1. part 5 PowerPoint Presentation by Charlie Cook Copyright © 2003 South-Western College Publishing. All rights reserved. All rights reserved. Product, Price, Promotion and Distribution Strategies Small Business Marketing 12e

2. Copyright © by South-Western College Publishing. All rights reserved. 15–2 Product Strategy Product –A total bundle of satisfaction—a service, a good, or both—offered to consumers in an exchange transaction. –Includes both the main element (physical product or core service) and complementary components (features).

3. Copyright © by South-Western College Publishing. All rights reserved. 15–3 Service Marketing versus Goods Marketing Characteristics Pure Services Marketing Pure Goods Marketing Tangibility Production/ Consumption Standardization Perishability Tangibility Production/ Consumption Standardization Perishability Intangible goods Occur at the same time Less standardization Greater perishability Intangible goods Occur at the same time Less standardization Greater perishability Tangible goods Occur at different times Greater standardization Less perishability Tangible goods Occur at different times Greater standardization Less perishability Hybrid Services/ Goods Marketing

4. Copyright © by South-Western College Publishing. All rights reserved. 15–4 Product Strategy (cont’d) Product Strategy –The way the product component of the marketing mix is used to achieve a firm’s objectives. –Product item  The lowest common denominator in the product mix— the individual item –Product line  The sum of the related individual product items –Product mix consistency  The similarity of product lines in a product mix

5. Copyright © by South-Western College Publishing. All rights reserved. 15–5 Product Development Process Idea Accumulation Business Analysis Total Product Development Product Testing

6. Copyright © by South-Western College Publishing. All rights reserved. 15–6 Product Strategy (cont’d) Product Development Process –Idea accumulation  Increasing the number of ideas under consideration –Business analysis  Product’s relationship to the existing product line  Cost of development and introduction  Available personnel and facilities  Competition and market acceptance

7. Copyright © by South-Western College Publishing. All rights reserved. 15–7 Product Strategy (cont’d) Product Development Process (cont’d) –Total Product Development  Branding, packaging, pricing, and promotion –Product Testing  Proving the product design through consumer reaction to the product.

8. Copyright © by South-Western College Publishing. All rights reserved. 15–8 Product Strategy Options Key to Strategy Alternatives (1) One product/one market(3) Modified product/one market(5) Multiple products/one market (2) One product/multiple markets(4) Modified product/multiple markets(6) Multiple products/multiple markets One Market Multiple Markets One Product Modified Product Multiple Products (1) (2) (3) (4) (5) (6) Product MixStrategy AlternativesTarget Market(s)

9. Copyright © by South-Western College Publishing. All rights reserved. 15–9 Building the Total Product Offering Branding –A verbal and/or symbolic means of identifying a product. Rules for Naming a Product: –Select a name that is easy to pronounce and remember. –Choose a descriptive name. –Use a name that can have legal protection. –Select a name with promotional properties. –Select a name that can be used on several product lines of a similar nature.

10. Copyright © by South-Western College Publishing. All rights reserved. 15–10 Building the Total Product Offering (cont’d) Packaging –Color, design, and protection for the product. Labeling –Shows the brand and informs the consumer. Warranties –A promise that the product will perform at a certain level or meet certain standards.  Implied and written warranties  Policy considerations: Cost, service capability, competitive practices, customer perceptions, legal implications

11. Copyright © by South-Western College Publishing. All rights reserved. 15–11 Product Strategy Within The Legal Environment Consumer Protection –Labeling  Nutrition Labeling and Education Act of 1990  Listing of contents  Proper care and use –Product safety  Consumer Product Safety Act of 1972  Packaging  Use instructions  Disposal

12. Copyright © by South-Western College Publishing. All rights reserved. 15–12 Protecting a Product Offering Trademark –An identifying feature used to distinguish a manufacturer’s product Service Mark –A legal term indicating the exclusive right to use a brand to identify a service. Vinnie’s Villa ™

13. Copyright © by South-Western College Publishing. All rights reserved. 15–13 Protecting a Product Offering (cont’d) Patent Protection –The registered, exclusive right of an inventor to make, use, or sell and invention. –Utility patent  Registered protection for a new process or product’s function –Design patent  Registered protection for the appearance of a product and its inseparable parts –Plant patent  Registered protection for any distinct and new variety of plant

14. Copyright © by South-Western College Publishing. All rights reserved. 15–14 Protecting a Product Offering (cont’d) Copyright –The exclusive right of a creator to reproduce, publish, perform, display, or sell his or her works. –Copyright notice  The copyright symbol ©  The year the work was published  The copyright owner’s name Trade Dress –Elements of a firm’s distinctive image (“look”) not protected by a trademark, patent, or copyright.

15. Copyright © by South-Western College Publishing. All rights reserved. 15–15 Fig. 15.5 CopyrightsTrade Dress Trademarks Patents Ways of Protecting Intangible Assets Protecting a Firm’s Intangible Assets

16. Copyright © by South-Western College Publishing. All rights reserved. 16–16 Setting a Price Price –A specification of what a seller requires in exchange for transferring ownership or use of a product or service.  Prices set too low, loss in revenue  Price set too high, loss in revenue Credit –An agreement between a buyer and a seller that provides for delayed payment for a product or service.

