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Written by Steven Silbiger. Famous book for MBA's

Source : Suraj Rana.

Published in: Business, Education


  1. 1. ContentsIntroductionDay 1MarketingDay 2EthicsDay 3AccountingDay 4OrganizationalBehaviorDay 5Quantitative AnalysisDay 6FinanceDay 7OperationsDay 8EconomicsDay 9StrategyDay 10MBA Mini-CoursesResearchPublic SpeakingNegotiatingInternational BusinessBusiness LawTen-Day MBA DiplomaAppendix: QuantitativeAnalysis TablesBibliographyMBAAbbreviation LexiconIndexAcknowledgmentsAbout the AuthorPraisefor the Ten-Day MBACopyrightAbout thePublisher
  2. 2. IntroductionAfter I earned my MBA, I had a chance toreflect on the two most exhausting andfulfilling years of my life. As I reviewed mycourse notes, I realized that the basics ofan MBA education were quite simple andcould easily be understood by a wideraudience. Thousands of Ten-Day MBAreaders have proven it! Readers areapplying their MBA knowledge every day totheir own business situations. Not onlyuseful in the United States, The Ten-DayMBA has been translated into manylanguages around the world. So manypeople are curious about businesseducation, including doctors, lawyers,businesspeople, and aspiring MBAs. Thisbook answers their questions. The Ten-DayMBA really delivers useful information
  3. 3. quickly and easily. Current MBA studentshave written me that they even use thebook to review for exams. Ten-Day MBAsare “walking the walk and talking the talk”of MBAs every business day. It’s proventhat this book can work for you. Written forthe impatient student, The Ten-Day MBAallows readers to really grasp thefundamentals of an MBA without losing twoyears’ wages and incurring an $80,000debt for tuition and expenses.Prospective MBAs can use this book to seeif a two-year investment is worth their while;those about to enter business school canget a big head start on the competition; andthose of you who cannot find the time orthe money can get at least $20,000 of MBAeducation at 99 percent off the list price.Unfortunately, this book cannot provide you
  4. 4. with the friendships and lifelong businesscontacts that you can develop at an eliteschool. However, it can impart many of theskills that make MBAs successful.The Ten-Day MBA summarizes theessentials of a Top Ten MBA education.The mystique and the livelihood of the TopTen business schools are predicated onmaking their curriculum appear as uniqueand complex as possible. Companies paythousands of dollars to send theirexecutives to drink from these hallowedfountains of knowledge for a few days. Ispent two years of my life not only drinkingfrom the fountain but also bathing andwashing my clothes in it.Which schools are included in the Top Tenis a subject of considerable debate, asdisplayed by the recent rankings shown at
  5. 5. the end of this introduction. The Top Tenactually refers to a group of fifteennationally recognized schools that playmusical chairs for Top Ten ranking. Theydistinguish themselves by long applicationforms, active alumni networks, long lists ofrecruiters, and the ability of their graduatesto demand and receive outrageous startingsalaries. The Top Ten schools require ofcandidates at least two years’ workexperience before admission. Experiencedstudents can enrich class discussions andstudy groups. A great deal of my learningcame from my classmates’ workexperiences.The Top Ten schools do not necessarilyoffer the best teaching, facilities, orcurriculum. Reputation plays a great part intheir status. A variety of rating books are
  6. 6. available that give the “inside” story onthose reputations. According to the 1998Business Week poll, “racking up thehighest satisfaction scores from graduatesare, in descending order, UCLA,Pennsylvania, Michigan, Cornell andCarnegie Mellon.” The recruiters’ rankings,on the other hand, are Pennsylvania,Northwestern, Chicago, Columbia, andMichigan.My aim is to cut to the heart of the top MBAprograms’ subject matter clearly andconcisely—the way only an MBA can, andthe way academics would not dare. Tocover the major concepts, I use examplesand outlines and summarize whereverpossible. I slice through the long-windedand self-serving academic readings that attimes I had to trudge through. This book
  7. 7. contains only the pearls of wisdom buriedin my thirty-two binders of cases, coursematerials, and notes.I have no vested interest in promoting anyof the business theories presented in thebook. Therefore, this book does not repeatthe same idea over the course of twohundred pages as many popular businessbooks have a tendency to do. I crystallizethe most important concepts in briefpassages so you can learn and rememberthem without losing interest.From my interviews with graduates fromWharton, Harvard, Northwestern, and othertop schools, I learned that all of theirprograms serve up the same MBA meal.Only the spices and presentations of thebusiness banquets vary.
  8. 8. The basics of MBA knowledge fall into ninedisciplines. Some schools have carefullycrafted their own exalted names for eachsubject, but their unglorified names are:MarketingEthicsAccountingOrganizational BehaviorQuantitative AnalysisFinanceOperationsEconomicsStrategyThe synthesis of knowledge from all ofthese disciplines is what makes the MBA
  9. 9. valuable. In the case of a new productmanager with an MBA, she can not onlysee her business challenges from amarketing perspective, but she canrecognize and deal with the financial andmanufacturing demands created by hernew product. This coordinated,multidisciplinary approach is usuallymissing in undergraduate businesscurricula. By learning about all the MBAdisciplines at once, in one book, you havethe opportunity to synthesize MBAknowledge the way you would at the bestschools.When MBAs congregate, we tend toengage in “MBA babble.” Our use ofmystical abbreviations like NPV, SPC, andMBO is only a ruse to justify our loftysalaries and quick promotions. Please do
  10. 10. not be intimidated. MBA jargon is easy tolearn! As you read this book, you too willbegin to think and talk like an MBA.My goal is to make you familiar with thesignificant MBA tools and theories currentlybeing taught at the leading businessschools and to help you understand anddevelop the MBA mind-set. When youfinish the ten days, please feel free to fill inyour name on the diploma at the end of thebook. It serves as evidence of yourscholarship and you should proudly displayit for all your friends to see.Current MBA School RankingsBelow are the most current rankings ofMBA programs. Although the rankingschange from year to year, the sameschools are consistently listed. Schoolnames listed in parentheses immortalize
  11. 11. founders and major benefactors. Two-Year MBA Degree ProgramsU.S. News & World Report, March 1998:1. Harvard1. Stanford3. Columbia3. MIT (Sloan)3. Pennsylvania (Wharton)6. Chicago6. Northwestern (Kellogg)8. Dartmouth (Tuck)8. UCLA (Anderson)10. Virginia (Darden)10. Berkeley (Haas)
  12. 12. 10. Michigan10. Duke (Fuqua)(Several ties in rankings)Business Week, October 1998:1. Pennsylvania (Wharton)2. Northwestern (Kellogg)3. Chicago4. Michigan5. Harvard6. Columbia7. Duke (Fuqua)8. Cornell9. Stanford10. Dartmouth (Tuck)11. Virginia (Darden)
  13. 13. 12. UCLA (Anderson)13. NYU (Stern)14. Carnegie Mellon15. MIT (Sloan)The Insider’s Guide to the Top TenBusiness Schools:ChicagoColumbiaDartmouth (Tuck)HarvardMIT (Sloan)MichiganNorthwestern (Kellogg)Pennsylvania (Wharton)Stanford
  14. 14. Virginia (Darden)This book by Tom Fischgrund (1993)provides excellent in-depth profiles of eachschool, written by graduates. Within theTop Ten, the schools are not ranked. Nondegree Executive MBA EducationBusiness Week, October 1997:1. Harvard2. Michigan3. Northwestern (Kellogg)4. Pennsylvania (Wharton)5. Stanford6. Virginia (Darden)
  15. 15. 7. Columbia8. INSEAD (French school)9. Duke (Fuqua)10. MIT (Sloan)11. Chicago12. IMD (Swiss school)13. North Carolina (Kenan-Flagler)14. Dartmouth (Tuck)15. Indiana Day 1 Marketing Marketing TopicsThe 7 Steps of Marketing StrategyDevelopment
  16. 16. The Buying ProcessSegmentationProduct Life CyclePerceptual MappingMarginsThe Marketing Mix and the 4 P’sPositioningDistribution ChannelsAdvertisingPromotionsPricingMarketing EconomicsA scene from the boardroom of AcmeCorporation:
  17. 17. DIRECTOR: Every time we do our annualreview of our executives’ salaries, I cringewhen I think that we are paying more to JimMooney, our vice-president of marketingfrom Ohio State, than to our company’spresident, Hank Bufford from Harvard. I justdon’t understand it.CHAIRMAN OF THE BOARD: What don’tyou understand? Without Jim’s sales wewouldn’t need a president—or anyone elsefor that matter!
