This document provides an overview of key concepts in industrial marketing and business-to-business marketing. It discusses the definition of industrial marketing, the marketing concept, market orientation, marketing mix, external environment, differences between business-to-business and business-to-consumer marketing, and key aspects of selling to organizations.

1. McDonald
Texas Tech University

3. Industrial Marketing
Also called: Business-to-Business (B2B) and
Organizational Marketing.
Definition: the creation and management of mutually
beneficial relationships between organizational suppliers
and organizational customers.
Customer can be private firm, public agency, or nonprofit
organization.
3

4. The Marketing Concept
Creating value for customers with goods and services
that address organizational needs and objectives.
4

5. Marketing Concept
Three major components:
All company activities should begin with, and be based on,
the recognition of a fundamental customer need.
A customer orientation should be integrated throughout
the functional areas of the firm: production, engineering,
finance, R&D.
Customer satisfaction is viewed as the means to long-term
profitability goals.
5

6. Strategic Focus Grid
High
Follower Interact
Customer
Focus
Isolate Shaper
Low
Low Technology Focus High
6

7. Market Orientation
Acquire intelligence from the external environment.
Disseminate that intelligence throughout the
organization.
Respond to the intelligence: take action.
(Kohli and Jaworski 1990, Journal of Marketing)
7

8. Marketing Mission Statement
State in terms of meeting customer needs, not in terms
of products or technologies.
Marketing Myopia (Levitt 1960 HBR)
8

9. Marketing Activities
Identify customer needs
Research customer behavior
Divide market into manageable segments
Develop new products/services
Establish/negotiate prices
Deliver, install, service products
Ensure adequate and timely supply of products at correct
place
Allocate resources across product lines
Communicate with customers
Evaluate/control marketing programs
9

10. Marketing Mix
Limited number of variables under Marketing’s control to
create position that is attractive to the target market
segment.
Four Ps
Product
Price
Promotion
Place (Distribution)
10

11. External Environment
Characterized by:
Degree of Stability
Complexity
Diversity
Hostility
11

12. External Environment
Six Environments
Technological
Economic
Social/Cultural (Customer)
Political/Legal
Natural/Climatic
Competitive
12

13. So what’s different about B2B?
Marketing Concept
Marketing Mix
Market Segmentation
Product Life Cycle
All apply in both B2C and B2B.
13

14. So what’s different about B2B?
The technical characteristics of the product are
important.
These products directly affect the operations and
economic health of the customer.
The customer is an organization rather than an individual
consumer, or family.
14

15. Five Major Differences
Between B2B and B2C
Products/Services being marketed
Nature of demand
How the customer buys
Communication process
Economic/Financial factors
15

16. Products/Services
More complex
Functional vs. Symbolic Attributes
Large unit dollar value/Large quantities
Custom/Tailored
Various Stages from raw material to finished goods.
Foundation, Entering, Facilitating Goods
16

17. Raw Material Extraction
Material Processing
Manufacturing
Parts/Subassembly
Facilitators
Assembly
Distribution
Wholesale/Retail Trade
Final Consumers
Firms in Production Chain 17

18. Nature of Demand
Derived
Joint/Shared
Concentrated
Inelastic
18

19. How Customer Buys
Group Process
Formal
Lengthy
Loyal
Decisions based on risk and opportunity
19

20. Communication
Personal selling more important than mass paid
advertising
Support sales with other promotional activities:
advertising in trade journals, catalogs, trade shows, direct
mail, WWW.
Message focused on technical, factual, and descriptive
content.
Multiple audience members.
20

21. Economic/Financial Factors
Competition oligopolistic
Power/Dependency relationships
Reciprocity:Doing business with companies that do
business with them.
Economic variables: interest rates, inflation, business
cycle
21

23. Purchasing
Usually the main point of contact
Boundary spanning function
Checks and Balances
Purchase requisition
Written purchase order
Negotiated/bid prices and terms
Contract
Receiving report
Invoice

24. Major Tasks of Purchasing
Identify/evaluate suppliers
Negotiate prices and terms
Purchase contract
Match delivery and production schedules
Expedite orders
Handle returns
Monitor changes in prices, markets, and regulations

25. Strategic Importance
Historically, not a top-level function
Now seen as:
a major source of cost savings,
contributor to operational efficiency
Materials Management Concept:
Buying
Storing
Moving

26. Life-Cycle Costing
Initial Costs
Purchase price to vendor, freight, insurance, training
Start-up Costs
Paid to other than vendor: modifying facilities and
complimentary/support infrastructure
Post-purchase Costs
Maintenance, repairs, power, financing, inventory costs,
and space requirements
Salvage Value
Recovery amount: resale, trade-in, scrap

27. Value Analysis
Reducing cost without reducing quality or effectiveness.
Also called value engineering.
Cost/Benefit trade-off
Redesign, standardization, less expensive manufacture,
substitute
Five stages: information gathering, speculation, analysis,
execution, reporting.
Reverse engineering/absorptive capacity

28. Time-Based Buying Strategies
Speculative Buying
Buying in excess of foreseeable requirements
Inflation or short-term price drop
Added inventory/carry costs
Risky
May buy too much
Prices may not go up

29. Time-Based Buying Strategies
Forward Buying
Buying in excess of current needs, but not foreseeable
needs
Take advantage of quantity discounts or volume freight
rates
Protect against temporary shortages or delays due to
unreliable vendors or transportation

30. Time-Based Buying Strategies
Hand-to-Mouth Buying
Short-term strategy
Minimize inventories
Falling prices
Changing technologies
Cash flow problems

31. Time-Based Buying Strategies
Just-in-Time
Parts and materials arrives as needed
No luxury of excess inventory against:
Human error, machine breakdowns, or defective parts
Requires cooperative relationships
Substantial investments (e.g. computer systems), short
lead times, reliable deliveries, intensive communication,
long-term purchase commitment
Reduced cost, quicker response, fewer delays,
simplified administration, and higher quality

32. Technology Impact
(TLA, or Alphabet Soup)
Materials Requirement Planning (MRP)
Electronic Data Interchange/Internet (EDI)
Web-Based Procurement (WWW)
Enterprise Resource Planning (ERP)

33. Materials Requirement Planning
Systematic determination of current and foreseeable
needs for materials and parts.
Uses economic order quantity (EOQ) models,
probability theory, and statistical demand
forecasting.
Three Inputs
Production schedule
Bill of materials
Inventory record file
Doesn’t work well for large volume, long lead times,
or irregular/infrequent purchases

34. Electronic Data Interchange
and the Internet
Computers communicate without regular
involvement of managers.
Not the World Wide Web
Large investment in equipment and software. Can
use third parties.
Timely, accurate, simpler, cheaper
Dis-intermediation vs. Sales Productivity
Marketing intelligence:
Can track customers, order quantities, purchase
frequencies, and prices over time.

35. Web-Based Procurement
Quick, low-cost access to get data on suppliers and their
offerings.
On-line catalogs and purchasing
Search engines help gather information
Three procurement models:
Catalog-based
Auction-based
Bid-based

36. Enterprise Resource Planning
Internal software-based system
Ties together all basic processes of the business
Order taking, inventory control, production, financial
systems, etc.
Lengthy implementation (Years)
Return on Investment questionable
Costly to convert data, modify procedures, overhaul
networks.

38. Value
May not be tangible
Value is PERCEIVED by the buyer
Can enhance value:
Packaging
Support services
Reliability
Warranties
Training

39. Selling to Organizations I
Social as well as economic dimension
Individual behavior contributes to the mission.
Formal reward system for individuals
Bad purchasing decisions
Interruptions in production/operations
Reduction in product quality
Slowdown in distribution
Dissatisfied customers
Wasted resources
Higher costs/lower sales and cash flow/lower profit

40. Selling to Organizations II
Usually formal contracts
Extensive search for suppliers
Negotiation
Long buying process
Multiple suppliers
Long-term, loyal relationships

41. Why?
Reduce risk of mistakes
Formal policies and informal culture

42. Business Customers
Fewer
Concentrated
Need long-term relationships because they are not easy
to replace

43. Technical Complexities
Products and services, and their applications can be
complex.
New technology
Interface with existing technology
Custom
High standards (e.g. clean rooms, surgical suites)

44. Commercial Complexities
So much is open to negotiation
Product, price, terms, discounts, warranties, delivery,
training, service, returns, etc.
Liability, nonperformance
POWER
$ize of deal, characteristics of parties, the deal, # of
parties involved, complexity of products

45. Behavioral Complexities
Negotiating not just with purchasing agent, but multiple
parties from multiple functional areas in the organization
The more people involved, the more complicated it gets
Technical and commercial complexity can exacerbate the
behavioral complexity

46. Who’s on first?
Key decision maker(s)
Important Product/Vendor attributes
Access to key decision makers
Customer purchasing policies and procedures

47. The Buying Center Roles
Initiator
Buyer
User
Influencer
Decider
Gatekeeper
Not really a center at all. Group decision process.

