FW1 - Mental Imagery
Look at the map
253 days before opening.
Marketing mix allows you to combine all the marketing tools in order to sell your product.
Lesson: 1 hour
External readings and quiz: 13 hours
Do it yourself: 20 hours
Total: 34 hours
The objectives of this lesson about marketing mix is to give you:
-The tools you need for establishing your detailed marketing plan and forecasting your sales.
You have gotten a rough idea about the market situation and the possible positioning of your product. Of course, it's far to be sufficient. Now, you must write your detailed planning. It means that brainstorming is ended and that you have to go to the specifics in examining and checking all the hypothesis you had made in the preceding chapters. You will use the marketing mix.
-Definition: Marketing mix is the combination of elements that you will use to market your product. There are four elements: Product, Place, Price and Promotion. They are called the four Ps of the marketing mix.
Some people think that the four Ps are old fashionable and propose a new paradigm: The four Cs! Product becomes customer needs; Place becomes convenience, price is replaced by cost to the user, promotion becomes communication. It looks like a joke but the Cs is more customer-oriented.
A good product makes its marketing by itself because it gives benefits to the customer. We can expect that you have right now a clear idea about the benefits your product can offer.
Suppose now that the competitors products offer the same benefits, same quality, same price. You have then to differentiate your product with design, features, packaging, services, warranties, return and so on. In general, differentiation is mainly related to:
-The design: it can be a decisive advantage but it changes with fads. For example, a fun board must offer a good and fashionable design adapted to young people.
-The packaging: It must provides a better appearance and a convenient use. In food business, products often differ only by packaging.
-The safety: It does not concern fun board but it matters very much for products used by kids.
-The "green": A friendly product to environment gets an advantage among some segments.
In business to business and for expensive items, the best mean of differentiation are warranties, return policy, maintenance service, time payments and financial and insurance services linked to the product.
Go to http://peerspectives.org and click on "Defining and serving a market" . Then click on "Launching a new product " and on "Product development" You will find a lot of articles about the subject.
A crucial decision in any marketing mix is to correctly identify the distribution channels. The question " how to reach the customer" must always be in your mind.
-Definition: The place is where you can expect to find your customer and consequently, where the sale is realized. Knowing this place, you have to look for a distribution channel in order to reach your customer.
In fact, instead of "place" it would be better to use the word "distribution" but the MBA lingo uses "place" to memorize the 4 Ps of the marketing mix!
The place is not where is located your business but where your customers are. For a retailer it is the same but for a boat producer located in Philippines the real place is the entire world.
Do not confuse positioning and place. Here place means the real physical position of the customer in a geographic area or along a distribution channel.
It exists today, with the internet, more channels than in the past but basically, you have to consider three main distribution channels:
-Selling to the customers: Whether you sell by yourself ( as retailer) whether you employ a sales force, you are in these cases in front of the final customer. There are not intermediaries between you and him. Unfortunately, except for the retailer business, this situation is far to be the general case.
-Selling to the retailers: For example, you manufacture the fun boards and you sell them to the Arizona retailers. This practice could be a bit complicated.
-Selling to the wholesalers: There are maybe four or five sport articles wholesalers in Arizona. You sell your fun boards to these big men. On turn the wholesalers sell the fun boards to the retailers which finally sell to their customers.
In the case of Pacific Boat which manufactures its boats in Philippines for customers located in the USA or in Europe, there is not alternative ways. It must sell through some big import export corporate's. Pacific boat has not any contact with its final customers but of course it must know exactly their profile. If the product does not fit to the profile of the final customer, the wholesaler will not buy it.
As you can see, the choice of your distribution channel heavily depends on your product and place in the productive process. If you are in coal mining, do not expect to sell some coal buckets to the final consumer!
The next drawing summarizes the different possible channels: You are represented by the black square, the wholesaler by the maroon one, the retailer by the yellow and the customer by the green!
Real life example:
A commodity is a product such as crude oil, coal, rice, wheat, sugar, copper and so on: Mainly primary products and raw materials. In a commodity market, the products have very few distinguished characteristics.
They are traded in few places like Chicago and London. In the rice market, there are maybe six or seven big traders for the entire world in front of some hundred millions of little producers grouped in cooperatives or primary marketing boards.
The big traders know each other very well and most of the bargain relies on trust.
Nevertheless, inside a type of channel, you keep the possibility to choose between the different wholesalers and retailers. You have to choose the best. It means that your choice must focus on two major facts: the margin and the image.
You have already gotten an idea about the price which should fit to the customer profile. Let's suppose this price is $100. It is the retail price: the price paid by the final customer.