  18. 18. Marketers see the world like the chairmanof Acme. As renowned Professor PhilipKotler of the Kellogg School atNorthwestern teaches, marketing comesfirst. Marketing integrates all the functionsof a business and speaks directly to thecustomer through advertising, salespeople,and other marketing activities.Marketing is a special blend of art andscience. There is a great deal to be learnedin marketing classes, but no amount ofschooling can teach you the experience,the intuition, and the creativity to be a trulygifted marketer. That’s why those with thegift are so highly paid. Formal educationcan only provide MBAs with a frameworkand a vocabulary to tackle marketingchallenges. And that is the goal of thischapter and of the numerous expensive
  19. 19. executive seminars conducted by theleading business schools.The top schools prepare their students forexecutive marketing positions—in spite ofthe fact that their first jobs will likely be aslowly brand assistants at large food or soapcompanies. Therefore, the core curriculumstresses the development of full-fledgedmarketing strategies instead of thetechnical expertise needed on an entry-level job out of MBA school.Numbers-oriented students tend to viewmarketing as one of the “soft” MBAdisciplines. In fact, marketers use manyquantitative or “scientific” techniques todevelop and evaluate strategies. The “art”of marketing is trying to create andimplement a winning marketing plan. Thereare literally an infinite number of
  20. 20. possibilities that may work. McDonald’s,Burger King, Wendy’s, Hardee’s, and WhiteCastle successfully sell burgers, but they alldo it in different ways. Because there areno “right” answers, marketing classes canprovide students with either an opportunityto show their individual flair, or many hoursof frustration as they try to come up withcreative ideas. Marketing was my favoritesubject. It was fun cooking up ideas fordiscussion. My B-school buddies still kidme about the time I proposed to the classthat Frank Perdue introduce a gourmetchicken hot dog. The Marketing Strategy ProcessThe marketing process is a circularfunction. Marketing plans undergo manychanges until all the parts are internally
  21. 21. consistent and mutually supportive of theobjectives. All aspects of a proposal needto work together to make sense. It is veryeasy to get one part right, but an internallyconsistent and mutually supportivemarketing plan is a great accomplishment.It’s a seven-part process.1.Consumer Analysis2.Market Analysis3.Review of the Competition and Self4.Review of the Distribution Channels5.Development of a “Preliminary” Marketing Mix6.Evaluation of the Economics7.Revision and Extension of Steps 1-6 until a consistent plan emergesAlthough there are seven steps, their orderis not set in stone. Based on circumstancesand your personal style, the order of the
  22. 22. steps may be rearranged. This chaptercould get bogged down in a morass ofmarketing theory, but to make it practical, Iwill outline the questions and areas thatshould be considered when developing amarketing plan. For expediency, I willconcentrate on product marketing, but thesame frameworks and vocabulary are alsoapplicable to service marketing.I will present the MBA models in the sameseven-step order in which they are taughtat the best schools. This chapter offers ageneric structure to apply to whatevermarketing issue you may encounter. I havenot neglected to use the vocabulary taughtat the schools, so you can pick up on theMBA jargon and speak like a real MBAmarketer. Marketing is an area especiallyrich in specialized vocabulary. With the
  23. 23. correct vocabulary, even your mediocremarketing ideas can appear as brilliantones. That may sound funny, but that’s theway ad agencies market their product,advertising.1. Consumer AnalysisConsumer Analysis Market CompetitionDistribution Marketing Mix EconomicsReviseAll marketing plans should begin with alook at the all-important “consumer” and hisor her needs. People do not have the sameneeds or desires. The objective ofconsumer analysis is to identify segmentsor groups within a population with similarneeds so that marketing efforts can bedirectly targeted to them. Starting anywhereelse tends to restrict your thinking and allsubsequent analysis. Several important
  24. 24. questions must be asked to find the marketthat will unlock untold marketing riches:What is the need category?Who is buying and who is using theproduct?What is the buying process?Is what I’m selling a high- or low-involvement product?How can I segment the market?What is the need category? Who needs usand why?What is the need or use that your productaddresses? The question may seemunnecessary, but in answering it you mayuncover a potential market for the productthat was previously overlooked. That is whythis question has to be addressed first,
  25. 25. before you begin to pollute your mind withconventional thoughts. The people at Arm& Hammer baking soda have done a greatdeal of this type of analysis. They havemade use of their powder in their ownbrand of toothpaste, air freshener, andcarpet freshener. In addition, they profitablyrecommend their raw baking soda powderfor hundreds of uses.Marketing Strategy Development
  26. 26. Who is buying vs. who is using theproduct?Buyers many times are different fromusers. Women, for example, make themajority of purchases of men’s underwearand socks. If an advertising campaignwanted to target the buyer of men’s socks,
  27. 27. it probably would be inappropriate to buyspace in Sports Illustrated. Determining thebuyer as well as the user provides theessential initial insights to create amarketing plan.What is the buying process?Once you have established the need, andwho is making the purchases, you shouldtry to form a hypothesis on how the productis bought. Marketing research is a primesource of information, but just as valid areyour own observations, investigation, andintuition.Understanding the buying process is criticalbecause it will lead to the possible routes toreach buyers. The buying process includesall the steps that a person takes leading toa purchase. It is also called the adoptionprocess and the problem-solving process
  28. 28. by some academics. Some researchers callit a Learn/Feel/Do process. Others call itAIDA for Attention/Interest/Desire/Action. Ihave read extensively on this topic andhave boiled the theories down to five steps.For any particular product, the buyingprocess can include one or all of thefollowing steps:Awareness Information Search EvaluateAlternatives Purchase EvaluateIn the instance of a soap purchase, theprocess would look like this:Smell Body What Should I Use? Soap?Ask Wife for Advice Make Trip to the StoreRead Labels Buy Dial Soap Bathe SmellBody for Odor Buy Dial Soap Next TimeThe steps of the buying process explained:
  29. 29. Awareness (Interest, Problem Recognition).“I might need something.” At some point aperson will realize a need, like the need touse soap. Advertising may trigger thatneed. Prestige products such as designerclothes and fragrances trigger desire. Theymeet emotional needs such as love andgroup acceptance. Head & Shoulders preyson the fear of a loss of love and groupacceptance. You need to ask yourself,“How do consumers become aware of myproduct?” “Where are my targets likely tobe exposed to my message?”Information Search. “Sounds good, let mefind out more about it.” People involved inpurchase decisions are confronted withinformation from a variety of sources:Consumer Reports, salespeople, specialtymagazines, family, friends, and local
  30. 30. experts. As a marketing manager, you wantyour target market to get as muchfavorable information as possible aboutyour product when and where buyers maketheir buying decisions. For example, storedisplays play that role at the point ofpurchase (POP). Cover Girl Cosmetics hasa display in drug stores to help buyersselect colors. For the same purpose, EstéeLauder has its Clinique ladies indepartment stores to do its talking.Evaluate the Alternatives. Which one isbest for me? This includes not onlyproducts within a category, but substitutesas well. When confronted with the highprices of automobiles, a college studentmay end up buying a motorcycle, a moped,or a bicycle. Depending on the importanceof the product, consumers may seek
  31. 31. additional information and advice. Carpurchases often include a trip to the localmechanic or the neighborhood car buff.Placing positive information where yourbuyers are likely to look is one key tomarketing success.At this stage of the buying process themarketing manager would like to identifythe influencers of his target’s buyingbehavior. In the golf industry the club pro isa key influencer in the equipment-buyingdecision of golfers. If you can sell the pro,you can sell to the club’s members.Distribution is also crucial at the evaluationstage of the buying process. If a product isnot readily available, a comparablesubstitute may be chosen just forconvenience or immediacy of need. Coca-Cola and Pepsi’s wide distribution make it
  32. 32. tough for any new cola competitor to everbe any more than a fringe brand. Even ifyou crave Dr. Brown’s Creme Soda, youprobably will accept a Coke or a Pepsiwhen you’re thirsty at the beach.The Purchase Decision. This is the bigsale. Even though the decision to buy couldbe “yes,” in certain instances the firstpurchase is only a trial. Adoption of “newand improved” Bounty paper towels as yourregular brand occurs only after a successfultest with those tough spills. With many big-ticket items, such as ocean cruises andappliances, a trial is not possible. In thoseinstances the decision process is moretime-consuming and difficult to makebecause there is more risk involved. It isvery important for the marketer tounderstand risk. Through the use of a
  33. 33. number of marketing tools, such asadvertising, knowledgeable salespeople,warranties, and printed materials, purchaserisk can be reduced by offering the buyerinformation explaining what level of performance he or she can expect, as well asproviding a basis of comparison withcompeting products.Evaluate (Postpurchase Behavior). Did Imake a mistake? This conclusion can bereached either on a physical level bytesting the product’s efficacy or on apsychological level by checking for peerapproval. Buyer’s remorse andpostpurchase dissonance are terms todescribe the period of confusion that oftenfollows a purchase. Automobile advertising,for example, is not only targeted atpotential buyers, but also at recent buyers
  34. 34. to reassure them that they didn’t screw upwhen they bought a Dodge Caravanminivan instead of a Honda Odyssey.In trying to understand the buying process,the first sparks of a marketing plan can beignited into a tentative idea aboutadvertising or promotion (to be consideredlater in Step 5 of the strategy developmentprocess).Research Can Help to Understand theBuying Process. Consumer research is amajor tool in helping make the buyingprocess theory useful. Research can showa marketing director where he hassucceeded and where his efforts need tobe redirected. For example, if the marketingdirector of The National, a sportsnewspaper that failed in 1991, had
  35. 35. conducted a survey that would have shownhim that 50 percent of men were aware ofthe paper, but that only 1 percent had readit, that could have been useful. That findingcould have led the director to increase hisefforts to gain wider newsstand distributionand to give more trial subscriptions.Research is valuable because it can betranslated into tangible marketing actions.Before you embark on research, you mustask yourself:“What specific question do I needanswered?”“How am I going to use the informationonce I have it?”If you haven’t thought through these twosimple questions, you will probably wasteyour time and money. I can assure you thatmany marketing research companies will
  36. 36. be glad to help you waste money.Is the product a high- or a low-involvementproduct?As the discussion of buyer behaviorindicates, different products elicit differentpurchase behaviors because of theirinherent importance to the buyer and user.If the consumer feels a high level of “risk” inbuying a product, then it is considered ahigh-involvement product. There areseveral reasons for high-involvementpurchase decisions:High priceThe need for the product’s benefit (e.g.,reliability, as in the case of a pacemaker)The need for the product’s psychologicalreward (e.g., status, love)
  37. 37. Stereos, clothing, cars, and professionalservices are examples of high-involvementpurchases. They are usually higher pricedand at times difficult to compare.Determining the differences betweenalternatives makes high-involvementpurchases difficult, especially if the buyer isnot an expert. Thus, the information searchcan be quite extensive. When litigating adamage claim, for example, usually there isno second chance to take the case to trial.Therefore, the choice of a lawyer is a high-involvement selection. With low-involvement products the decision issimpler. For example, if a candy bar isn’ttasty, you can always pitch it and buyanother one.