48. Rational Decision-Making?
Purchasing for business, not self
Purchaser being judged on performance
Fiduciary responsibility
Formal structure and procedures
# bidders
Evaluation criteria
Multiple signatories

49. Rational Decision-Making?
Emotional and Social Factors
Friendship
Like/Dislike vendor/rep
Personal/Professional Favors
Influence of others in organization (+/-)
Personal/Departmental Needs & Objectives may not
match those of the organization.
Conflict

50. Rational Decision-Making?
Manage process to control social & emotional
influences.
Need to have good decisions being made.

51. Buystages
Need recognition (May not be decider)
Solution characteristics/quantity (Specs)
Describe solution in detail (Make/Buy)
Find qualified sources (product +)
Receive/analyze proposals (price +)
Evaluate proposalsSelect supplier
Establish order routine
Feedback/Evaluate (FOLLOWUP)

52. Buying Scenarios
Newness and past experience with product
Amount/Type of information needed by
influencers/deciders
Number of alternatives
Common buying situations (buyclasses)
Straight rebuy
Modified rebuy
New task purchase

53. Structural Perspective
Vertical Involvement: # levels
Lateral Involvement: # functional areas
Absolute Size: # people
Connectedness: Direct communication among buying
center members
Centrality: Degree of communication regarding purchase
flowing through purchasing department

54. Power Perspective
Ability to influence or make buying decisions; often
situation specific
Types
Reward: $, social, political, Ψ
Coercive: punish, penalty
Referent: personality, charisma, persuasion
Expert: specialized knowledge
Legitimate: formal position/title

55. Risk Perspective
Purchase decision is risk reducing behavior
Probability of Loss x Magnitude of Loss
(What about consequences?)
Risk mitigation strategies may help to make the sale
PERCEIVED uncertainty

56. Problem-Solving Perspective
Routine orders: little risk
Procedural: How to use product. Learning/training
Performance: Can product meet need?
Political: Internal politics, departmental squabbles
(legitimate and petty)

57. Reward Perspective
Individual motivation
Influenced by evaluation & reward
Individual values and objectives; brought from
department to buying center
Agency Theory

58. External Environmental Organizational
Influences Influences
Buyer Center
Dynamics
Individual
Influences
Buyer Center Model

60. From Single Sale to Symbiosis
Discrete Repeat Brand/Source Dyadic Strategic
Transactions Transactions Loyalty Relationships Partnerships
Perspective
Short-Term Long-Term

61. Shifting Objectives
Sales Revenue: “Close the Deal.” Transaction
Perspective
Market Share: “Own the Market.”
Operating Profit: “Generate ‘acceptable’ rates of return
on product, segment, channel investment
Customer Equity: “Capture desired portion of
Customer’s Lifetime Value

62. Loyalty
Technology
Product Category
Particular Brand
Vendor
Person

63. Industrial Loyalties
Take longer to establish
Last longer
More difficult to dissolve

64. Loyalty Factors
Task Concerns
Quality, Delivery, Service, Price
Organizational Concerns
Politically safe, minimal benefit for change
Work Simplification Concerns
Makes it easier, too much trouble to change
Attitudes Toward Source
Buyer’s attitude toward company and people

65. Relationship Marketing
Strong, Lasting Ties
Earned Trust
Successful Long-Term Exchanges
Structural and Social Bonds
Cooperation/Collaboration
Long-Term, personalized, mutually beneficial, based in
deep understanding of customer needs and
characteristics

66. Relationship Marketing
Strategic Orientation
Both Buyer and Seller are committed
Long-Term
Mutually Beneficial
Collaboration
Win-Win

67. Relationship Marketing: Reality or Lip
Service?
Requires more commitment than most are willing to
make.
Most take tactical steps rather than strategic
Shortcomings observed:
 Locking in the customer: Needs to be win-win
 Informality: legal, strategic, outcomes
 Primarily non-financial investments: Capital equipment is
important
 Avoiding Dependency: Flexibility over commitment
 Unilateral: Buyers should initiate
 Not all customers are worth the investment
 One size never fits all

68. Relationship Strength Affected By:
Volume of purchases
Frequency of contact
Extent of collaboration in product development
Technical distance
Physical distance
(See Table 4.1)

69. Relationship Classifications
On/Off Transactions
Repeat Transactions
Source Loyal Accounts
Relationships
Strategic Partnerships

70. Variables Affecting Relationship
Relational
Social/Structural
Social Actor
Normative

71. Some Helpful Criteria for Selecting
Partners
High risk of losing account
Important customer
Customer open to partnership
Can improve relationship
Cultural match (Not Gateway/IBM: cows and suits)
Potentially mutually beneficial
Can add benefits in service
Good competitive position

73. Market Segment
A group of existing or potential
customers sharing some common
characteristic that is relevant in
explaining or predicting their response to
a company’s marketing program.

74. Market Segmentation
Identify sub-markets within market
Decide which one(s) to pursue (target)
Design marketing mix(es) to be attractive to targeted
segment(s)

75. Segmentation Strategies
Undifferentiated Mix 1 (A-E) A
B
Mix 2 (C) C
Differentiated
Mix 2 (E) D
Concentrated Mix 3 (E) E

76. Segmentation Bases
Company size
Company location
Industry
Technology (used)
Policies (purchasing)
Product application
Benefits sought
Buying center characteristics

77. Homogeneity
Key to successful segmentation: everyone in the
segment is the same on segmentation basis, not
necessarily on multiple bases.
Can think in terms of the “typical” segmentation
member, and create the marketing mix that positions
your company in the most attractive place.

78. Segment Selection I
Attractiveness
Long-term profitability +
Judgments
Use market research and forecasting
Size
Likely market share/segment
Long-term profits

79. Segment Selection II
Select and prioritize based on:
Time (Sales force)
Effort (Customer service)
Money (Promotions)

80. Segment Selection III
Stress profitability +:
Sales volume
Ease of penetration
Image enhancement

81. Segment Selection IV
After selection, study deeper
Patterns in buying behavior
Assess strengths and weaknesses of
competitors
Identify areas of competitive opportunity

82. Positioning
Design marketing program(s) to cater to distinct needs or
problems of target segment(s).
Marketing Mix
Product
Price
Place
Promotion

83. Degrees of Segmentation
Undifferentiated: One marketing mix for the entire
market.
Reality
Differentiated
Concentrated
Niche
One-to-one:
The ultimate segmentation
Every customer is a market segment.

84. Why Segment?
Efficiency
Optimize firm resources
Target most promising customers
Rifle vs. Shotgun
Effectiveness
Match capabilities to needs/wants/problems
Pinpoint prospects
Identify/Exploit competitor weaknesses

85. Usefulness Criteria
Does the segmentation fit firm’s strategy?
Are there homogeneous sub-groups in the market?
Needs
Buying behaviors
Can the segments be measured?
Potential?
Are the segments accessible?
Reachable via unique marketing mix

86. Selecting Target Segment(s)
Fit with company image and experience
Responsive
Substantial
Competitive
Profitable

87. How to allocate resources
Quantitative
Financial: Revenue & Profitability
 Marginal return
 Contribution
Qualitative
Non-financial, strategic benefit
 Image
 Insulation from competition
 Access to technologies
 Control
Cost-Benefit

88. Macro Strategy
Group by customer organization characteristics
Size
Usage rate
Industry
Organization structure
Location
End Market
New/Repeat purchase

89. Micro Strategy
Characteristics of decision-making process and buying
structure of customer organization.
Perceived importance of purchase
Relative importance: product/vendor attributes
Attitudes toward vendors
Vendor selection rules
Buying center structural
Power of key departments in buying center
Key member: personality, demographics

90. Nested Approach
Hierarchical structure
Start with macro and work down to micro
See Figure 5.6, page 144

92. Why do research?
The external environment is dynamic.
Knowledge becomes outdated.
To gather more information
Better Information  Better Decisions

93. Limitations
Managers NEVER have all of the relevant information
that they need.
Constraints of time and money
Desired information is often more costly than it’s worth.
Decisions are time sensitive. Can’t wait for all of the
information.

94. When NOT to do research
Good research has already been done.
When decisions have been made and won’t be altered by
new information.
When management does not understand scope
necessary and won’t commit $.
Don’t have talent, won’t hire.
Uncertainty reduction justifies cost.