The retailer takes his margin (or the mark-up). This margin is calculated on the retail price. Suppose, he takes $30. It means that he buy $70 to the wholesaler.
As the wholesaler trades big quantities, his margin is usually lower than those of the retailer: Maybe 15% of the selling price to the retailer. So, he will take $10,5. It means that he has bought $59,5 to you.
Consider now that you support the cost of the shipping from your manufacture to the wholesaler store: For example $9,5. Finally, your factory price is $50 for a product sold $100 to the final customer. In many case, when taxes and new packaging occur at the different levels, the factory price can easily be only one fifth of the final price!
Do not imagine that you have too much choice. Each intermediary fills up a real function and it's not easy to ignore him. For example, you can't sell your fun board straight to the consumer: you should need a massive sales force.
You could also ignore the wholesaler in selling directly to the big retail supermarket. You will save in this case $10,5 but you can expect that the supermarket which usually practices low prices will tell you the following speech " $100 as consumer price is too much. I want to sell that $80. Of course I keep 30% as margin. So I buy it $56 to you "
It could look fair but the number of the supermarkets is higher than those of the wholesalers. It means more shipping and consequently a rise in costs. Instead of paying $9,5 for shipping, you will pay $12. Now what is the result?
Supermarket selling price----56
Shipping to supermarket-----12
It does not look a good business: $44 instead of 50! You can object that the sales will rise because of the lower price to the consumer but it does not fit with your hypothesis about the customer profile. Anyway, could you afford $44 as your factory price? Is it good to sell your fun board through the supermarket? Is your customer buying in a supermarket or in a fashionable specialized sport shop?
Real life example:
Periodically, people complain against margins and plead for short distribution channels. These claims often come from the farmers because most of them are blindly ignorant about economic reality.
They regularly try to market their product directly to the consumers but it does not last very long because they quickly register heavy losses.
Some stubborn guys go on with that practice and as a result they can't pay back their loans to the State owned agricultural banks. Finally the bank losses are covered by the taxpayers!
The place of sale influences the perception of your product. Consequently, you must pay attention to the choice of your outlets: wholesalers and retailers. If you sell products for every one, a mass distribution through the supermarket will be probably the best issue. On the contrary, if you sell fine products, you have to choice fine shops and beautiful people to sell them. In the fun board case, you should have better to emphasize on the image and to look for fashionable shops and people.
You have also to take notice of the share of power inside the distribution channel. As you will be a beginner, do not expect to get too much power! For example, you can ask the retailers to store your product on the first line or in the best situation in the shop. They will probably answer " OK! but I'm going to charge 35% margin instead of 30%". May be it's a fair bargain but is the rise of the consumer price compatible with your previous positioning?
It's quite difficult to list all the occurrences in this matter. Give a chance to your intuition but keep in mind that all these daily decisions must always remain in line with your customer profile.
Price means the pricing strategy you will use. You have already fixed, as an hypothesis a customer price fitted to your customer profile but you will have now to bargain it with the wholesalers and retailers. Do not be foolish: They know better the market than you and you have to listen their advices.
In fact, you have to choose between three strategies:
-Competitive pricing: If your product is sold at the lowest price regarding all your competitors, you are practicing competitive pricing. Sometimes, competitive pricing is essential. For instance, when the products are basically the same, this strategy will usually succeed.
Remember that the success of competitive pricing strategy depends on achieving high volume and low costs. If your prices are lower than your costs, you are going straight to bankruptcy! To avoid such a mistake, you have to take notice of the break even ratio that you will find below.
-Cost-plus-profit: It means that you add the profit you need to your cost. It is also called cost-orientated strategy and is mainly used by the big contractor of public works. The authority may have access to the costing data and should like to check if the profit added to the cost is not too high.
In fact, this strategy is only good for a business whom the customers are public collectivities or government agencies.
-Value pricing: It means that you base your prices on the value you deliver to customers. For example, when a new technology has a very large success, you can charge high prices to the customer. This practice is also called skimming. It is easy when you are in the introductory phase of the product life cycle.
Value pricing is also common in luxury items. Sometimes, the higher the price, the more you sell: Fashionable clothing or restaurants for snob people. Of course value pricing is limited by the price elasticity as you have already learnt in Economics.
About these pricing strategies, click on www.businessplans.org. Click on "business planning resource" and then on "pricing".
See also www.sdrnet.com . Click on "analytical services", then on "exploratory price modeling" and finally on "premium price policy".