  38. 38. A helpful matrix on page 10 captures thepossible behaviors resulting from theinteraction of the levels of involvement andproduct differences. By understanding thepossible behaviors, you, as a marketer,may be able to take advantage of thisknowledge to sell your product.This academic model does have real-worldimplications for action. A high-involvementproduct, such as a Harley-Davidsonmotorcycle, would appear in the upper left-hand corner of the matrix. The model wouldsuggest that Harley’s marketing effortsshould be geared toward demonstrating itstechnical superiority, but also include anemotional appeal—“buy an Americanclassic”—to engender loyalty.The marketer’s magic is at work when he orshe transforms a previously low-
  39. 39. involvement product into a high-involvement one. Athletic shoes are aprime example. Once just functional shoesfor gym class, sports shoes have become astatus symbol for young people and eventhe cause of murder on inner-city streets.The conversion of a low-involvementproduct to a high-involvement product canmake a simple commodity product standout against an undifferentiated field ofcompetitors. There are four generic ways inwhich this can be accomplished.CONSUMER BEHAVIOR MATRIX
  40. 40. Adapted from Henry Assael, ConsumerBehavior and Marketing Action, 4th ed.(Boston: PWS-Kent Publishing Co., 1992),p. 100.Link Product to a High-Involvement Issue .Linking Procter & Gamble’s Puritan no-cholesterol cooking oil to a wife’s fear of ahusband’s heart attack is a classic exampleof an advertising ploy.Use Involving Advertising. If the advertisingcreates a value-expressive message about
  41. 41. the product or service, then a product canbecome important. Such messages linkvalues, such as social status and love,instead of promoting physical productattributes to differentiate the product fromthe competition. Pepsi tries to link beingmodern and youthful with its products byusing singers in elaborate commercials tosell its soda.Change the Importance of Product Benefits. Products as well as services provide avariety of benefits. If through marketingaction a benefit can be raised to aheightened level of importance, buyers arelikely to become more involved. The beerwars of the 1980s made calories animportant competitive issue. An overlookedattribute—calories—made health-consciousdrinkers more aware of their purchasing
  42. 42. decisions, and consequently Miller Litemade out like a bandit.Introduce Important Characteristic toProduct. A marketer can also tinker withsome of the elements of the product itselfto distinguish it. When childproof caps wereintroduced on household cleaners, theinvolvement of parents in this purchasedecision was heightened. The first productswith protection caps stood out on the storeshelves. But once all competitors copiedthe cap, new avenues of differentiationwere needed and the purchase returned toits low-involvement status.Truly low-involvement products often arethat way because a minimum level ofacceptable performance is required. Athumbtack, for example, does not have a
  43. 43. very difficult job to perform. No matter whatthe brand, you can’t go too wrong. If thecost of trial is low, such as for a pack ofgum, involvement is difficult to stimulate.Related to involvement is the level ofpurchase planning. Is the purchaseplanned or an impulse buy? High-involvement products are usually plannedwhile impulse products are bought on thespur of the moment. If a purchase isplanned, then a buyer is likely to seekinformation. If not, the proximity of theproduct to the need is very important.Snack foods are an example of impulsebuying. Midday hunger leads to the nearestjunk food.Do I intend to segment the market? Why?How?
  44. 44. I skirted around this issue in the buyerbehavior section, but the question “Who isour consumer?” is central to the marketingtask. If you think you have something thatis for everyone, then a mass marketstrategy is appropriate. If your productsatisfies the masses, then feed it to them. Ifnot, you must choose a segment orsegments of the market to target.Segments are homogeneous groups ofsimilar consumers with similar needs anddesires. For instance, Coca-Cola uses amass-market approach to get everyonedrinking the “real thing.” Orangina, aspecialty soda, appeals to a more narrowlydefined market segment. It’s priced higherand its bottle is shaped differently.Orangina appeals to a special segment ofthe soft drink market.
  45. 45. Segmentation of the market serves thefollowing functions:To identify segments large enough to serveprofitably.To identify segments that can be efficientlyreached by marketing efforts.To help develop marketing programs.By having a definite segment in mind, youcan effectively aim and efficiently executeyour marketing activities to yield the mostsales and profits. Without a target, you riskwasting marketing dollars on disinterestedpeople. There are four major segmentationvariables used in segmenting consumermarkets:
  46. 46. - Geographic- Demographic- Psychographic- BehavioralGeographic Segmentation. Divides themarket by country, state, region, county,and city. The federal census lists 310Standard Metropolitan Statistical Areas(SMSAs) to define the major geographicpopulation centers of the United States.Arbitron, a large media research firm, hasdefined a similar measure to capture the210 major television markets of the country,called Areas of Dominant Influence (ADIs).A. C. Nielsen, a competitor, has a similarmeasure called Designated Market Areas(DMAs).
  47. 47. Demographic Segmentation. Divides apopulation based on the followingmeasurable variables to reach ahomogeneous group of people:Age—Different generations’ different wantsand needsSex—Gender use and buying patternsIncome—The ability to purchaseMartial Status—Family needsFamily Life Cycle—Starting out, emptynesters, etc.Education/Occupation—An indication of thesophistication of the consumerEthnicity, Religion, and Race—Particulartastes and preferences
  48. 48. Psychographic Segmentation. Divides themarket by psychological differences:Life-style—Activities, interests, andopinionsPersonality—Conservative, risk-taking,status-seeking, compulsive, ambitious,authoritarian, gregarious. (People mayhave different hot buttons that advertisingcan try to trigger.)Psychographic segmentation is difficult.Personality variables are tougher to identifyand quantify than demographics, but theycan be very valuable.
  49. 49. Behavioral Segmentation. Divides themarket by observable purchase behaviors:Usage—Amount of use, manner of use,benefits soughtPurchase Occasion—Gift, vacation,seasonal, etc.Brand Loyalty—Loyalty to one productindicates receptiveness to others.Responsiveness to Price and Promotion—Some groups respond to specialmarketing efforts more than others.Housewives use more coupons than singleprofessional women.Marketers must not only select the “right”group of variables but also decide howmany to use. The correct number of
  50. 50. “useful” variables will identify the mostaccessible and receptive target, not themost specific. For example it is possible todescribe a target segment for Corvettes asbrown-haired, male, twenty-five to sixty-fiveyears old, with income over $50,000.However, the ability to target just brown-haired men with effective advertising islimited and its usefulness would bedubious. Is brown hair a necessarysegmentation variable? There are nomagazines exclusively targeted to brown-haired males. Besides, blond andredheaded men may also be a reasonablemarket for Corvettes. You should use thefollowing criteria to evaluate possiblemarketing segments:
  51. 51. Measurability—Can you identify thesegment? Can you quantify its size?Accessibility—Can you reach the segmentthrough advertising, sales force ordistributors, transportation, orwarehousing?Substantiality—Is the segment largeenough to bother with? Is the segmentshrinking, maturing, or is it a growingsegment?Profitability—Are there enough potentialprofits to make targeting it worthwhile?Compatibility with Competition—Are yourcompetitors interested in this segment? Arecompetitors currently investigating it or is itnot worth their trouble?Effectiveness—Does your company havethe capabilities to adequately service this
  52. 52. segment?Defendability—Can you defend yourselfagainst a competitor’s attack?With that theoretical background, here’s asample demographic profile of gourmetcoffee buyers that marketers actually use:Twenty-five to fifty-four years oldCollege educatedProfessional or business executiveemploymentChildless householdsHousehold incomes greater than $50,000This “yuppie” market segment ismeasurable, accessible, large, and
  53. 53. profitable. Consequently, many large coffeecompanies continue to target it.Even in markets that appear hopeless,there may be a segment that othersoverlook. Xerox controlled 88 percent of thecopier market in the 1970s. The majority ofits sales came from large and medium-sized units. But by 1985, Xerox had lostmore than half of its market share. Whathappened? Xerox ignored the small-copiermarket. Thousands of small companieswith light copy needs had to run to the localcopy shop every time they had a copy job.Canon, Sharp, and Ricoh seized thismarket by selling a smaller and lessexpensive copier. With a foothold in smallcopiers, the Japanese competitorsproceeded to topple Xerox in the large-copier segment of the market.
  54. 54. Consumer analysis serves to “prime thepump” when you need to form acomprehensive marketing strategy. Do itfirst so as not to stifle your creativity withthe quantitative analysis you will perform aspart of the strategy developmentframework. On a first pass, you can makean “intuitive” choice of a target segment.After the other steps are completed it canbe altered to fit an evolving marketingstrategy.2. Market AnalysisConsumer Market Analysis CompetitionDistribution Marketing Mix EconomicsReviseWhile segmentation analysis focuses onconsumers as individuals, market analysistakes a broader view of potentialconsumers to include market sizes and
  55. 55. trends. Market analysis also includes areview of the competitive and regulatoryenvironment. By closely examining themarket, a marketing manager candetermine if the segment selected is worththe trouble of a targeted marketing effort.MBAs ask three important questions toevaluate a market:What is the relevant market?Where is the product in its product lifecycle?What are the key competitive factors in theindustry?What is the relevant market?The easiest mistake to make is to believethat your relevant market includes the totalsales of your product’s category. In
  56. 56. between the first and second years of myMBA education, I worked for aninternational trading company. Iinvestigated the possibility of selling aMexican gourmet ground coffee in U.S.grocery stores. It would have beenmisleading for me to assume that all coffeesales were in my relevant target market.Approximately $11 billion of coffee wassold in the United States in 1990. However,60 percent of that total was sold in stores,while the other 40 percent was sold to theinstitutional markets, including restaurantsand vending machines. That left me with aretail market of $6.6 billion.But within that larger coffee market therewere additional sub-markets to investigatebefore arriving at my final relevant market.The gourmet coffee market accounted for
  57. 57. $750 million, or 11 percent of the retailmarket’s sales. Within the gourmet coffeemarket, only 60 percent of the coffees soldhad no artificial flavorings. My Mexicancoffee had no additives and the producerrefused to artificially flavor his coffee.Therefore, my relevant market was furtherreduced to $450 million. But of that marketslice, only 55 percent was sold insupermarkets. That left me with a $248million market. That was my relevantmarket.Once a market segment is identified, youhave to ask if it is large and accessibleenough to justify your marketing effort. Ifthe answer to that question is no, then youhave what is called a “makable” product,but not a “marketable” one. Onlymarketable products make money.