95. Marketing Research Tasks
Estimate market potential
Analyze market share/share of customer
Track competitors
Identify market characteristics & trends
Analyze sales data
Sales forecasting: Existing/new products

96. Key Concerns
Reliability: measures/methods yield consistent
results
Xt1 ≈ Xt2 ≈ Xt3 ≈ Xt4
Validity: research measures what it says it measures; i.e.
little or no error
XA ≈ XM; or XA = XM + Є, and Є ≈ 0

97. Types of Data
Primary
New information generated for specific task.
Can be expensive/time consuming.
Gather by survey, tests, observation, focus groups,
interviews.
Secondary
Existing information.
May not be in useful form.
Sources: government, trade/professional associations,
company records

98. Sampling Issues
Sample vs. Census
Probability
Random, equal chance
Random, stratified
Non-Probability
Convenience
Judgment

99. Questionnaires
Ask what you want to know
Watch length
Aesthetics
Easily understood; watch vernacular
Social desirability bias
Non-response bias
Question order effects

100. Coding-Analysis-Interpretation
Data entry tedious.
Mistakes are made
Need to clean data
Use statistical tools to analyze data.
SPSS/SAS
Can data mine
Important to understand analysis
What results means
Limitations of method

101. B2B vs. B2C Research I
Technology
Need to understand technical needs of customers
Direct economic effect
Quality/Price trade-off very important
Organization, professionals
Understand multiple players, in socio-political setting

102. B2B vs. B2C Research II
Smaller #s of buyers to study
Smaller sample sizes
Secondary data often exists
Tough to get buyer’s attention for research
Need to know which buyer(s) to study
Need technical knowledge for research
Surveys take longer, cost more

104. Marketing Intelligence
Continuous flow of information
Strategic and Tactical
Systematic and periodic
Better understanding of environment over time
Collect from variety of sources
Customers, competitors, regulators, etc.
Constant vigilance

105. Marketing Intelligence System I
People, Procedures, Computers
Acquires, Disseminates, Interprets, Stores information
about internal and external environments

106. Marketing Intelligence System II
Transform raw data to useful information
Can organize information by customer, competitor,
product line, territory, activity
Sources
Internal: sales, service, accounting
External: government, trade associations, competitor
literature, customers, publications
Output
Periodic reports
Special information needs

107. Decision Support Systems
Computer-aided decision-making
Involve analysis, not just retrieval
Database: Repository of data
Statistics: Analyze data
Model: Patterns in the data; relationships
Optimization: Decisions leading to best outcome given
model

109. What is strategy?
Recognize and interpret opportunities (and threats) in
the environment.
Capitalize on these opportunities (and threats) in a
timely fashion.

110. Characteristics of Strategy
Based on clearly defined objectives
Take comprehensive approach to organization problems
Adopt long-term view
Flexible
Planning is everything. The plan is nothing.
 Dwight D. Eisenhower

111. Why have strategy?
State where company wants to be and how it plans to
get there.
Ensure long-term prosperity.
Coordinate efforts throughout the organization.
Have an idea what to do when things don’t go according
to plan.

112. Goal of strategy
Match organization’s core capabilities to its environment
to gain/maintain competitive advantage.
Strategies at multiple levels
Overall corporation
SBU
Product Lines/Markets

113. Strategy vs. Tactics
Strategy
Long-term
overall plan
= Σ Tactics
Tactics
Short-term
Action-oriented
Narrow, immediate goal

114. Strategy Questions
Does it match environment?
Assumptions valid?
Basic elements consistent?
Feasible?
Risk mitigated?
Rewards adequate?

115. Strategy Types
Growth strategy: Product/Market-Based
Primary/Selective Demand Growth
(Product Category vs. Own Brand)
Strategic Target/Advantage (Porter)

116. Growth Strategies
Existing New
Market Product
Existing Penetration Development
Markets
Market
New Diversification
Development
Products

117. Demand Development
Market Potential
Industry Sales
Sales
Company Sales
Primary
Secondary
Time

118. Porter’s Strategies
Overall Cost Leader
Cost
Differentiation
Value
Niche
Own Target Segment
Middle-of-the-Road
Road-Kill

119. Strategic Marketing Management
Emphasize a continuous search for competitive
advantage (lower cost or higher perceived value).
Maximize portfolio or product line rather than every
product.
Product strategies:
 Build for future profits
 Reap profits
 Fill product line (RTE Cereal)
 Defend against cheaper competitors
 Support other products (ink jet printers)

120. Strategy Planning
SWOT Analysis
Strengths
Weaknesses
Opportunities
Threats
ObjectivesStrategyTactics

121. Price Change
Low Long-Term Impact
Low Investment
Low Risk
Easy to implement quickly
Easy for competitor to respond
High chance of similar competitive response.

122. Reengineer Existing Products/Process
Moderate Long-Term Impact
Moderate Investment
Moderate Risk
Moderately easy to implement quickly
Moderately easy for competition to respond
High likelihood of competitor responding with similar
action

123. New Products/Major Process Δ
High Long-Term impact
High Investment
Moderate-High Risk
Difficult to implement quickly
Difficult for competitor to respond
Low chance of competitor responding with similar action

124. Potential Pitfalls of Planning
Low motivation to plan
Justification; Habit
Poor planning abilities
Art (creativity) and Science (analysis)
“Plans are nothing, planning is everything” (Eisenhower)
Unanticipated environmental changes
Contingency Plans and Continuous Updating
Goldilocks Forecasting

125. Planning Tools
Product Life Cycle
Portfolios
BCG Matrix
GE Portfolio
Experience Curves
Technology Life Cycles
“Killer Aps”
Creative Destruction

126. Strategy: Planned or Happens
Intentional vs. Emergent
Planned Strategy
Crafting Strategy

127. Concepts
Killer Applications
Moore’s Law (Intel) (2X Transistors/Chip or 2X speed
every 18 – 24 months
Metcalfe’s Law: Network externalities and
complimentary products (Telephone, www)
Coasian Economics: Transaction costs
Flock of Birds (not seagulls)
Technology is nonproprietary
Fish Tank Phenomenon: Startups compete

128. Closing Thoughts
Strategy cannot be discussed separately from marketing.
Marketing is an integral part of the process of developing
and implementing strategy.

130. Why innovate?
Maintain/Gain competitive advantage
Customer needs & wants change
Competitors’ offerings change
New products are a significant portion of many
companies’ revenues.

131. Dynamic Theories of Competition
Dickson 1992, 1996
Hunt 2002
Hunt and Morgan 1995, 1996, 1997
Innovation is central to gaining and holding competitive
advantage.

132. Root of Theories
Joseph Schumpeter 1934, 1942
Some firms are always innovating, looking for an edge
over competitors.
Not satisfied with status quo.
Creative Destruction
World-Changing Innovation: telephone, automobile,
airplane, television, computer, Bakelite

134. Innovation
Radical/Incremental
Product/Process
Technical/Administrative
Proactive/Reactive
Efficiency Enhancing/Value Adding

135. Decreased
Cost
Increased quality
Lower cost & lower cost
& lower quality
Increased
Quality
Higher cost
& lower quality Increased quality
& higher cost
“Innovations” in this Decision Line
quadrant would
hurt
the organization’s McDonald and Srinivasan 2004
competitive

136. Types of Innovations I
Discontinuous
Fairly revolutionary
Disruptive impact on buyer patterns
Dynamically Continuous
Some disruptive effects
Generally same ways to satisfy needs

137. Types of Innovations II
Continuous
Most common
Little or no disruption
Imitation
Replicate someone else’s idea
 Cheap, no R&D $

138. Innovation Dilemmas I
Unknown vs. Control
Breaking/Following Rules (Skunk-works)
Freedom/Discipline
Constraints, Deadlines

139. Innovation Dilemmas II
Answering needs that customers are not aware of
(MOPRO)
Innovating and Not Innovating Risky
Revolutionary vs. Evolutionary

140. Innovation Dilemmas III
Innovation  Obsolete Products (Intel)
Infrastructure may become obsolete
Innovation generally comes from small entrepreneurs,
but is costly

141. Innovation Dilemmas IV
Perfection vs. “Good Enough”
Technology-Driven
 Market? (Iridium, Ricochet, Dot-Coms)
Customer-Driven:
 Competition? (Dig. Cellular)

142. Innovation Dilemmas V
Genius vs. Persistence
Inspiration vs. Perspiration
Breaking the rules of the game vs. playing a different
game
Discontinuity; Creative Destruction

143. Innovation Dilemmas VI
First to market does not equal success
Need complimentary assets (Teece 1988)
Market needs to be ready

144. Risks I
Natural tendency to resist change
Don’t want to learn new things
Threat of taking resources
High failure rates
Hasn’t been done before
Expensive

145. Risks II
Economic Failure
Effect on company image
Psychological well-being of company after failure (also
myopia of success)
Drain on company resources
Cash Flow
Distraction of management
Cannibalism

146. Reasons for Failure
No market
Too much competition
Competitor leap frog
Environmental myopia
Can’t deliver on promises
Price

147. Necessary Resources
Financial
Engineering
R&D
Marketing Research
Production
Sales

148. Internal Incompetence
Poor technical assessment
Loose screening criteria
Market potential over/under-estimates
Sloppy financial analysis
Weak quality control in production
Under-estimating competitor’s strengths &
customer loyalty
Bias in marketing research

149. Dimensions of Success I
Keys to success
Product Uniqueness/Superiority
Market Knowledge/Proficiency
Technical and Production Synergy

