – even though the product istime.” (Maynard) Consumer Purchases the same. Frequency of consumer purchases is The consumer decides the size ofPricing Competitively very important. Repeat purchases are package most suited to each product. One question to ask is whether the the keys to a successful outlet selection. The size and type of package willproduct is priced similarly to other Not all products are purchased at the depend on knowing what the consumercompeting brands but above costs of same frequency, and marketing man- will accept for each type of product.production. For more information on agers need to understand how often Consumers are more likely to buythis, see K-State Research and consumers will be purchasing their smaller food packages of items that areExtension bulletin Economic Analysis products when determining production used occasionally. They will buy largeof a New Business—Doing it Right, rate, transportation, storage, etc. The packages of items used frequently andMF-2184. most common purchasing patterns are in a relatively short time, if the product Once consumers have been as follow. remains safe to use during this period.identified, a retail outlet has been Most plant and animal products mustlocated and test marketing completed, Daily be packaged appropriately to beproducers need to determine at what Some products – such as milk, preserved: pickled, canned, smoked,price a product will sell and still be bread, and doughnuts – might be cooked, dried, or frozen. The type ofprofitable. Price is the only means for purchased daily, meaning the producer processing will determine the length ofgenerating income and profit for the will have to deliver the product time the product can be safely usedproducer. frequently. These products are usually from the time processed. There is no one method of setting quite perishable.prices. It is imperative to keep in mind Storage andthat costs of production do not Weeklydetermine the price of the product. These are generally products with a Transportation ofConsumers are only interested in the 3- to 6-week shelf life. For these Food Productslowest price they can get, and they do products, careful control of production Products must be stored from thenot care what it costs to produce the inventory will be necessary. A producer time they are processed until they areproduct. must have the ability and capacity to transported and sold to consumers. If the consumer’s desire for the store products between deliveries. Various products require different typesproduct is great, set the price high Monthly of storage and transportation facilities.enough to ration the available supply These require a larger consumer Storage and transportation arefor sale. As production increases, prices territory if the consumer only buys one critical to the marketing process.may have to be lowered to sell item per month compared to one per Obviously, different products requireadditional products. However, do not week. Delivery will be less often, and different types of storage andlower prices below the cost of storage will have to be increased, either transportation facilities. For example,production. Always know your cost of on the shelf or in the back room. frozen products should not be allowedproduction, and never price your to thaw during storage andproduct below that if the goal is to Seasonal transportation. Keeping the productremain in business. These are products that generally are frozen requires additional expense. Part If the consumer’s desire for the associated with a specific growing of the storage and transportation costproduct is not great, and if the product season or holiday. These types of includes spoilage and breakage.is in a competitive market, sales will products usually are sold only during Fresh products have to move todepend on the success of convincing one time period each year. consumers quickly. Dried products canconsumers to buy products for prices remain in storage and be movedabove total costs. through marketing channels at a slower

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