  58. 58. These questions are difficult to answer andinvolve marketing research. If it is a newproduct, the answers will not be readilyavailable. Test markets may have to beused to obtain that information. This stepmay lead to further segment investigation.The growth and decline of consumersegments within a market should also benoted. When the market is growing, futuresales growth can come from new users orexisting customers. If the pie is shrinking,any sales growth has to come out of yourcompetitors’ hide, and they’ll fight you formarket share! Following the demographictrends to attract a growing senior citizenmarket, Lederle Laboratory, themanufacturer of Centrum vitamins, made avery minor reformulation in 1990, andsuccessfully introduced its “Silver” formula.
  59. 59. Where is the market in its product lifecycle?Markets can be characterized by the stagethat they are at in their product life cycles(PLC). Instead of being merely a factor oftime, the PLC describes how a product’ssales grow as new segments becomeaware and begin buying it. Cellular phoneservice began in the early 1970s with fewerthan ten thousand users. But it wasn’t untilthe 1990s, when the prices dropped andmany could afford a unit for their cars, thata multisegment market of over six millionusers emerged.The PLC concept is important because theprocess of diffusion or adoption by thepopulation has major implications for how aproduct is marketed. Each productdevelops its own unique PLC as it matures.
  60. 60. Understanding the PLC can give you anMBA insight that your competitors maylack.The four generic stages of the PLC andtheir implications for action are:Stage 1: Introduction, “What is it?”Awareness and education are needed. Ifpossible a trial is important. Highadvertising costs may be incurred to get theword out. Some vendors opt for anexclusive distribution of their products in afew select outlets at first. Initiallycompanies make frequent product changesas customers’ needs become known. Thefirst buyers are called the innovators,followed by the early adopters. They freelytake purchase risks because theirpersonalities or pocketbooks allow them to
  61. 61. do so. When companies introduce newproducts, managers must make difficultpricing decisions because there isfrequently no basis for comparison. Thelevel of initial prices and profits has greatimplications regarding the outcome offuture battles with competitors as well asyour ability to perform additional researchand development (as with products likehigh-definition TV and DVD).Stage 2: Growth, “Where can I get it?”Education is still important, but at this stagecompetition is intensified. The earlymajority becomes interested. As moreconsumers become familiar with a productthey examine the new models to decidewhich to buy, not whether they should buy.When buyers get to the store they start
  62. 62. comparing features. To make the productmore accessible, marketers often choose aselective distribution to gain a greaternumber and variety of outlets. At this stageit is important to boost your sales volumeahead of the competition in order to reducecosts through production and advertisingefficiencies. This helps a company gain thecompetitive advantage in the next stage ofthe PLC (e.g., palm organizer).Stage 3: Maturity, “Why this one?” At thisstage the late majority of the mass marketbuys. Because people are accustomed tobuying the product and the differences arefew, brand loyalty plays a dominant role.Price competition often becomes heated instable markets because additional marketshare comes directly from your
  63. 63. competitors. The product’s features thatwere so important in the growth stage havebecome standardized. Because there isless differentiation on product attributes,advertising is used as a vehicle todifferentiate products. Marketing managerstry to segment their target market as muchas possible to meet specific unmet consumer needs. In mature marketscompetitors are ferreting out all possiblesegments. All possible channels ofdistribution are also considered using amass market distribution strategy (e.g., CDplayers, VCRs).The Product Life Cycle
  64. 64. Stage 4: Decline, “How much?” As aproduct ages in its PLC, it is likely that itscompetitors offer similar products. Even themost timid consumers, the laggards, find itsafe to buy the product at this late stage. (Ifit does cause cancer, the FDA usually hasfound out by now.) Consumers turn a deaf
  65. 65. ear to advertising because they know thatall competing products are the same. Atthis stage many companies focus theirefforts on reducing price if competitionremains, or slowly increasing prices if thecompetitive field thins. Trade relations arekey to staying on the retail shelf at thispoint, because without the excitement ofnovelty, distributors and retailers wouldrather allocate space to newer andpotentially more profitable products. Theeffort to sell the trade is popularly calledrelationship marketing (e.g., black-and-white TVs, phonographs, and cassettes).With some products the maturity phasedoes not necessarily mean death. Productscan be reinvigorated after a period ofmaturity and a new growth phase canbegin. Baseball trading cards underwent
  66. 66. such a revival, encouraged by Topps Inc.’smarketing efforts in the 1980s, and losttheir luster in the 1990s.In some cases, lingering death throesproduce large profits for the lastmanufacturer. In the vacuum tubebusiness, which supplies electronic tubesfor old TVs, radios, and other equipment,Richardson Electronics is the survivor in anindustry once dominated by GE, RCA,Westinghouse, and Sylvania. Using an endgame strategy, the remaining producerscan extract large profits from customerssince they have nowhere else to go for theirreplacement parts.What are the key competitive factors withinthe industry?The basis of competition in each industry ormarket tends to be different. It has a major
  67. 67. impact on how a business attacks itsmarket. There are five major keycompetitive factors that constitute thebattleground in most industries:- Quality- Price- Advertising- Research and Development- ServiceIn the fast food industry, for example,intensive advertising and promotion arekey. In industries providing raw materials toothers, price and service are key. In myinvestigation of the coffee industry, I foundprice and quality to be the basis ofcompetition. When developing a marketingplan, you may want to try to change thebasis of competition to one that favors yourfirm, but the key underlying competitive
  68. 68. factors cannot be ignored.3. Analysis of Your Company Versus theCompetitionConsumer Market Competitive AnalysisDistribution Marketing Mix EconomicsReviseBy this stage the marketer has preliminarilychosen a consumer segment toward whichto direct his or her efforts. Now, a plan tobeat the competition must be developed.You need to look at yourself and at thecompetition with the same level ofobjectivity. What are your advantages?What things do you do well? (MBAs callthem core competencies.) What are yourweaknesses? How can your companycapitalize on its strengths or exploit yourcompetitors’ weaknesses? The following
  69. 69. questions help to flush that out.What is your company good at and what isthe competition good at?- Distribution (Frito-Lay)- New Product Development and Introduction (3M)- Advertising (Absolut vodka)Who are we in the marketplace?- Market Size and Relative Market Share- Financial Position- Historic Performance and ReputationWhat are our resources versus those of thecompetition?- People- Technology, Research- Sales Forces- Cash
  70. 70. - Trade Relations- ManufacturingBarriers to entry to new competitors in amarket play an important role in assessingthe competition. Barriers are conditions orhurdles that new competitors have toovercome before they can enter themarket. The availability of cash andspecialized knowledge are such barriers.The pharmaceutical industry, for example,is dominated by a few companies. To be aplayer, a company needs a large salesforce, research labs, and a large bankaccount to pay for it all. Because of thesebarriers, most small companies team upwith large ones if they have a promisingnew drug to peddle.If in an industry the barriers to entry arelow, the playing field becomes very
  71. 71. crowded. Savvy marketers should plan forthat eventuality by trying to form amarketing strategy that new competitorscannot easily copy. This is more fullydiscussed later in the book in the Strategychapter.During my coffee investigation, I looked atwhat my company had to offer. It didn’thave much. It didn’t have any experience inthe United States. We lacked distribution,advertising expertise, a reputation, andcash. The only thing my Mexican employerhad to offer was quality packaged coffee.What could a small competitor do againstFolger’s and Maxwell House coffees? Aftermuch questioning, and feeling a little ill, Ihoped that there might be a large foodcompany that would like to enter into a jointventure. We would supply the coffee and
  72. 72. the partner would do the distribution andmarketing. We could piggyback, not unlikewhat small pharmaceutical companies do,recognizing that some profit is better thannone.What are the market shares of the industryplayers?Many tracking services are available forconsumer products such as Selling AreasMarketing Inc. (SAMI) and A. C. Nielsen.Checkout scanners and warehousetracking collect supermarket sales data.However, for industrial products, such asmanufacturing equipment, the informationis less accessible. Trade associations are agood source.The shift of share over time is extremelyimportant. In the battle for “instant” coffeesales in the grocery store, for example, the
  73. 73. top three competitors controlled 95 percentof the market in 1989, up 5 percent from1986. They were Kraft Foods (37 percent),Nestle (34 percent), and Procter & Gamble(24 percent). Little was left for a newentrant.Market share leverage is a key concept toconsider when examining market shareswithin an industry. The companies withlarger market shares relative to theircompetition usually enjoy higher profits.Larger competitors can produce morecheaply on a per-unit basis because theycan spread their costs over more units. Asmaller competitor cannot afford to spendas much on either research or moreefficient equipment, because the smallersales volume cannot support the burden. IfI had been charged with a new instant
  74. 74. coffee to sell, I would have had toreconsider entry into the declining instant-coffee market dominated by bigger, lower-cost competitors. Fortunately for myMexican coffee’s entry, in 1989 18 percentof the “ground” coffee market wascontrolled by smaller competitors. And thatshare had increased from 16 percent in1986. This constituted a far more favorableenvironment for a new entrant such as myMexican ground coffee.How does my product perceptually mapagainst the competition?The perceptual mapping technique is agraphic way to view and compare yourproduct against the competitors’. Acommonly used grid is price and quality,but many others are possible and useful.Maps are another MBA technique to
  75. 75. generate ideas for marketing for yourproduct, and perceptual maps mayhighlight an unserved market segment byshowing how the consumer perceivescompeting products, regardless of thephysical reality of performance.Perceptions are paramount in marketing,just as they are in politics. In the papertowel industry, for example, towel strengthand decorator appeal are very important.As an example, using my own judgment, Ihave created a “hypothetical” map on page23. Notice that Bounty found itself a veryprofitable market segment by providingstrength and a pretty pattern.By visualizing how your product mapsversus the competition, you may gain aninsight into how to market your existingproduct, make product changes, or add
  76. 76. additional products in a comprehensivemarketing strategy.If your company has many products withina category, then you are said to have depthof line. In the paper towel market no oneproducer dominates the category. But overin the dog food aisle, Ralston’s depthchokes the shelves with Dog Chow, PuppyChow, HiPro, O.N.E., Lucky Dog, and atleast six other brands.If your company has many products in avariety of product classes, you are said tohave breadth of product line. Kimberly-Clark has a wide breadth of paper productsin several categories: Hi-Dri paper towels,Kleenex tissue, Kotex sanitary napkins, andHuggies and Pull-Ups diapers. Depth andbreadth of product lines can be cleverlyused in a blocking strategy to prevent
  77. 77. competitors from gaining access to thechannels of distribution. If they are not onthe shelf, your competition can’t make anysales.Perceptual Mapping Paper Towel Brands (Hypothetical)
  78. 78. In the dog food industry, competitors foundother ways around Ralston to reach doggieowners. Iams sold $350 million ofEukanuba brand premium dog food in 1996to breeders and specialty stores. In the
  79. 79. same year Hill’s Pet Products, a division ofColgate-Palmolive, pushed $750 million ofScience Diet pet food and other productsthrough veterinarians’ offices.4. Review of the Distribution ChannelsConsumer Market CompetitionDistribution Analysis Marketing MixEconomics ReviseMarketers speak of the avenues to theconsumer as the channels of distribution.There are often many ways of reachingyour customers, as described with dog foodsales. Distribution channel analysis iscritical, because the choice of channelinfluences the price you can charge, and,consequently, the profit margins that youmay enjoy. Three questions should beasked to provide you with a basis for yourdistribution decision:
  80. 80. How can my product reach the consumer?How much do the players in eachdistribution channel profit?Who holds the power in each distributionchannel available?How can my product reach the consumer?In the case of many mail-order catalogs,there is a direct link between the marketerand the final consumer. A catalogmanufacturer of clothing has a direct pulseon sales, returns, pricing, and consumertastes. As manufacturers of grocery items,brand managers are distanced from thebuyer. Cereal, for instance, must gothrough wholesalers and retailers beforereaching the consumer. Those middlemenare called channel intermediaries. As a
  81. 81. strategist, the marketing manager mustoutline all the paths to the consumer todevelop a plan.Commonly used channel intermediaries tothe consumer are:- Wholesalers- Distributors- Sales Representatives- Sales Forces- RetailersHow do the players in each distributionchannel profit?As I mentioned, it is very helpful tounderstand all the paths to the consumer inorder to know all the possible ways tomarket your product. Take the time to drawthem out on paper. A channel sketch canalso give you the insight into the retail pricethat must be charged to make a profit.