150. Dimensions of Success II
Success Facilitators
Marketing Resources
Strength of Communications and Launch
Large, Growing Market with Need

151. Dimensions of Success III
Barriers to Success
No Economic Advantage
Extremely Dynamic Market
Customers Already Satisfied

152. Dimensions of Success IV
Factors of Unknown Impact
Market-entry order
Pre-commercialization proficiency
Dominant Competitor in Market
Production Start-up smoothness
Newness of product to company
Project magnitude/technical complexity
Clear product demand
Customer Attitudes

153. Innovation Charter
Innovativeness
How radical
How risky
Proactiveness (Offensiveness)
Lead vs. follow
Synergy
Compatibility with current products and resources

154. Characteristics of Innovative
Companies
Organizational commitment to innovation
Entire organization involved
Attention to Marketing
Effective design/development
Good Communication (Internal/External)
Management Skills/Professionalism

155. Process of Innovation
Idea Generation
Screening
Technical Feasibility Analysis
Product Testing
Profitability Analysis
Test Marketing
Market Launch
Life-Cycle Management

156. Organizing for Innovation
See Table 8.6, pp. 260-1
Notice that each has certain
advantages and disadvantages
There is no one right way
Task Dependent
Resource Dependent

157. Marketing-R&D Interface
House of Quality
It takes both sides of the organizational brain working
together to be successful.
Each has talents and knowledge that compliments the
other.

158. Corporate Entrepreneurship
Intrepreneurship
Champion/Marketing Subversive
Skunk-works
Characteristics
Proactive
Risk Taking
Innovative

160. Products
Marketing is exchange, and
the product is what the
company is offering.

161. Time
New industrial products can take years to develop.
Technologies
Patents
Packaging
From prototype to reliable commercial product
Strategies for the supporting parts of the marketing mix
(price, promotion, and distribution) take weeks or
months to develop.

162. Marketing Mix Elements
The product/service offering determines
Appropriate quality position
Target markets
Competitors
Appropriate distribution/logistics
Furthermore, cost structure/financial needs influenced
by design, production, delivery requirements.

163. Product vs. Service
Tangible/Intangible
Caterpillar Tractor vs. Federal Express Delivery
Customers are really buying “solutions.”
Caterpillar provides intangible services to support
products.
FedEx uses tangible products to support services.

164. Products
Each product should be thought of as a bundle of
problem-solving attributes, or a package of benefits.
Each product can be evaluated on four levels.
Core Product
Tangible Product
Augmented Product
Communicated Product

165. Core Product
The primary benefit sought by the customer.
An engine would provide the power to make an automobile
run.
A tractor will enable a farmer to till the field.
A computer will allow an organization to keep records, and
communicate.
A desk will provide employees a place to work.

166. Tangible Product
The physical aspects of the product.
Quality
Features
Options
Styling
Color
Packaging

167. Augmented Product
Services/extras that support the product.
Warranties
Delivery
Installation
Training
Service
Tech Support

168. Communicated Product
That which the company uses to present the product to
its customers
Brand name
Logo/trademark: Identity
Positioning
Image

169. Strategies
Generally we think of moving out from the core benefit
as the best strategy.
However, a competitor’s product advantage might be
diffused by moving back in.

170. Uniqueness of Industrial Products
Broad range of products: trucks, factories, staples.
The type of product has implications for the
development of the marketing strategy and tactics.
Can qualify products along 8 dimensions.

171. Eight Product Dimensions
Standardized/Customized
Simple/Complex
Low/High Unit Cost
System Part/Stand Alone
Sold in Volume/Per-Unit Basis
Ready to Use/Requires Installation
Unfinished Good, Component/Finished Good
Consumed Quickly/Over Many Years

172. Service
Deed, Performance, Effort
Service Experience  delivery of service attributes to
customer
Visible Components: Front Office,
Customer sees
Personnel, facilities, equipment (Quality Cues)
Invisible Components: Back Office
Internal Operations, Customer does not see
Administration, purchasing, accounting, computer
operations, maintenance, employee training

173. Dry dock: Boat building and boat repairs (Ketchikan, Alaska)

174. Unique Characteristics
of Industrial Services
Intangible (Most distinguishing characteristic)
Perishable (can’t inventory)
Often consumed at purchase (simultaneous)
Difficult to gain production economies
Customized more frequently than products
Consumed in irregular patterns typically
Generate less customer loyalty than products

175. Industrial vs. Consumer Services I
Non-convenience type: Custom, impact $, search
Transportable
Brought to customer (Auditing, Legal)
Not as conducive to mass production/marketing
Customer (as individual) does not become part of the
service. (Janitorial vs. Haircut) Often service is
performed on facilities, equipment, or end products.

176. Industrial vs. Consumer Services II
People intensive (capabilities, experience, background),
but also expensive equipment
Sophisticated, knowledgeable customers with specific
expectations
Formal buying process; tangible evidence of ability (cues,
referrals)
Longer term, more stable relationships
Demand patterns more stable/predictable

177. Classifying Products and Services
Based on Tangibility
Consulting Corporate Furniture
Intangible Retreat Tangible

178. Most Companies Sell Both
Few pure products or pure services
Often companies sell complementary products and
services
Consultants may sell software to implement their
recommendations
Security service might also install equipment
Advertising medium might also design ads

179. Product/Service Line Decisions
Cannot make decisions on isolated products or services
Decisions must be made holistically.
Some products/services support others
Some might protect market share
Might use one to set up demand for more profitable
after-sale service or products

180. Mixes, Lines, and Items
Mixes are largest group: Total set of items/lines
Nokia Mobile Communications
Mid-level are lines: Related Items
Tech, production, cost, distribution, customer aps
Can have sub-lines by P/Q
Nokia Cellular Telephones
Items are within lines: Specific Offering
Nokia 3210 Cellular Telephone

181. Assess Item Relationships
Cross-Elasticity
Effect of one product/service on another
Positive Cross-Elasticity
Substitute one product for another
Product from lower end line
Negative Cross-Elasticity
Complimentary products
Computer and Printer

182. Breadth, Length, & Depth I
Breadth is the number of different lines carried by the
company.
Not just #s, but Consistency: tech, production, distribution,
customers
Length is the number of items in a given line.
Shallow (few items) or Deep (many items)
Depth is the number of variations of a particular item in a
line.

183. Breadth, Length, & Depth II
See example of 3M, Figure 9.5, pg. 288.
Do not spread company too thin, or offer products that
do not capitalize on core competencies.
Shallow lines may appeal to fewer segments; deeper
lines may be inefficient.
Depth may grow with PLC, until decline stage

184. Breadth, Length, & Depth III
Strategies
Full Line/All Market (GE)
Market Specialist (Kidder Peabody Financial Services)
Line Specialist (TRW Valves)
Limited Line Specialist (ACI)
Single Item Company (ADD Systems)
Special Situation Company (Pilko, Boots & Coots)

185. Managing Product Quality I
PRODUCT QUALITY
How well do the product specifications meet customer
needs? How well does the product design conform to
these specs?
How well does the product conform to design?
How well does the product perform?:
Reliability, Safety, Durability, Maintainability

186. Managing Product Quality II
SUPPORT QUALITY
How well does product meet customer’s needs at and after
sale?
DELIVERY QUALITY
Timely delivery

187. Managing Product Quality III
Marketers need to ensure that delivered quality meets or
exceeds customer expectations.
Goal is a satisfied customer.
Tracking cost of quality; benchmarking.
Negative costs: of defective products
Positive costs: of eliminating defects

188. Managing Service Quality
Matching service features/characteristics to customers’
needs
More difficult to do with intangible services vs. tangible
products
Establish formal service standards

189. Service Standards I
Focus on the major components of the service
experience (people, equipment, tangibles)
Technical Quality
What the customer receives: audit rpt, market rpt.,…
General know-how, equipment, abilities
Functional Quality
How the customer receives service: professionalism
Reflects attitudes and behaviors of contact employees
Need both functional & technical working together

190. Service Standards II
Difficult to measure
Subjective measures easier to administer than objective
measures
Objective: On-time deliver %
Subjective: Customer judgment of sales performance
SERVQUAL (See Table 9.4, pg. 295)

191. Positioning I
How the firm wants the product/service lines to be
perceived by the customers. (Not where the store is
located!)
Perceptions about underlying benefits
Perceptions about how they compare to competitors’
offerings
Use the marketing mix (4 Ps) to create position

192. Positioning II
Attribute (Reliable: UPS)
Price/Quality (Cheap: USPS)
Competitor (Away/Against)
Product Application (Medical, Transportation)
Product User (Medical, Finance, Trucking)
Product Class (Locks as security: Schlage)

193. Perceptual Map High Quality
Poor Service Excellent Service
Low Quality

195. Price
Price is unique among the 4 Ps in that it directly affects
the company’s revenues and profits.
Pricing is both a science and an art.
Diligence and creativity are both necessary.
Pricing seems to be the one “P” that has been
dramatically affected by the use of the Internet.