In addition, go to: www.ideasformarketing.com and click on the article: "How to develop a product or service pricing". You can also download a free-book on pricing!
The diagram below illustrates how you have to determine your price. You could see that a conflict could arise between your financial objectives ( the expected profit) and your actual costs.
So, you have to calculate your break even ratio.
42-Break even ratio
Suppose you price your fun board $ 1000 to make a competitive pricing strategy. You have some fixed costs which remain constant whatever the number of fun boards you sell: For example your office rent, your secretary and your own salary: Saying $200,000.
To manufacture one fun board, you need $900 in labor and raw material. $900 is the variable cost per unit.
To recover your fixed costs without making any profit you have to sold:
Fixed costs (200,000)/Selling price(1000)-Variable costs(900)=2000.
You have to sell 2000 fun boards just to recover your fixed costs. Now suppose that the total market in Arizona amounts 2000 fun boards per year. Do you believe that you should conquer the entire market despite your five existing competitors? It would seem quite unrealistic!
If you sell 500 fun boards ( 25% of the market) what should be the results:
Receipts: -----500*$1000= $500,000
Variable costs: -500*$900= $450,000
It means that you must charge a higher price: May be $1300. In such a hypothesis, your fixed costs could be recovered:
Now suppose, that your competitors offer the same quality, with a price ranking between $1050 and $1250. In this case, it means that your project is not economically sound and that you must review it: Whether the fixed costs, whether the variable cost per unit are to high. In fact, the choice of a pricing strategy depends heavily on the break even analysis.
Go to http://peerspectives.org and click on "Defining and serving a market" Click on "Pricing" and at the end of the page click on "Small business administration-pricing your product"
Advertising, public relations and so on are included in promotion and consequently in the 4Ps. Sometimes, packaging becomes a fifth P. As promotion is closely linked to the sales, I will mention here the most common features about the sale strategy.
-Definition: The function of promotion is to affect the customer behavior in order to close a sale.
Of course, it must be consistent with the buying process described in the consumer analysis.
Promotion includes mainly three topics: advertisement, public relations, and sales promotions.
It takes many forms: TV, radio, internet, newspapers, yellow pages, and so on. You have to take notice about three important notions:
Reach is the percentage of the target market which is affected by your advertisement. For example, if you advertise on radio you must know how many people belonging to your segment can be affected.
Frequency is the number of time a person is exposed to your message. It is said that a person must be exposed seven times to the message before to be aware of it. Reach*frequency gives the gross rating point. You have to evaluate it before any advertisement campaign.
Message: Sometimes, it is called a creative. Anyway, the message must: get attraction, capture interest, create desire and finally require action that is to say close the sale.
There are some magical words that you can use in any message:
Public relations are more subtle and rely mainly on your own personality. For example, you can deliver public speeches on subjects such as economics, geo-economics, futurology to several organizations (civic groups, political groups, fraternal organizations, professional associations)
These speeches will enable you to develop new relationships and their cost is nil !
It includes fair trades, coupons, discounts and are linked to the sales strategy.
Go to: http://peerspectives.org . Click on "Defining and serving a market". Then click on "Public relations"
Sales bring in the money. Salesmen are directly exposed to the pressure of finding prospects, making deals, beating competition and bringing money.
You have first to learn some definitions used by the MBA lingo:
A lead is a person who has been identified as a prospect.
A prospect is a potential customer.
An account is a customer that often buys from the company.
A national account is a very big customer
An order taking: the customer asks for a product and the vendor sells it. It's usual way to sell candy, soda or to sell tickets for theater.
On the contrary, active selling involves locating customers and persuading them to buy.
Inside sales refers to selling done mainly by phone or by internet. Outside sales involves getting appointment to meet customers at their home. Home cold calling means to phone people you do not know. Hard sell means to use of high pressures upon the prospect.
We have then to distinguish the sale process and the sale organization.
62-The sales process:
It depends heavily on the buying process. It includes prospecting and persuading.
Prospecting involves finding the leads and presenting the product. After making contact, the salesman must show that the product solves a customer's problem. He must also answer two questions :
- Has the prospect a need or an interest in the product ?
- Does the prospect have the money to buy the product ?
If the prospect does not meet these criteria, you have better to move on to the next prospect !
Persuading and authority are often necessary to close a sale. The salesman's approach is often to rise questions in order to lead the prospect to a logical conclusion : I must buy now.
63-The sale organization:
The two major issues are to recruit salesmen or to organize a franchising or or multi-level market
If you recruit the salesmen:
-You should determine the size of the sales force: It must cover the customer segment. A poor coverage is an invitation to competitors. Remember the production possibility frontier to determine your maximum sales force.