  82. 82. Everyone who touches the merchandisetakes a cut, which is called their margin.Participants in the distribution chain aresaid to “take margin” from themanufacturer. As a manufacturer of aproduct, you do not “give” the channelmargin; there is no charity involved.Channel participants in most industriescalculate their cut as a markup on sellingprice. Canadian and some U.S. drug firmsuse a markup on cost, but they are theexceptions. The selling price is not theultimate retail price, but the price at whichone intermediary sells goods to the nextintermediary in the chain. The retail price iswhat a consumer pays.Because of my experience in the coffeeindustry, I will use coffee retailing todemonstrate the economics of the channels
  83. 83. of distribution. At each level of the chain,the intermediary buys the coffee from theprevious level and takes a margin based onthe sales price to the next level. The marginis not based on cost.This is how one dollar’s worth of coffeebeans, in my example, can reach theconsumer at a price of six dollars. At eachlevel, the channel participant adds valueand incurs costs by either roasting,grinding, and packaging the coffee beans;promoting the brand; or distributing andshelving the packaged coffee for theconsumer. I have outlined on page 27 whatI estimated were the channel economics in1989 for Maxwell House’s gourmet Private
  84. 84. Collection coffee.At each level in the distribution channel, theparticipant performs its function, takes itsmargin, and sells to the next participantcloser to the consumer. If a coffeeprocessor, such as Kraft Foods, believesthat its gourmet Maxwell House PrivateCollection coffee brand must retail at $4.00per pound rather than $6.00, then theeconomics of the chain must change. Let’swork backward through the chain to see itseffect on the prices charged at each level.Selling Price × (1 Markup %) = ThePreceding Distribution Level’s Selling PriceWorking backward through the distributionchain:$4.00 Retail Price to Consumer × (1 .23Retail Markup) = $3.08
  85. 85. $3.08 Wholesaler Price to Retailer × (1 .09Wholesale Markup) = $2.80$2.80 would be Kraft Foods’ (theProcessor’s) Price to WholesalersAt the $4.00 price, Kraft Foods’ brandmanager must ask if $1.75 ($2.80$1.05)per pound is a sufficient margin to covercosts and provide an adequate profit. If theanswer is no, the brand manager mustreexamine the marketing plan’s channelmathematics. Because marketing strategyis a circular process, another price,manufacturing process, or cost may haveto be altered. Such changes could affect allthe other elements of the plan.The relative power of the channelparticipants can dictate pricing decisionsbased on the economics of the channelchosen. In Kraft Foods’ case, the brand
  86. 86. manager could have opted for the lower$4.00 retail price in the grocery store.However, he chose $6.00 to yield hisdesired profits.Kraft Foods decided to use an alternativechannel in addition to grocery stores. Kraft“bypassed” the grocery trade’s middlemenand sold its Gevalia and Garraway coffeebrands directly to coffee lovers by mailorder at a price over $8.00 per pound. Withmost products there are usually a variety ofways to reach the consumer. Each channelhas its own channel margin mathematics.By understanding the math you are betterable to make a choice of channel.Who has the power in the channels?The question of channel power is verycrucial in selecting where to sell. If yourproduct is unique and in demand, then the
  87. 87. manufacturer generally has the power tooutline the terms of the relationship. If not,the channel’s intermediaries will be able todictate the terms to take as much marginas possible.Channel of Distribution for Maxwell House’sPrivate Collection Coffee with ChannelMargins and Prices
  88. 88. In the grocery trade, the power of thechannel has shifted from the manufacturersto the supermarket chains. As smallergrocery chains consolidated into largersuper chains in the 1980s, the largerchains’ management realized that they heldthe prized real estate, “shelf space.” Eachstock keeping unit (SKU) on the shelf takesspace. Each product must be tracked,shelved, and inventoried. (When Mazolacooking oil produces three sizes, it takes upthree (SKUs.) With a finite amount of storeand warehouse space, the shelf real estatehas become valuable, and retailers want tobe paid for carrying each SKU. Marketerseven diagram their shelves like architects indrawings called planograms and fight overbest placement.
  89. 89. Packaged goods companies, large andsmall, must often pay slotting fees to thechains to reserve their “slots” on theirshelves for both new and existing products.In the 1970s the packaged good giantscould force their products on the trade.When there were many smaller grocerychains, Procter & Gamble and Kraft Foodscould play one chain against another bythreatening to withhold their popularproducts. That is no longer the case.Unfortunately, slotting fees can run intomillions of dollars for a new productintroduction. Therefore, in practice, slottingfees bar smaller competitors from selling inthe supermarket. A maker of an excellentpizza in the Midwest that I knew failed toget off the ground because it could notafford the bribes necessary for space.
  90. 90. Slotting fees are a “hot topic” in retailing.Feel free to interject this topic into MBAconversation as often as you like.5. Development of the Marketing MixConsumer Market CompetitionDistribution Plan the Marketing MixEconomics ReviseBased on judgments developed in theanalysis of the consumer, the market, thecompetition, and the distribution channels,the marketing manager must make a set oftangible decisions. MBAs call it the actionplan. Marketing managers choose what mixof marketing efforts should be made. Themix is commonly referred to as the Four P’s of marketing.The development of the marketing mix isan evolutionary process whose goal is an
  91. 91. internally consistent and mutuallysupportive plan. That cannot beoveremphasized. Tinkering with one P inthe mix generally means the marketingstrategist must alter all the other P’s insome way, because one P affects theothers.The Marketing Mix
  92. 92. Product Place Promotion PriceProduct Decisions
  93. 93. How does my product fit with my otherproducts?How will I differentiate my product?How does the product life cycle affect myplans?How does the product fit with my existingproduct line?This question tries to identify areas ofsynergy among your products, or uncover aconstraint on your activities. For example, if“The Dependability People” at Maytagadded dishwashers to their line of clotheswashers and dryers, the product, thecustomers, and the retailers for thedishwashers would be shared with theirexisting line. There would be a fit with thisline extension. But if Maytag wanted to sellpersonal hair dryers, the fit would bequestionable.
  94. 94. How will I differentiate my product?Differentiation is a broad issue that includesany way that a marketer can distinguish hisproduct from the field. Consequently thereare many ways to do it.- Feature—Capabilities- Fit—Tailoring- Styling—Functional, visual- Reliability—Warranties, return policies- Packaging—Color size, shape, protection- Sizes—Clothing, appliances, computers, and luggage sizes- Service—Timeliness, courtesy, accuracy- Brand Naming—LabelingIf Ralph Lauren had used his real name,Ralph Lifshitz, he would have foregone thepsychological benefits derived from hisRalph Lauren’s Polo label on $1.3 billion inclothing, cologne, and bedding in 1998.