196. Characteristics of Industrial Prices I
Includes more than list or quoted price
Delivery & Installation
Discounts (quantity, promotion, remit time)
Training costs
Trade-in allowance
Promotions: 2 for 1
Financing costs

197. Characteristics of Industrial Prices II
Not an independent variable. Pricing interacts with:
product,
promotion, and
distribution strategies
Must consider complementary or substitute products
when establishing price strategy

198. Characteristics of Industrial Prices III
Prices can be changed by:
Changing price paid by buyer
Changing quantity/quality offered by seller
Changing premiums or discounts
Changing time and place of payment
 Carry
 Tax/Cash Flow implications
Changing time and place of transfer of ownership
 Delivery

199. Characteristics of Industrial Prices IV
Pricing often set through competitive bidding on a
project-by-project basis
Don’t know competitors’ prices
Negotiation may be used instead (some insist)
Emphasis on fairness
Need to justify price increases
Also justify higher prices

200. Characteristics of Industrial Prices V
Affected by economic factors outside company’s control:
Inflation
 Long-Term contract (escalation clauses)
Interest Rates
Currency Exchange Rates
 Affects cost of materials
 Affects price of exports

201. Price = f(Value)
Need to set an initial price that is neither too high (hurts
sales) or too low (lost profit)
Value has two major dimensions:
Customer’s subjective estimate of product’s capacity to
satisfy a set of goals
Objectively established by the competitive market. “What
the market will bear.”

202. Economic Value to the Customer
Purely economic sources of value
Need to compare life-cycle costs of your product and
substitutes
If incremental value is high enough to justify a higher
price, then there is EVC
Sometimes it takes a convincing sales effort to help
customer see the value

203. What’s it worth to the customer?
How much money can customers save by using our
product?
Can the product help them increase sales or reach new
customers?
Does the product provide a competitive advantage?
Does the product improve the safety of the products the
customer sells? ( Value)
How much time can customer save by buying product vs.
making themselves?

204. Strategic Pricing Programs:
Objectives I
ROI; Market Share
LT/ST Profit
Sales Growth
Stabilize Market
Convey Desired Image
Desensitize customers to price
Be Price Leader
Discourage entry & push out weak competitors

205. Strategic Pricing Programs:
Objectives II
Avoid Government interference (Anti-Trust/Regs)
Perceived Fairness
Customers, Distributors, Suppliers
Create interest & excitement
Sell other items in line
Discourage competitors from dropping price
Recover investment quickly
Generate sales volume
Encourage quick payment

206. Strategic Pricing Programs:
Strategy
Cost-Based
Fixed and Variable costs/Unit
Markup/ROI
Market-Based
Competitor Prices
Customer Demand

207. Market-Based Pricing Strategies
Floor: just cover costs
Penetration: lower than market
Parity: match market
Premium: skimming
Price Leadership: everyone plays follow the leader
Stay Out/Keep Out
Bundle: Multiple products/services
Value-Based: Segment pricing
Cross-Benefit: “Gotcha” (Razors, Ink Jet)

208. Strategic Pricing Programs:
Structure
Basic: One price, no discounts, everyone pays the same
Lacks flexibility, limits sales
Low Cost  competitive advantage in price
Price moves toward costs in PLC, until end
Creative Pricing: empty seats, box filler, late
cancellations, season, demand, advance purchase,
customer loyalty

209. Strategic Pricing Programs:
Levels/Tactics
Actual price charge w/discounts
Acceptable range that conveys value
Odd ($2,999) vs. Round ($3000)
Ensure adequate price gaps between items
Modify for costs, competitors, market Δs
Timing: not arbitrary, justify to customer
Sends signals to customers/competitors
Rebates, 2/1, trade-in, etc.

210. Pricing Program
Strategy, structure, level, and tactics all work together.
They must be coordinated.
Strategy may be long lived (several years).
May need to modify structure periodically.
Offer special price deals.
Levels and tactics need to be monitored closely and
changed as needed.
Address competitor changes
In response to cost changes
As demand changes

211. Pricing Decisions: What Lies Beneath?
Most companies use multiple pricing strategies.
If the firm sells complimentary or substitute products,
they are more likely to use product line strategies (e.g.,
bundling).
Objectives
Costs
Demand
Competition

212. Objectives/Strategies
Differentiation  Higher Margins
Fewer competitors are substitutes
Increased brand loyalty
Moving to low price from premium-quality position can
hurt sales, not help
Recoup development costs over longer period of time.
Otherwise run risk of sales numbers that are too low to
ever recoup costs.

213. Costs
Establishes the minimum price
Set price based on target margin or return
Can price below cost to:
Keep employees and facilities working during downturn
Support other products in the line
Low bid to establish relationship. Make $ in long term, or
on extras
Experience or reputation
New skills

214. Standard Cost Approach
Target Return Pricing
Need accurate sales forecast: standard volume
Variable costs and fixed costs/unit: standard costs
P = DVC + FC/Q + rK/Q
P: Price DVC: Direct Variable Cost/Unit
FC: Fixed Cost r: Rate of Return
K: Capital Used Q: Standard Volume (units)

215. Standard Cost Approach
Can include interest rates on debt, tax rates (perhaps
different countries for mfr and sales), or inflation factors.
Don’t raise prices to counter weak sales; Don’t drop
prices too quickly either
Need reliable standard volume estimate
Initial low price may increase volume, which in turn
lowers per unit fixed costs

216. Contribution Analysis
Trade off between price and units sold
Total Revenue – Total Variable Cost = Variable
Contribution Margin
Fixed Costs ÷ Contribution/Unit = Break Even Sales
Volume (minimum sales)
Estimate change in volume for changes in price and
compare to break even (Maximum sales/profit

217. Demand
Sets the upper limit of price
Need to understand customer’s reasons for buying
product; how they use it
Hard Benefits
Physical Attributes: hp, productivity, durability, error rate,
performance tolerances
 Soft Benefits
Warranty, service, other augmented product
Balance benefits to customer against the costs (price +)

218. Costs
Price + (delivery, modifications, financing, maintenance,
operation, less salvage)
CT machine $500K-$1MM to purchase
Also costs ~ $100K/year to operate and maintain
Cost to prepare facilities to house
Risk (defect, poor performance)  Cost
What trade offs are the customers willing to accept?
Slower delivery; Low service priority
Higher, chunkier inventory
Larger purchase commitment

219. Elasticity of Demand
Sensitivity of customer’s quantity demand to changes in
price
Usually demand has a negative slope (higher price 
lower demand)
Issue is how steep
Sometimes must hit a threshold level before there is a
change in elasticity  Substitutes become more
palatable as prices rise

220. $
Elastic
Inelastic
Quantity

221. Elasticity
% Δ Quantity ÷ % Δ Price
If > 1, elastic
If < 1, inelastic

222. Determinants of Elasticity
Available substitutes
Necessity of product
Relative size of purchase $$$
Differentiation of product/Standardization
Customer switching costs
Ease/Difficulty of comparison (Complexity)
Third-Party Payer (Pass-Through)
Price/Quality Association
Time (Payment due, need for product)

223. Industrial Products
Tend to have inelastic demand
Especially if technically sophisticated, customized, or
crucial to operations
Routine purchases more elastic
Situational elasticity: customer and market
circumstances
Incumbents push uniqueness
Challengers push substitutability
Elasticity can vary across segments

224. Cross Elasticity
Compliments
Lumber and nails, drill presses and bits
Negative cross elasticity
Substitutes
Shipping by train vs. truck, Company B vs. A
Positive cross elasticity

225. Competition
Need to monitor continuously
Anticipate changes
Relatively easy because there are relatively few suppliers
and few customers
Tends to be oligopolistic
Structure: concentrated
Price Leader
Sets the tone for pricing
Usually the organization with the best cost structure
(competitive advantage)

226. Four Strategic Pricing Options
Pressure Pricing
Opportunistic Pricing
Gold-Standard Pricing
Negotiated Pricing

227. Pressure Pricing
Market leader maintains fairly stable price level
Price not dictated by demand fluctuations
Price increases controlled
Controls market entry

228. Opportunistic Pricing
Follow the swings of the market
Raise prices as high as elasticity will allow
Raise prices as high as customer goodwill or loyalty will
allow
Lower prices as demand drops

229. Gold-Standard Pricing
William Jennings Bryan
Cross of Gold Speech

230. Gold-Standard Pricing
Short run policy
Quote all customers the same price
Ignore specific circumstances

231. Negotiated Pricing
Tailor pricing to each customer (or segment) based on
Elasticity
Competitive Alternatives
Type of Customers

232. PLC Pricing I
Critical at Introductory Stage
Sets the tone for future pricing decisions
Penetration pricing (low)
Higher sales, lower margins
Can leave too much on the table
Parity pricing (match)
Premium/Skimming pricing (high)
Can get highest margins
Risk competitive entry
Always easier to lower prices than to raise
Don’t try to recoup R&D costs too quickly

233. PLC Pricing II
Growth: New competition
More specialized need segments develop
Product extensions developed
Scale economies and experience curve start to come into
play
Price ranges narrow; convergence on market price
Downward pressure on pricing

234. PLC Pricing III
Maturity: Market more saturated
Competition aggressive and entrenched
Product may be cash generator (Cash Cow)
Focus is on repeat sales/internal cost efficiency
Competition more heavily priced based; but stop short of
price war
Maximize short-term direct product contribution to
profit

235. PLC Pricing IV
Decline
May raise price to capitalize on remaining, inelastic
demand, or
Leave prices stable, cut expenditures, let product die, or
Cut price, toward break-even, use as loss leader to sell
complimentary products

236. Competitive Bidding I
Most common with
public projects
governmental agencies
custom, technically complex products
long manufacturing cycles
Usually the low bidder
Not always in private sector
Consider bidder qualifications (See AGC form)

237. Competitive Bidding II
Invitation to Bid: RFP published
Newspaper
Private Publications: Dodge Reports
Usually very precise plans and specifications that become
part of the purchase contract
May have to provide a performance bond to ensure that
the product/service will be completed. Bid bonds less
common.