-You should also determine the alignment of the sales force:
Alignment by territory divides the market into geographical areas such as counties or cities and specializes each salesman in an area.
Alignment by product specializes each salesman in a product
Alignment by customer specializes each salesman in a customer (it means that the customer must be a national account).
You can also combine the three alignments.
-You should finally determinate how to motivate the sale force: Sales people can be compensated by commissions, salary or salary plus commission. For a starting business it's more convenient to pay only commissions
If you organize a multi level marketing: Salesmen becomes independent distributors. They operate as contractors. They are encouraged by your company to recruit other distributors. In return, they receive a percentage commission on the sales of their recruits.
There are two benefits from multi-level marketing :You get a large sale force without the expense of full time employees and the distributors work very hard to improve their income.
Anyway let to the salesmen a sufficient commission to enable them to manage prospecting and advertising on their territories at their own expenses.
Go to: http://peerspectives.org . Click on "Defining and serving a market". Then click on "Sales analysis", "Sales cycle", "Sales", "Sales presentation" and "Sales techniques".
Time is coming to emphasize on the logical connections between all these elements.
Low involvement products such as soda, with high price elasticity can afford a competitive pricing and a mass market strategy.
But you have to take notice that competitive pricing implies low costs and a lot of technical progress, that require big investments and big money.
What is more, mass market strategy implies very important budgets in advertising and once again big money.
It is easy to view all the implications. It shows that this strategy fit to important companies.
On the contrary, high involvement product with low price elasticity do not always implies big investments or important expenses in advertising: Value is subjective to the consumer and is not related to the real cost ( fashionable clothing, luxurious perfumes)
But how to convert any product in a high involvement product?
1) The best way is to create a value expressive message about the product. You have to link the product to very high involvement issues. For example : health, social status, youth, success, and so on. This link must be seen by the consumers as a very important characteristic (in fact, this characteristic is only subjective. It just exists in the consumer's mind).
2) A product provides different benefits : For example, a single garment brings you three benefits : it is warm, it is fashionable and it is easy to clean. Underline one of the benefits to create the special value and justify a higher price.
-Go to: www.marketingteacher.com . Click on any graph and access to the lesson store. You will find all the topics you have just studied above and some new such as the five forces analysis and different matrix. Study each lesson and make the exercises. They are quite easy. The process for realizing all the exercises will take about 3 hours.
The four Ps, product, place, price and promotion are the elements of the marketing mix used to establish a detailed and final marketing plan.
After the product which is a paramount, the place is very important because it describes how you reach the consumer and what distribution channel you are going to choose: Margins and image are quite important features in this matter.
According to your product and place , the pricing strategy will have heavy consequences on the promotion campaign and on success or failure of your business as a whole.
Sales bring in the money. Your sales organization is a core topic .
DO IT YOURSELF:
1-You have to describe for your own biz:
- Your distribution channel. Picture it with diagrams.
-Your pricing strategy. Indicate the price you will choose. Indicate at each level the margins and the impact regarding you product image. As a potential customer, ask information's to your future competitors!
-Your advertising program and evaluate your budget for promotion: Collect some estimates from newspapers, Radio and so on.
-Your sale force: How do you pay them (straight commission : which percentage of the price)? Look for your first salesmen. Establish contacts.
-Your projected sales for the twelve months of the first running period and then for the four next years.
2-Estimate the costs of the marketing function:
Take the model of your grid cost drawn up in FW12 (First sketch)
Distinguish the starting and the running period
Distinguish advertisement costs and sales force costs.
-About advertisement: You put the cost of your launching advertisement program in the starting costs. If you envision to advertise on the long run, estimate a yearly budget and post it in the running costs.
-About the sales force: I expect that you will not recruit salesmen during the starting period just for admiring the implementation of the business! Consequently, the sales force costs must mainly appear at the beginning of the running period.
You have to estimate the human costs of the sales force: numbers, qualification, salary, commissions and the consumable costs such as transportation, travels, phones, hostels. Finally, value the equipment costs: vehicles and so on.
3-Insert in your business plan
Open your Plan ware folders and insert these elements in the adequate chapters.
Modify your first sketch according to these results: your forecasted sales are a core element!
Right now, You can estimate the ordered quantity for a given price as well as the required quality, customers service, and so on. Being aware of the demand, you can specify the following points:
- How to improve the product
- How big must be the production : technology. Investment analysis.
- choice and cost of the required staff.
Count about 20 hours for performing these tasks.
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