  95. 95. Lifshitz somehow fails to convey the imageof English aristocracy.In many cases the so-called brand equity ofone product can be transferred to newproducts using a brand or line extensionstrategy that differentiates it from the pack.Kraft Foods has chosen to place the Jell-Obrand name on its new pudding and icecream treats. The Jell-O brand bestowsupon the new products all the goodwill andbrand recognition (brand equity) that Jell-Oearned over decades. It would take manyyears of expensive advertising to establishthe brand equity of the Jell-O brand.Accordingly, almost 70 percent of thetwenty-four thousand new productintroductions since 1987 were line andbrand extensions. If stretched too far, abrand’s equity can be diluted and its
  96. 96. effectiveness with consumers devalued.The choice of any one of these productdifferentiation techniques affects the entiremarketing process, as it lays thegroundwork for your promotional efforts. Aproduct can be differentiated from thecompetition by creative advertising andpromotion, even if competing products arephysically identical.Perceptual maps and positioning can helpto differentiate the product. All the productattributes mentioned affect the positioningof a product in the marketplace. Themarketer can always call upon hiscompany’s product engineers to develop aproduct’s physical characteristics if theprofits justify it. As my perceptual map ofpaper towels indicated, consumers havespecific needs within a product class and
  97. 97. they perceive each product differently. Themarketer’s job is to uniquely position theproduct (using a perceptual map as a guideif desired) to earn its place in the market.That place is often called a product’s nichein the market. As pictured in the perceptualmapping of paper towels, James River’sBrawny brand is positioned as the tough,durable towel for really dirty cleanups.Hopefully the brand manager will choose aniche that will yield the most sales andprofits by targeting a market segment hisproduct serves best. Positioning isinexorably tied to the market segmentselected through your consumer andmarket analysis.How does the product life cycle affect myplans?
  98. 98. Based on the point in the product life cycle(PLC), different aspects of the productbecome more important in the competitivebattles. The previous discussion of the PLCnoted that product features are extremelyimportant to differentiate products in thegrowth phase, while branding isincreasingly more important in the maturityphase. The emphasis on multiplay featureson compact disc players, for example,currently indicates the growth phase of thePLC. In the mature cassette deck market,the battles over auto reverse and Dolbynoise reduction have already been playedout. Whatever the choices for the product,product decisions will have a definite effecton the other P’s of the mix.
  99. 99. ProductPlace Promotion PricePlace of Sale Decisions: Where to Sell?In your review of the distribution channels,the goal was to determine what avenuesexist and what margins are available. Atthis stage, having made product decisionsand a choice of target market, the marketerhas to choose an appropriate channel to fitwith the product and the intended buyers.What distribution strategy should I use?On what basis should I choose a channel ofdistribution?What type of distribution strategy should Iselect?- Exclusive—Sell in only one outlet in each market
  100. 100. - Selective—Sell in only a few outlets in each market- Mass or Intensive—Sell in as many outlets as possibleThe place of sale affects the perception ofyour product. The choice of distribution isan evolving process that matches theproduct’s intended diffusion along theproduct life cycle, as described in themarket analysis passage. A distributionstrategy can differentiate your product fromthe crowd. For example, if a new designerchooses to sell exclusively at NeimanMarcus, it gives a certain cachet to theproduct. Consumers tend to perceivecertain attributes in a product, such asstyle, quality, and price, based on the pointof sale. The same designer may choose toselectively sell in only better department
  101. 101. stores to provide greater initial salesvolume. The California marketer of carwindow sun shields had no such concern,and selected a mass distribution strategy.The company wanted to distribute thecardboard shade as widely and quickly aspossible. That choice made sense sincethe shades, unlike designer clothing, didnot have any status appeal and could beeasily copied and manufactured.Each of these distribution methods placescertain responsibilities upon themanufacturer and the retailer. By choosingto be selective, the manufacturer may be“obligated” to provide high quality, goodservice, and possibly cooperative payments(co-ops) for promotional support. Whenmanufacturers share the costs ofadvertising with retailers, that is called
  102. 102. cooperative advertising.In distribution relationships involvingmanufacturers’ incentives, the retailer isalso obligated. Retailers may be “obliged”to pay special attention to the product bygiving it preferential placement, specialpromotion, display, and sales attention. Ifthose obligations are not met, the contractis breached and the relationship can besevered. In Ralph Lauren’s case hebelieved that his Polo clothing line was sounique that he became the first designer todemand separate boutique space indepartment stores. Ralph provided theimage and the margins sought by retailers.The retailers were in turn obliged to provideRalph Lauren with special placement andselling efforts.
  103. 103. Which channels of distribution to choose?It depends…on a variety of factors. Thereis usually more than one choice. However,if a channel is integrated into a mutuallysupportive and internally consistentstrategy, many choices can potentially besuccessful. Three factors should serve as aguide to make a selection.Product Specifics. Another factor toconsider is the level of attention needed forthe sale. This is related to the level ofcomplexity of the product, the newness, orthe price. The product may indicate a needfor your own sales force despite the costs.On the other hand, products such as candyand soft drinks are sold through a series ofwholesalers and distributors beforereaching the store shelves. These productsare simple and do not require direct control
  104. 104. by the manufacturer over the presentationand sale.Need for Control. The ability to motivate thechannels to carry your product effectivelyand appropriately enters into the placementdecision. The further the manufacturer isremoved from the consumer withdistributors, wholesalers, and jobbers, theless control the manufacturer has over howa product is sold. Pharmaceuticalcompanies usually have their own salesforces, also called captive sales forces, thatare thoroughly trained to provide credibleinformation to doctors. If Merck or Pfizerhad to rely on an independent sales forcethey would not have absolute control overtheir training or conduct in the field.Margins Desired. The analysis of thechannels of distribution helps to determine
  105. 105. the potential profits available. Where arethe margins taken at each level? Can yourcompany deliver the product through thechannels at a competitive price and stillreserve enough margin for itself? Based onthe available margins, channel decisionscan be made. In the case of radardetectors, Cincinnati Microwave opted tosell directly to the public through magazinedisplay advertising. They chose not to sellthrough electronics stores or other generalmerchandisers. Their managementbelieved that the technological superiorityof their Escorts and Passports would helpthe units sell themselves. CincinnatiMicrowave chose to capture the entire retailmargin and to cut out all the middlemenwho typically distribute and sell electronics.Their strategy faltered because they failedto maintain their product’s technical edge.
  106. 106. Product PlacePromotion PricePromotional DecisionsPromotion includes all the advertising andselling efforts of the marketing plan. Goalsetting is paramount in developing apromotional campaign. You need to knowthe mission you want to accomplish beforeyou can begin to draft or spend thepromotion budget. The ultimate goal ofpromotion is to affect buyer behavior;therefore the desired behavior must bedefined. Different products, at differentstages of the PLC, with different levels ofinvolvement and complexity, requiredifferent promotional efforts to performdifferent missions. The promotional missionchosen for your product must be consistentwith the buying process outlined in your
  107. 107. consumer analysis.Buying ProcessPromotional MissionAwareness Inform about product, prompt aneed messageInterest Provide compellingmessage, solve a need messageTrialMotivate actionRepurchase Cue to buy,increase usageLoyalty Reinforce brand orimage, special promotionsPush or Pull Strategy? As with distribution,promotional efforts should be guided by astrategy. Pull strategies are those effortsthat pull buyers to the outlets that carryyour product. TV pitches that instructviewers “to ask for Perdue chicken byname at your local grocer” pull consumersto the stores that carry it. Another importantmission of promotion is to encourage the
  108. 108. distribution channels to stock and sell aproduct to consumers. Such efforts are apush strategy. Beer distributors, forinstance, spend a great deal of their timetrying to court bar owners to stock andpromote their brew on tap. Most plans havean element of both push and pullstrategies. In the beer industry they spendheavily to advertise the brand as well as togain greater bar distribution.To pull buyers to a store or to push thedistribution channel to stock and sell, thereare five general categories of promotionalefforts:AdvertisingPersonal Selling
  109. 109. Sales PromotionPublic Relations and PublicityDirect SellingAdvertising. Advertising takes many forms:television, radio, outdoor (billboards),magazine, and newspaper. Two importantthings to keep in mind are your intendedmission and the quantitative measurementof exposure required to accomplish it.Please pay attention to the followingmeasurement vocabulary. This is what youpay for when you buy advertising. Thetendency for the uninitiated is to listen tothe ad world’s babble, not understand it,and buy their wares anyway. Buyingadvertising is just like buying marketingresearch—know what and why you are
  110. 110. buying—buyer beware.Reach and frequency are key quantitativemeasurements of media goals. Reach isthe percentage of the target market whosee and hear your promotion oradvertisement. Frequency is the number oftimes they saw or heard it. Marketers referto the number of times a person is exposedto a message as the total impressionsmade on that audience. Because of thebuying behavior associated with differentproducts, different mixes of reach andfrequency are required to induce purchase.When multiplied, Reach X Frequencyequals a measure called gross rating points(GRPs). Add the GRPs together and youget total rating points (TRPs). GRP andTRP are the measures by which radio, TV,and outdoor advertising is sold and
  111. 111. purchased.The desired demographics andsegmentation variables of the audiencesdelivered also enter prominently into theequation. A TV station’s regional golfprogram that delivers active, middle-agedgolfing males with incomes over $100,000in the Southwest could be efficiently usedto advertise a variety of products. A TVprogram that attracts a muddled mix ofdemographic audiences is less valuableper audience member. Even if you have theright media vehicle, scheduling is key inreaching your target.High GRPs do not guarantee sales. Themessage delivered is also a keydeterminant. When advertising people referto the message, copy (wording), or layoutof advertising, they call it the creative, a
  112. 112. noun. Ad agency people who develop theideas are called creatives.Magazine and newspaper advertising ispurchased based on the size andsegmentation variables of their circulations.Magazines have a longer shelf life, butnewspapers deliver a much moreimmediate and focused geographicreadership which is best for salepromotions. Both of these print audiencesare bought on a cost per thousand (CPM)readers basis. A comprehensive listing ofmedia and mailing list prices is provided bySRDS (Standard Rate & Data Service), in aseries of telephone book-sized volumes.A competitive measure of media is share ofvoice. Using this measure, an advertisercan target a certain percentage of mediaspending by all competitors within a
  113. 113. product category. Advertisers believe thatto have an impact through the competitivemedia clutter and noise, the relativespending level is just as important as theabsolute dollars spent.Through the clutter, it would have beenfutile to run a TV ad to promote the tinycoffee brand that I managed during mysummer internship. A small competitor hadno chance against the likes of Procter &Gamble, Kraft Foods, and Nestlé, whotogether spent over $200 million inadvertising in 1999. Any affordable adwould have been drowned out by thegiants.Remember, each medium has its strengthsin reaching people. Some are moreselective than others. Marketers want toreach their intended targets as efficiently as
  114. 114. possible to induce the desired buyingbehavior.Personal Selling. Marketers choosepersonal selling when they need to makedirect contact with the buyer. A salespersoncan personalize your message to fit thebuyer’s needs and situation, and can fieldobjections and questions in this interactiveprocess. This avenue is generally the mostexpensive element in any marketing mixbecause of the high cost of labor andcommissions paid.Managers of products that are new,complex, or expensive find that the benefitsof personal selling often outweigh their highcost. Because some target markets areinaccessible by other media vehicles,personal selling is sometimes the only
  115. 115. means to reach consumers. Waterpurification systems, pharmaceuticals,encyclopedias, copiers, and industrialproducts widely utilize personal selling intheir marketing mixes.Current theory holds that personal selling isa problem-solving and consultationprocess. Professor Derek A. Newton of theDarden School at the University of Virginiasaw personal selling as having evolvedover the years in four stages: Music Man,Animated Catalog, Magic Formula, andProblem Solver. Before World War I it wasbelieved that the “Music Man” approach toselling was the key to success. It was thesalesperson’s personality that enabled himto charm his customer into buying. AfterWorld War I, the “Animated Catalog” wasconsidered the right way to sell. Vacuum
  116. 116. cleaner salespeople knew all the factsabout their products, and their salespresentations were rehearsed catalogreadings. During the 1930s the slick pitchor “magic formula” was thought to be thebest sales approach. Encyclopedia salesreps would control the presentation andlead the customer down a “mapped-outroad” to a “sure sale.” Many books currentlyon the bookstore shelves claim they holdthe “secret” of how to close a sale. Today,academics agree that personal selling stillrequires some element of pizzazz andcataloglike product knowledge, but salesforces must also have extensive knowledgeof the prospect’s needs and buyingprocesses to be successful. Salespeopleshould sell benefits that solve customers’problems, rather than simply peddlingproducts.