238. Competitive Bidding III
Sealed/Closed Bids
Due at same time
Open all at once
One time pricing
Open/Negotiated Bids
Iterative process
Combines bidding and negotiating
Web bidding has facilitated this process

239. Competitive Bidding IV
Questions to consider:
Is project large enough to bid?
Are the specs precise enough to do an accurate bid?
How will successful bid affect our other jobs, products, and
customers?
Who else may bid? How hungry are they?
Do we have time to put together quality bid?
 (Courtesy Bid)

240. Competitive Bidding V
Bidding Strategy
Probabilistic Bidding (Value????)
Assumes profit maximization is goal
Assumes lowest bid selected
Focus on size of bid, expected profit if win, and probability
that bid will win
E(X) = P(X)Z(X)
X = Bid Price Z(X) = Actual profit if successful
P(X) = Probability of bid acceptance
E(X) = Expected profit at this bid

241. Competitive Bidding VI
Bidding models are only tools
Managerial judgment is critical
Set price to achieve a good win
Bids are not always fixed
Might have an escalation clause
Might have a pass-through clause (cost+)
Post-Bid negotiation (by customer) common
Extras (not addressed by bid) PROFITABLE

242. Negotiation

243. Price Negotiation I
Need good interpersonal skills, persuasion skills,
judgment, conflict resolution skills
Negotiation is the result of two sides coming together to
decide how much gain each will have by working
together
If not win-win, won’t happen
Each side has minimums that it wants to “win” and needs
to “win”
If < “need”  No deal
If << “want”  No repeat deal

244. Price Negotiation II
Need to understand risks and rewards for both sides of
negotiation
Estimate settlement ranges for self and other party
Bargaining zone: Seller’s minimum price to Buyer’s
maximum price

245. Seller Buyer’s Max Buyer
Opens Price Wants
High Bargaining Low
Zone
Seller’s Min Buyer
Seller
Price Opens
Wants

246. Negotiation Styles
Avoidant: Relatively rare
Avoid confrontation. Out for self.
Collaborative: Good long-term strategy
Win-Win. Try to satisfy self and other party.
Competitive: Short-sighted
Win-Lose. Get all you can from other party.
Sharing: Common
Both parties partially satisfied.
Accommodative: Rare
Satisfy other party, at own expense.

247. Other Issues on Negotiation
One time deal, or repeated negotiation?
 Repeat  more cooperation
 Have longer term view
What else besides price is important?
 Guarantees
 Return Policies
 Volume
 Quality
 Financing
 Service
Time constraints?

248. Discounts and Incentives
Common point of negotiation
Can use to attract new customers, or keep existing ones
Can offer on select products, and to select customers
Prepaid freight, drop-shipping, financing, post-dating,
returns, rebate
Discounts:
Cash
Quantity
Trade

249. Cash Discounts
Incentive to pay quickly
Helps cash flow
2/10, n30: 2% off if paid w/in 10 days, otherwise, full
amount due in 30 days
Might offer discount for prepaying, prior to delivery, or
even prior to production
Many companies need cash, and will discount for up-
front $ (+ no risk)
Prepaid expenses can provide payer tax benefits in
addition to discounts offered

250. Quantity Discounts
Cheaper by the dozen theory
Seller gets guaranteed sales
Can plan production better
Smoothes out production, inventory, delivery
Helps with financing, & getting other business
Can offer discounts on $ or unit level
Might spread out large purchases over a period of time,
but commit up front

251. Trade Discounts
Also called functional discounts
Usually given to distributors for performing certain
functions for the manufacturer
Storage, warehousing
Sales
Transportation
Promotion
Common with automobile dealers

252. Leasing I
Contract to use an asset that is owned by someone else
(renting) for a period of time
Avoid cash payment up front
Sometimes avoid maintenance and ops costs
Can expense for taxes (not amortize)
Does not reduce debt capacity
Hedge against technology obsolescence

253. Leasing II
Financial Lease
 Longer term
 Σ lease pmts > Purchase price of asset
 Lessee (buyer) responsible for maintenance & operating
expenses
 Can apply some of lease pmt to purchase @ end
Operating Lease
 Shorter, cancelable
 Not amortized
 Lessor (seller) responsible for ownership expenses
 No purchase option
 Lease price > financial lease price

254. Transfer Pricing
Internal sales price from one division to another within
the same company
Need to cover costs
Need to be cheaper than market
Exact price subject to negotiation
Both sides usually profit centers
May need to be determined by higher-up
Set formula (cost + 2/3 of margin to market)

255. WWW & Pricing
Facilitates information search by customers
Auctions: buyers set prices, not sellers
Buyers control transaction, on-line bidding
Can get spot pricing on everything and can take
competitive bids on lots of purchases
Forces even strong brands to be treated like
commodities

256. What to do about WWW
Use differential pricing
Optimize pricing by using customer data: increases
customer switching costs
De-Menu pricing; can adjust pricing almost instantly
as needed; remove lumpiness
Push differentiation even more: can use web to
provide pleasing aesthetics, entertainment,
education, or escapism
Don’t assume customers will not pay more
Establish electronic exchanges, barter excess
supplies
Maximize revenue, not price: Yield Management

258. What is distribution?
Set of companies involved in the flow of products from
the manufacturer to the ultimate customer.
Sometimes called a “value-added chain”
Involves intermediaries (“middlemen”)
Joins makers and buyers

259. Channel Functions
Transportation
Storage & Inventory
Breaking bulk into sellable sizes & Sorting
Creating assortment
Financing
Selling
Promoting
Feedback from market
Training
Service

260. Channel Flows
Goods and Services
Assignment of risk also moves
Titles are transferred
Money/Financing flows
Information flows

261. Purpose of Channels
Provide goods to the right customers
In the right quantities
Of the right quality
At the right time
In the right place
To maximize profits

262. Value of Intermediaries
You can eliminate intermediaries, but not their functions
The reason that intermediaries exist is that they provide
these functions more effectively and efficiently than the
manufacturer can on its own
Economists have noted fewer intermediaries at
intro/growth and decline phases of PLC

263. B2B Channels
Fewer customers, larger purchases, complex delivery
requirements, tech support/service
Means B2B channels are shorter and more direct than
B2C
B2C uses wholesalers and retailers
B2B uses industrial distributors, manufacturers’ agents,
jobbers, & brokers

264. Manufacturers’ Representatives I
Independent business, usually 5-15 clients
Long-term relationship, a decade or more
Usually a large geographic area
Often > 100 customers
Principle function is SELLING.
Established contacts and tech knowledge
Only get paid when making sale

265. Manufacturers’ Representatives II
Especially helpful for small and medium-sized
manufacturers
Can use instead of or to supplement sales force, esp. in
remote areas
When sales get large enough, manufacturer may choose
to use own sales force. Need to anticipate this conflict.

266. Manufacturers’ Representatives III
Use of reps  loss of control by manufacturer
Conflict often occurs because rep carries products from
multiple manufacturers
Agency theory suggest that rep will push:
Better quality products
Products with higher commissions
Products of mfrs they have better relation with
Products with stronger promotional support

267. Manufacturers’ Representatives IV
Reps sell
Care less about market information or customer service
They want reliable, quality products, mfr support,
reasonable commission rates, training, and good mfr
reputation and image

268. Manufacturers’ Representatives V
Selection Criteria
History, Growth/plans
Territory
Facilities, personnel, management
Other lines
Reputation
Services

269. Industrial Distributors I
An independent wholesaler who sells the majority of its
goods and services to industrial , commercial, and
institutional customers, the government, builders, &
farmers.
Independently owned/operated merchant
Takes title to merchandise, keeps inventory, delivers,
extends credit, may service after the sale

270. Industrial Distributors II
Two major categories
General (Grainger)
Specialized (Caterpillar)
Heavy reliance on short-term debt
Most assets tied up in inventory and AR
Use inside and outside sales
Stock small ticket items:
Spare parts, lubricants, power tools, small machinery,
bearings

271. Industrial Distributors III
Principle functions: selling, inventory, credit
Can provide important feedback to manufacturer about
the local market, about problems with sales, service, etc.
Sell popular parts, small quantities
Distributor may carry competitor product lines, and
many different products.