  117. 117. Sales Promotion. Sales promotion isdesigned to elicit the desired behavior fromthe consumer, the sales force, and otherchannel participants. Sales promotions aredesigned to complement and reinforceother promotional efforts, especiallyadvertising. Each type of promotion has itsown associated vocabulary that you shouldbe aware of. If you are not a marketer,knowing the vocabulary does not make youan expert, but it can sure help you toengage in intelligent marketingconversation, if need be. There are twotypes of promotions: those directed towardthe consumer, and those directed at thedistribution channels.Consumer sales promotions techniquesavailable are coupons, refund offers,
  118. 118. samples, premiums, and contests.Coupons are a direct way to pass a pricereduction on to consumers. As amanufacturer, if you give retailers adiscount in hopes that they will pass italong to consumers, you may be sadlydisappointed. Marketers use coupons toencourage trial, brand switching, and brandloyalty. Grocery coupons are most oftenplaced in a special coupon section of theSunday paper called freestanding inserts(FSI). The leader in FSIs is ValassisInserts, which prints almost half of the $100billion in face value of coupon savingsdistributed annually in Sunday FSIs.Refunds are generally used to acceleratethe normal consumer purchase cycles.Refunds are usually used to increase thequantity or frequency of purchase by
  119. 119. encouraging buyers to stock up. Batterymanufacturers frequently use refund offers.Such offers have been cleverly used tostock up consumers just before acompetitor’s promotion or productintroduction.Samples are a high-cost way of introducinga new product. Sampling requires a cashinvestment to produce and stock thesmaller-sized packages. Samples areproperly used for products whose benefitsare “sensory in nature” and cannot becommunicated effectively by advertising.Sampling may also be effective forproducts that consumers would view asrisky in switching to a new brand, or thatmay have a high probability of generatingword of mouth (WOM) activity after use.Many new shampoos use free or low-cost
  120. 120. samples since their benefits are sensory.Consumers are reluctant to risk four dollarsto try a whole bottle. Sampling reduces thebuyer’s risk of trial.Premiums are items offered at low or nocost to purchasers of a product. Self-liquidating premiums are those for whichthe price charged covers just costs.Hershey has periodically offered watchesand Christmas ornaments as premiums. Toget the goodies, chocolate lovers have tosend in wrappers as proof of purchase. Mr.Bubble, the happy pink bubble-bath man, ispictured on inexpensive T-shirts, beachtowels, and sweatshirts that are printed onevery box.Contests and sweepstakes are a popularpromotion and the most restricted legally,because they border on gambling. A very
  121. 121. thorough analysis of the game rules andthe laws must be conducted to avoid adisaster. State gambling laws must beinvestigated to ensure compliance. Thegame rules and odds of winning must alsobe scrutinized to ensure that thepromotional budget will cover theforecasted costs. In 1984 McDonald’s ran asummer Olympics medal game. Every timethe United States won, game pieces couldbe redeemed for free food and other prizes.When the Communist bloc boycotted thegames, the United States won most of themedals, and most of the game piecesbecame winners.Trade-directed sales promotions toolsinclude sales contests, point-of-purchasedisplays, dealer incentives, trade shows,and in-store demonstrations.
  122. 122. There are many variations on the point-of-purchase display (POP). To get them in thestores requires the cooperation of thetrade. On the retail shelf a POP can be ashelf talker, a mini-billboard attached to theend of the shelf with a little ad used toattract attention. Freestanding aisledisplays and built-in shelf displays are otherforms of POP. When a display is at the endof an aisle it is referred to as an end cap.To get those prime spots, the manufacturermust entice the retailer. A marketer can doit by providing a high markup per item or ahigh turnover on lower-margin items.Dealer and employee incentives: Paymentsmade to dealers for marketing support arecalled spiffs. They can take the form ofslotting fees, case discounts, cashpayments, free merchandise, or prizes.
  123. 123. Spiffs enable the dealer to discount,promote, or justify carrying a product. Amanufacturer can also give incentives tothe dealer’s employees to place storedisplays or award prizes for meeting salestargets.Trade shows are a way to promote a newor existing product to the wholesalers,dealers, retailers, and distributors. Thispromotion tries to encourage the channelparticipants to carry your product. Afledgling start-up company makinghousewares, for example, would need toattend trade shows to develop thedistribution contacts that might carry theirproducts to retail. If you have no tradecontacts, you have to develop them.In-store demonstrations: Trained expertsfrom the manufacturer are extensively used
  124. 124. to promote products that otherwise wouldnot generate consumer interest or beaccepted by the trade. Small kitchengadget hucksters set up demonstrationplatforms to bring inconspicuous blades tolife by creating “beautiful” plate garnisheswith ordinary vegetables. The Cliniqueladies in their white smocks perform asimilar mission for their boxes of “natural”beauty at the cosmetics counter.Whatever the sales promotion you maychoose in a marketing mix, each elementmust have an explicit marketing mission tojustify its cost in the marketing mix.Public Relations and Publicity. Publicrelations (PR) is typically a promotional toolused to communicate to a broaderaudience. PR is intended to create a
  125. 125. favorable climate for your product, not todirectly sell it. The list of possible PRtargets can include politicians as well asthe communities in which a companyoperates. The PR message can beintended to create goodwill, correct amistaken impression or factual situation, orto explain a firm’s actions. Sponsorship ofprestigious or charitable events or causesis often used to create a halo effect ofpositive feeling toward a corporation and itsproducts. Hallmark Cards’ sponsorship oftelevision’s Hallmark Hall of Fame aligneditself and its products with the attributes ofquality, culture, and good citizenship.Because the goals of PR are less definedthan a sales target, the results are moredifficult to measure. Opinion polls andlegislative victories are often used to
  126. 126. measure PR success.Publicity, a form of public relations, is anyunpaid form of mass media communicationabout a company or product. It can take theform of a news story or even theappearance of a product in the media.Publicity is a two-edged sword. It is judgedas more credible by the public because it isnot purchased; however, there is lesscontrol over the message. Pressconferences, press releases, use bycelebrities, and staged events are used tocapture the media’s attention. Using a PRagency allows you to tap into their mediacontacts to capture an audience andhopefully control the impression madeabout your company or products.When tennis star Pete Sampras or AndreAgassi wears Nike shoes and sportswear
  127. 127. at the U.S. Open, the TV can’t help butflash Nike on the screen each time heserves and volleys. This network time hasgreat value. If the athlete makes thenational evening news or Sports Illustrated, which cost $50,000 per thirty seconds and$150,000 per page, respectively, the valueof free media exposure can be great.Accordingly PR executives track theireffectiveness by measuring the value of themedia time or space captured. Trackingservices, such as Burrelle’s press clippingservice for print, report on their clients’ PRand advertising media exposure across thecountry. Burrelle’s can also trackcompetitors in the same way. Although it isoften overlooked in the marketing mix,publicity can often create a tremendousimpact if skillfully and creatively
  128. 128. orchestrated.Direct Sales. Direct sales includes therealm of the Internet, junk mail, catalogs,shopping networks, and long-format TVinfomercials. Direct sales are big business.Internet sales exceeded $15 billion in 1999
  129. 129. and are growing rapidly. In 1998 mail ordersales alone constituted $465 billion in salesor 6 percent of all retail sales. Over 8,000firms mailed out 12 billion catalogs thatyear and the numbers are still growing. In1999 the leading home shopping network,QVC Network Inc., had over $2 billion insales. Infomercial companies racked upover $400 million in revenues.The nature of the direct mail game is tosegment, segment, segment. Mailers targettheir market with a focused mailing list todirectly reach those households with acompelling mail piece. Lists can bedeveloped internally or purchased fromvendors listed in SRDS’s Direct Mail ListRates and Data directory. The moredefined, affluent, and focused the list is ona desired demographic composition, the
  130. 130. higher cost per thousand (CPM) names.The results are tracked by rate of return(ROR) and dollar amount per order.Because TV audiences lack a list’sselectivity, TV sales pitches cannot be asdirectly targeted as direct mail.The other component of both direct mailand TV selling is fulfillment. Fulfillment isthe process of order entry, orderprocessing, inventory management,mailing, and customer service. The dreamsof those viewers of the Home ShoppingNetwork who want to buy porcelainfigurines must be fulfilled. The operationmay be executed internally orsubcontracted out to a fulfillment house thatperforms the duty for a per-order fee overcertain volume minimums. It saves smallercompanies the initial investment required to
  131. 131. establish in-house fulfillment capabilities.Because direct selling is becoming such alarge part of the economy, it should not beignored as a possible channel to theconsumer. A thorny issue connected withthis selling method is the backlash againstthe “big brother” effect of having verypersonal information captured in mailinglists that churn out personalized pitches.This topic, like slotting fees, is a “hot” onefor MBA chatter.Each method of promotion—advertising,personal selling, sales promotions, publicrelations, and direct selling—canaccomplish a separate mission dependingon the product, the place of sale, and theprice. The gifted marketer goes to his orher palette of promotional options andcombines them in a coordinated
  132. 132. promotional strategy to sell the productefficiently.Product Place PromotionPricePricing Decisions: What Should My PriceBe?The pricing decision, like the productdecisions, can dramatically affect themarketing mix by suggesting a channel ofdistribution or an advertising strategy. Thepricing itself can differentiate your productfrom the competition. Both the Yugo andthe Rolls-Royce are differentiated atopposite ends of the automobile spectrum.There are many rationales behind pricingeach product and service. Haven’t youseen a pair of Nike cross-trainers for sale at$59.95 instead of $60 for somepsychological advantage? Besides
  133. 133. psychological pricing, there are eight majorpricing methods and strategies suggestedby research and case analyses.Cost Plus. This is a simple method oftaking your cost and adding a desired profitmargin. Highway contractors often use thissimple method; however, it is not theproper way to price.Perceived Value to the Consumer. You cancharge the customer the value provided,regardless of its cost. Replacement partsare a prime example—exorbitant prices arecharged for a cheap but crucial custom nutor bolt. The owner of a fixture manufacturerconfided to a group of my classmatesduring a school-sponsored plant visit thatthe majority of his company’s profits were
  134. 134. derived from the twenty-by-twenty-footreplacement-parts cage, not from the longassembly lines producing the fixtures. If theprice charged for an item is commensuratewith the benefits provided, then it will beconsidered a good value in the mind of thebuyer. But remember, there are limits evenin a monopolistic situation.Skimming. Early in the introduction phaseof the PLC, a company can opt to charge ahigh price and skim high margins from anew and novel product or service. Themargins could be used to further R&D, as isdone in high-tech industries, or toimmediately reward the owners for fadproduct introductions. RCA used thisstrategy to charge high prices for color TVswhen they were introduced in the 1960s.
  135. 135. Penetration. This pricing can be used in theintroductory phase or later in the PLC. Apenetration strategy would use a low priceto gain market share; the goal is primarilyto lower costs per unit by producing manyunits in hopes of eventually controlling amarket as the low-cost producer. Thespecifics of this strategy are discussed laterin the Strategy chapter’s discussion ofJapanese VCR production.The Price/Quality Relationship. Becauseconsumer perceptions are not necessarilybased on just the physical attributes of aproduct, the “perceived” quality is ofteninfluenced by its price. Apparel, perfume,and jewelry are examples where the priceitself affects the perception of product
  136. 136. attributes. Consumers often attribute thecharacteristics of style and workmanship toa product just because of the high pricecharged.Meet Competition. Strategies frequentlydecide to match or beat competitors’ pricesto gain or retain market share in acompetitive market. This is especially thecase in commodity products and servicessuch as gasoline, steel, and airline tickets.The economics of pushing a productthrough the distribution chain, as explainedin the discussion of distribution channels,has a great effect on what price amanufacturer can charge to sell his productto the distribution chain and still end up witha competitive retail price.
  137. 137. Meet Profit Goals Based on the Size of theMarket. If a market is limited in size, then aprice must be charged that will allowenough profit to justify the marketing andmanufacturing effort. If the product cannotcommand a profitable price, then to lowercosts investigate either other user marketsor manufacturing improvements.Price Based on the Price Elasticity of theBuyer. Price elasticity describes how abuyer’s behavior changes due to a changein price. Buyers with elastic demand do notreadily accept price hikes. Their demand isgreater or smaller depending on the price.Buyers with inelastic demand behaviorsdon’t care about price increases. Theydon’t decrease their quantity or frequency
  138. 138. of purchase depending on the price.Tobacco and crack cocaine smokers, forexample, have absorbed many priceincreases and continue to buy becausetheir addiction makes their demandinelastic to pressure to accept priceincreases. If elastic, buyers will not paymore than a given price point and will stopbuying or buy much less based on theintensity of their desires, their personaldisposable income, or their psychologicalprice thresholds. Former New York Citymayor Edward Koch proposed in the 1980sthat the bridge tolls onto Manhattan Islandbe raised to ten dollars to reduce the city’sgridlock traffic conditions. He believed thatthe majority of the driving public’s demandwould be elastic to such a price increase.
  139. 139. There are many avenues that may be takenwith any given product. In the case of mygourmet packaged coffee, a distinctivecoffee “product” may require a distinctivepackage, a higher “price,” a targetedpromotion, and a selective “place” fordistribution. But what really tells the story isthe economics. Can I do it and makemoney?6. What Are the Economics of My Plan?Consumer Market CompetitionDistribution Marketing Mix Determine theEconomics ReviseThis may be the last step of marketinganalysis. This step may also send themarketing manager directly back to Gowithout collecting two hundred dollars. Bythat I mean that the consumer analysis maybe exemplary, the marketing mix masterful,
  140. 140. but it just doesn’t make money. The costsmay be too high, the market price too low.Perhaps unrealistically high sales volumemay be needed to break even. In those sadcases the entire circular process ofmarketing strategy must be restarted in aneffort to find a profitable solution. Todetermine whether you have created a planthat is both profitable and reasonable youmust address several issues.What are the costs?What is the break even?How long is the payback of my investment?What are my costs? Fixed or variable?The first cost question for a marketingmanager should be, “Which of my costs arevariable and which are fixed?” If this
  141. 141. sounds like accounting, it is.Variable costs are those that vary with thevolume of products sold or manufactured.The costs of materials and labor arevariable costs. As more units are sold ormanufactured, the total costs of materialand labor are higher. Fixed costs do notvary with volume even if no sales aremade. As volume fluctuates neither rent norsupervisor salaries change—within arelevant range. By that I mean that if salestriple, a new factory may have to be leased,and thus fixed costs will go up. Promotionalexpenses such as advertising are alsoseen as a fixed cost of a marketing plan,because if the product is a flop theadvertising dollars are already spent. Theyare considered sunk costs—after a TV adairs, the dollars are “sunk” in the ocean of
  142. 142. TV land. Total costs are a combination ofboth variable and fixed costs.Total Costs = Variable Costs Per Unit (VC)× Units Sold + Fixed Costs (FC)They can also be shown graphically asfollows:Wooden End Table Production
  143. 143. Fixed Costs + Variable Costs = Total Costs
  144. 144. What can be seen in the graphs is thatregardless of unit volume, the fixed costsremain constant. When units are actuallyproduced, variable costs are added on topof the fixed costs to equal total costs.What is my break even and is itreasonable?Break even is the point at which the fixedcosts are recovered from the sale of goodsbut no profit is made. Promotion andmanufacturing are very expensive. A waymust be found to recoup thoseinvestments. That’s the whole point ofmarketing: to recover costs and makeprofits.
  145. 145. (Unit Contribution = Your Selling PriceVariable Costs)Using my data from the coffee industry, Ihave provided an example from the realworld. I determined that the prices andcosts of a proposed marketing plan for theMexican gourmet coffee were:CostCost Type Retail Sales Price $6.00 lb.Selling Price to Distributors 4.20 lb. CoffeeBeans Cost 1.00 lb. Variable Roasting andProcessing Cost .44 lb Variable PackagingCost .55 lb. Variable Shipping Cost .25 lb.Variable Spiffs and Slotting Fees 50,000Fixed Production Equipment Rental 12,000Fixed Promotional Efforts 150,000 Fixed
  146. 146. The corresponding break-even volume wascalculated:And the break-even dollar sales were:108,163 lbs. × $6.00 lb. = $648,978 break-even retail salesThe same equation can be used tocalculate a target volume to yield a desiredprofit.
  147. 147. To return a $30,000 profit target, you justadd the profit to the numerator with thefixed costs.One very important aspect of this analysisis that it does not include the costs thatwere “sunk” in the development of theproduct or the ad campaign if they havealready been spent. The evaluation of theeconomics is always performed from theperspective of the present. There shouldnot be any crying over spilled milk. Youneed to decide if you can make money on
  148. 148. the proposed marketing spending in thefuture. For example, if the coffee blend wasthe product of millions of dollars ofresearch, that would be irrelevant to thedecision to whether I should spendadditional money to market it. If I includethe millions of research, it would be adefinite “no go.” However, with that moneydown the drain, it might be profitable toinvest additional cash in a marketing effort.The graphical representation of themarketing plan economics for the Mexicancoffee looked like this:Gourmet Coffee Marketing Plan Economics
  149. 149. Is my break even reasonable in relation tomy relevant market? Answering thisquestion must be your next step. In thecoffee example, $648,978 of break-evenretail sales was a .26 percent share of the$248 million market for gourmet,nonflavored coffee sold through thesupermarket channel as explained earlier in