272. Industrial Distributors IV
Exclusivity Agreements: 1-Way, 2-Way
MFR can provide:
training
discounts
service
missionary sales
Value?

273. Brokers
Bring buyer and seller together
Facilitate transaction, including negotiations
No ownership
Short-term relationship, transaction-specific
Commission
Can represent seller or buyer

274. Commission Merchants
Short term relationship
Deal with bulk products like raw materials, commodities
Never take possession of materials
Represent manufacturer
Never take title
Paid on commission

275. Facilitators
Improves the efficiency of the channel
Can provide financing, credit, market information,
grading/certification
Never take title
Does not negotiate sale or purchase

276. Jobbers
Manufacturers’ rep
Bulk products (raw materials, commodities)
Take title
Do not take possession
Short-term relationships

277. Sales Agents
Independent salespeople
Handle entire marketing function of a single producer
May design promotions, establish prices, determine
distribution policies, and recommend marketing
strategies.

278. Channel Conflict
Only an issue when it becomes dysfunctional
Conflict can arise over many issues: inventory levels,
margins, competitors, promotional expenditures, trainings,
returns, product obsolescence, delivery, sales support,
commissions (See Table 13.4, p. 448)
Monitor conflicts and resolve/manage
Can address through
Ownership
Contract
power

279. Channel Strategy

280. Channel Strategy
To intermediate or not to intermediate. That is the
question.
Distribution objectives
Sales, profits, market share & coverage, control, costs,
service, image
Consider buyers, product, competition, available
channels, legal environment

281. Why Adjust Channels?
Number of buyers and specialized needs change during
PLC
Buyers’ change and their buying changes
Changes in customer demands
Price, order size, delivery times, etc.
Some options become available, while other options
become feasible over time

282. Why Adjust Channels?

283. Why Not Adjust Channels?
Long-term commitment
Legal, moral, social
Inertia: Change is difficult. Takes time and much energy.
Competitors may tap abandoned channels
Need data to justify change
Resistance to change company and channel
Change is disruptive

284. Evaluating Intermediaries
Need to periodically review channel members’
productivity, profitability, and effectiveness
Contribution Analysis Method
Weighted Factor Method

285. Contribution Analysis
Objective measure
Evaluate intermediaries based on their contribution to
indirect fixed costs and profitability, after covering fixed
costs
See Table 13.6, pg. 457

286. Weighted Factors
Subjective measure
Identify evaluative criteria
Assign weights based on importance
Evaluate each intermediary
Weight x Evaluation = Score
See Table 13.7, pg. 459

287. Logistics

288. Logistics
Transportation
Warehousing Order Processing
Inventory Management Production Planning
Protective Packaging Customer Service
Plant, Warehouse
Materials Handling
Location (Traveling
salesman problem)

289. Ketchikan, Alaska Barge Traffic

291. Logistics Performance Measures
Total Cost
On-time Delivery Customer
Complaints
Cost Trends
Inventory Levels
Customer Satisfaction
Inventory Turns
Actual vs. Budget
Cost/Unit
Stock-outs
Delivery Consistency

292. Newark

295. Industrial Promotion Mix
Four More Ps:
Personal Selling
Paid Advertising
Sales Promotion
Publicity

296. What’s different about
industrial promotion?
Differences due to:
Products are more technical
Fewer buyers
Buyer location
Long, complex buying process
Therefore, advertising, sales promotion
and publicity play support roles to sales.

297. What else is different about
industrial promotion?
Not much mass media.
Mostly print advertising
Messages logical/factual, vs. emotional
May need different promotion to
different organizations, or even people
within a single organization.

299. Available Promotional Tools I
General Business Publications: Forbes
Trade Publications (See pg. 362)
Horizontal: Job/Function focused: purchasing
Vertical: Industry focused: steel, agriculture
Industrial Directories: Thomas Register
Trade Shows
Catalogs

300. Available Promotional Tools II
Direct Mail
Videos
Technical Reports
Web Sites/Internet
Samples
Publicity
Novelties
Telemarketing

302. Spending Promotional Dollars
Specialized business pubs: 23%
Trade shows, exhibits, displays: 18%
Direct Mail: 10%
Electronic Media/Internet: 9%
Publicity/Public Relations: 7%
General Magazines: 6%
Dealer/Distributor Material: 5%
Directories, Yellow Pages: 5%

304. Cost/Effectiveness of Promo Mix
Cost/Contact Effectiveness
High Field Salesperson High
Inside Salesperson
(Telemarketing)
Medium Trade Shows Medium
Direct Mail
Catalogs/Manuals
Low Low
Trade Journals
Other Advertising

305. Micro Look at Buying
Cognition  Affect  Behavior
Awareness: Publicity and Advertising
Comprehension: Education and Advertising
Conviction: Personal Selling, some Adv.
Ordering: Personal Selling

306. Macro Look at Buying
Problem Awareness: Sr. Mgmt/Current Users; use Trade
Shows and Trade Publication Advertising
Solution Identification/ Information Search: Techies; use
Catalogs, Samples, Trade Journal Advertising, Sales Force
(defense)
Evaluate Alternatives: Purchasing Mgrs.; use Comparative
Adv., Testimonials, Sales, Tech Reports, Publicity
Decide/Purchase: SALES: negotiate, persuade, adapt
Post-Purchase Evaluation: Advertising, inside sales, direct
mail

307. Implications for Marketer
Can influence buyer’s decision
Need to determine:
Most critical stages for product/market
Which promo tool most appropriate for stage
Balance cost/benefit of promo
As risk increases, the buyer seeks more info
More conflict, the buyer seeks more info

308. Does B2B advertising make sense?

309. Should businesses advertise to businesses?
Yes, but focus on print media
Need to reach specific industries, organizations, and
individuals within organizations
Can use some TV and Radio, but usually for products with
broad market appeal (insurance, computers)

310. Print Media
Advantages
Not fleeting like broadcast
Can include technical information
Buyer can go back and see again
Buyer can go through at own pace & focus on what she/he
is interested
Disadvantages
Can’t possibly include all pertinent information
May not be seen
Difficult to assess effectiveness (like all adv.)

311. Why businesses should advertise.
Can reach people in the buying center that sales can’t reach
Good tool for prospecting (1-800; reply card)
Can lay groundwork for salesperson’s call
 Creating awareness
 Providing general information
Can reduce cost of sales call
Motivate/support intermediaries/distributors
Can create pull for customer’s products, leading to increased
derived demand
Can convey desired image

312. Advertising Objectives I
Express as sales or market share (easy to measure)
Could also use awareness levels or changes in attitudes,
beliefs, or perceptions
Might just be reminder (esp. in decline)
Post-sale reassurance (reduce cognitive dissonance)
BE SPECIFIC: Time and Audience
Unfortunately, most managers don’t know or understand
their objectives

313. Advertising Objectives II
Objective Strategy Characteristics
Awareness Corporate Diffuse, LT Benefits; Low Persuasion
Generic Informative, not comparative
Knowledge Preemptive Establish superiority. Informative,
moderate persuasion
Liking Brand Image Focus on benefits, not competitors
Emotion, moderate persuasion
Preference Positioning Focus on differentiation vs.
Conviction competition. High/moderate
persuasion
Purchase Unique What comp. Does not do. Hi
Appeal to action persuasion
Incentive to act. High persuasion

314. Budget
% of sales: Easy, bad if sales decrease
Last year’s budget + %: Easy, not rigorous
Competitive parity: Are competitors right?
Product/Service profitability: Low Π needs adv.
Productivity judgments: Cost/Benefit analysis
Task & Objectives: Complex, best method

315. How much to spend?
High Low
Standardized Products Customized Products
Broad product line Narrow product line
Superior product quality Lower product quality
High price Low/Average price

316. The Message I
Need visual magnetism: get attention
Color, contrast, angles, straight lines, oddities, …
Select the right audience
Invite reader into the scene: identify with ad
Promise reward (benefits, good performance)
Back up promise: support claim
Testimonials, tech standards, …

317. The Message II
Organize ad to present message in logical sequence
Speak to reader as an individual, personalize, keep
simple, ACTIVE VOICE
Avoid Clichés
Easy to read
What vs. where or who: Focus on product or service
first, not the company (except…)
Reflect company’s character & personality
Be consistent, takes long time to develop and maintain
image

318. Choosing Media I
General B. Pubs (Forbes, Business Week)
Good for products with broad appeal to large # of
customers, who are geographically dispersed.
Good to project image to business community.
May be best to reach upper level management.
Cost up to TEN TIMES price of trade journal ads.
Trade Journals (Modern Metal, Purchasing Today)
 Special Interest. Knowledgeable readers.
 Vertical vs. Horizontal.
 Useful for directing specific, technical messages
 Can reach technical people who read these journals

319. Choosing Media II
Industrial Directories (Thomas Register)
List suppliers of variety of product types
Also Catalogs, like Sweet’s
Telemarketing
WATS, incoming and outgoing
Complaints, inquiries, orders, service requests
WWW
Catalogs, orders, email, phone directories, information on
company and products
Direct Mail: Brochures, Intro letters, LISTS

320. Evaluating Advertising
Compare outcomes to goals.
Look at bottom-line increases in sales. Be sure to
account for other factors (pricing, sales efforts,
competitor actions)
Nonlinear relationship, diminishing returns
Time lag can be months
Was target audience reached?
Which medium was most effective? $/sale
Effect of adv on audience attitude, awareness, recall,
behavioral intent (to buy)

321. Sales Promotion
Supplements and complements sales
Samples
Contests for distributors
Advertising Specialties: Trinkets and Trash
Trade Shows, conventions
Catalogs
Technical Reports

322. Trade Shows I
Formal exhibition of products
Opportunity to make lots of contacts at once
Good for customers to ask questions and compare
competitors
Introduce/demonstrate products
Build awareness
Make personal contacts
Parity with competitors (Keeping up with Joneses)
Recruit employees, reps, and distributors

323. Trade Shows II
Need to identify goals
Measure effectiveness
Know which shows to focus on
Displays and Literature: Location, Quantity/Quality
Static Displays: Well trained salespeople.
Attention-Getters: Contests, Shows, Games, Gimmicks
Audiovisual Presentations: Tapes, Computers, Films
Live Product Demonstrations: 10 Minutes ±
Be on MUST SEE list
Take-Aways: Literature, brochures, samples

324. Catalogs
Contain information on the company’s line of products.
Might include price lists & warranties.
Can customize
Use Direct Mail, Trade Shows, Sales to distribute
Put on-line
Publish in industry directories, like Sweets

325. Technical Reports
Describe product and its use
Gives fairly detailed specifications (customer
understanding, no trade secrets)
Cut-Sheets: Graphs, charts, illustrations
May give results of product testing
Distribute via direct mail, trade shows, sales

326. Publicity
“FREE” (or at least less than advertising)
Credibility: Objective 3rd Party
Events: Chili cook-offs
Sponsorships
Press releases
Press conferences
Public speaking
Article Writing in trade journals
Supplemental Role: Inform about new products; Generate
inquiries; Increase awareness

328. Personal Selling
The most important promotional tool in B2B marketing
Transaction/relationship is often too complex to
consummate without personal interaction between
marketer and buyer.
Physical link between parties
Boundary Spanner

329. Salespeople as Boundary Spanners
Represent the company to customers
Represents the customer to company
Bring info back to company
Sales forecasting, product suggestions, competitor
impressions
Negotiates prices and terms
Solves problems

330. Personal Selling
NOT manipulation
Might persuade or entice, but cannot force the customer
to buy.
Sales must be professional. Not fast-talking, shiny-
suited, slick liar.
Customers are sophisticated and you need a long-term
relationship to be successful.
B2B sales cost more than B2C selling.
Account for more $/sale
More direct, shorter channels

331. Training and Skills
More technical knowledge in B2B
Need to know customers’ businesses
Build relationships over a long period of time before
reaping rewards
Negotiate effectively
Price, payment terms, delivery, quantities, returns, post-
sale training and service

332. How salespeople spend their time
Selling: 32%
Waiting, travel: 21%
Telephone: 19%
Administration: 15%
Service: 13%

333. Four Types of Selling Jobs
Trade Selling
B&D to HD
Missionary Selling
DeWalt to contractors
Technical Selling
New Prospect Selling
Customer Service (Non-Sales, Selling)
Post-sale satisfaction

334. Selling Aids
Small Gifts
Useful, permanent, quality, tasteful, relevant
Not substantial; Not to Gov’t customers
Plant Tours
Customer’s attention, seller’s turf, best way to educate
customer about company
Chaparral Steel
Entertainment
Lunch, dinner, drinks (careful), leisure (sports, golf), parties
for clients

335. Sales Process Steps
Prospecting
Identify
Qualify
Preparation
Research: prospect, industry, market, competitors
Presentation
Approach, Presentation, Objections, CLOSE
Post-Sale
Delivery, Installation, Training, Billing, Returns,
Relationship Building

336. Sales Management
Sales Plan
Planning
Implementation
Control/Evaluation
Responsibilities
Recruiting
Training
Organizing
Motivating
Evaluating
Compensating

337. Relationships
Industrial sales: develop and maintain relationships
Power: Who is dependent on whom?
Effect of power on negotiation
Sources of conflict and cooperation

338. Structural Positions
Central and Formal buying
Level of key buying decisions
Functional areas participating in buying process
Fit between our salesperson and buyer reps
May be an issue if mismatched

339. People
Demographics and personal characteristics of buyers and
salespeople
Age, experience, education, lifestyle, race, gender,
personal goals
Better fit might lead to better relationship, but
differences may be productive too.
Need to determine if relevant
If so, which dimensions?

340. Roles, Norms, and Rules of the Game

341. Roles, Norms, and Rules of the Game
Mostly unwritten
Some (gifts) written
Acceptable/Unacceptable tactics for both buyers and
sellers.
Perceived roles played by buyer and seller
representatives
Are both sides seeing same thing? Do perceptions
match?

342. Roles
Role Ambiguity: Unclear understanding
Role Conflict: Role partners want different things from
sales person
Role Accuracy: Misunderstanding
Role Consensus: Buyer/Seller agree on roles
Role Fulfillment: Buyer/Seller satisfied
Can improve some with training, supervision, and
experience

343. Managing Sales Force
Sales force size
Sales force organization
Recruiting and selecting salespeople
Training
Motivation and Compensation
Standards
Evaluation

344. Sales Force Size
Breakdown Method
Forecast Sales
Estimate Salesperson Productivity
Calculate Number of Salespeople Needed
Work Load Method (in text)
Number of accounts (current/potential: ABC)
Call Frequency
Call Length

345. Methods of Forecasting
• Subjective
– Users’ Expectations
– Sales Force Composite
– Jury of Executive Opinion
• Delphi Technique

346. Methods of Forecasting
• Objective
– Market Test
– Time Series Analysis
• Moving Averages
• Exponential Smoothing
• Decomposition
– Statistical Demand Analysis

347. Organizational Structure
• Geography: States/Regions, Downtown/Suburban
• Product Type: Yard Equipment vs. Power Tools
• Customer Type: Industrial/Consumer,
Hospitals/Schools, Wholesalers/Retailers
• Selling Function: Prospecting, presenting, servicing

348. Recruiting and Selecting Salespeople
Job analysis and description
Sales jobs are different: e.g. inside/outside
Characteristics: Enthusiasm, education, flexibility,
stability, past performance, goals
Tests: Intelligence, aptitude, psychological
Interviews and References
Sources
Legislation

349. Training Topics
Product Knowledge
Market/Industry
Company
Time/Territory Management
Legal/Ethical Issues
Other: Computer program, Relationship building, Selling
procedures, Decision Support System (DSS)

350. Training Methods
On-the-job: most common
External seminars: top three, major tool
Home assignments: least favorite
In house classes

351. Training Costs/Time
New Hires
$4,000+ to nearly $10,000
4± months average
Existing Salespeople
About $4,000/year
Nearly a week (32.5 hours) per year
More emphasis on product vs. skills

352. Motivation
Expectancy Theory
Expect that effort will lead to performance
Reward is instrumental in achieving reward
Salesperson Valence for reward
Need all for motivation.

353. Rewards and Compensation
Extrinsic and Intrinsic
Money, awards, recognition, travel, promotions
Personal Growth, sense of accomplishment
Lower/Higher Order Needs
Compensation
Salary
Commission
Bonus
Contests
Benefits

354. Standards: Quotas
Goals assigned to salespeople for
specific time period.
Three Purposes
Motivate salespeople
Evaluating performance
Controlling salespeople’s effort

355. Characteristics of Good Quotas
Attainable
Motivation requires reasonable chance of
attainment
Easy to understand
Too complex  suspicion and mistrust
Complete
Cover all criteria to avoid imbalance

356. Types of Quotas
Volume
Units, Dollars, Points
Activity
# cold calls, proposals, displays, service calls, meetings,
collections, demonstrations
Financial
Expenses, Gross Margins, Net Profit

357. How to Set Quotas
Volume
History
Territory Potential
Activity
Sales reps and managers; sales reports; research
Financial
Based on financial goals of firm
Adjust to meet needs