17. Copyright © by South-Western College Publishing. All rights reserved. 16–17 Price Changes Affect Revenues Situation A Quantity sold x Price per unit = Gross revenue 250,000$3.00$750,000 Situation B Quantity sold x Price per unit = Gross revenue 250,000$2.80$700,000 Difference in Revenue$50,000

18. Copyright © by South-Western College Publishing. All rights reserved. 16–18 Fig. 16-1 Total Cost Selling CostOverhead Cost Salesperson's time Advertising Cost of Goods Sold Storage, Salaries Taxes Example costs: Cost of item Freight charges The Three Components of Total Cost in Determining Price

19. Copyright © by South-Western College Publishing. All rights reserved. 16–19 Cost Determination for Pricing Total Cost –The sum of cost of goods sold, selling expenses, and overhead costs. Total Variable Costs –Costs that vary with the quantity produced or sold. Total Fixed Costs –Costs that remain constant as the quantity product or sold varies.

20. Copyright © by South-Western College Publishing. All rights reserved. 16–20 Cost Structure for a Hypothetical Firm, 2001 Sales revenue (25,000 units @ $8.00)$200,000 Total costs: Fixed costs$75,000 Variable costs ($2.00 per unit) 50,000 125,000 Gross margin$ 75,000 125,000 Gross margin$ 75,000 Average cost = $125,000 = $5.00 25,000 Fig. 16-2

21. Copyright © by South-Western College Publishing. All rights reserved. 16–21 Cost Structure for a Hypothetical Firm, 2002 Sales revenue (10,000 units @ $8.00)$80,000 Total costs: Fixed costs$75,000 Variable costs ($2.00 per unit) 20,000 95,000 Gross margin$ (15,000) 95,000 Gross margin$ (15,000) Average cost = $95,000 = $9.50 10,000 Average pricing overlooks the reality of higher average costs at lower sales levels Fig. 16-3

22. Copyright © by South-Western College Publishing. All rights reserved. 16–22 How Customer Demand Affects Pricing The Elasticity of Demand –The degree to which a change in price affects the quantity demanded. –Elastic Demand  Demand that changes significantly when there is a change in the price of the product. –Inelastic Demand  Demand that does not change significantly when there is a change in the price of the product. Demand Price Elastic Inelastic

23. Copyright © by South-Western College Publishing. All rights reserved. 16–23 Pricing and a Firm’s Competitive Advantage Pricing and Competitive Advantage –Customers will demand and pay more for a product or service that they perceive as important to their needs. Prestige Pricing –Setting a high price to convey an image of high quality or uniqueness (competitive advantage). –Customers associate price with quality. –Markets with low levels of product knowledge are candidates for prestige pricing.

24. Copyright © by South-Western College Publishing. All rights reserved. 16–24 Applying a Pricing System Break-Even Analysis –A comparison of alternative cost and revenue estimates in order to determine the acceptability of each price. –Steps in the analysis  Examining revenue-cost relationships: the quantity at which the product will generate enough revenue to start earning a profit.  Incorporating actual sales forecasts into the analysis.

25. Copyright © by South-Western College Publishing. All rights reserved. 16–25 Fig. 16.4 Break-Even Graphs for Pricing

26. Copyright © by South-Western College Publishing. All rights reserved. 16–26 Applying a Pricing System (cont’d) Examining Cost and Revenue Relationships –Breakeven Point  The sales volume at which total sales revenue equals total costs (fixed and variable).  The point at which profitability starts and losses cease. Incorporating Sales Forecasts –Adjusted Break-Even Analysis  Price has a variable impact and influence on demand.  Adjusting for the indirect effect of price allows for a more realistic profit area to be identified.

27. Copyright © by South-Western College Publishing. All rights reserved. 16–27 A Break-Even Graph Adjusted for Estimated Demand 900 700 500 300 100 10 3050 7090 Units Costs and Revenue ($) Sales (Price = $12) Sales (Price = $7) Sales (Price = $18) Total Cost Fig. 16.5 Sales Curve from Demand Schedule Profit 7 12 18 Demand (Units) 90 60 15 Revenue ($) 630 720 270 Price ($) Fig. 16.5

28. Copyright © by South-Western College Publishing. All rights reserved. 16–28 Applying a Pricing System (cont’d) Markup Pricing –Cost plus pricing system that adds a markup percentage to cover:  Operating expenses  Subsequent price reductions  Desired profit

29. Copyright © by South-Western College Publishing. All rights reserved. 16–29 Selecting a Pricing Strategy Penetration Pricing –Setting lower than normal prices to hasten market acceptance of a product or service or to increase market share. Skimming Pricing –Setting very high prices for a limited period before reducing them to more competitive levels. Follow-the-Leader Pricing –Using a particular competitor as a model in setting prices.

30. Copyright © by South-Western College Publishing. All rights reserved. 16–30 Selecting a Pricing Strategy (cont’d) Variable Pricing –Setting more than one price for a good or service in order to offer price concessions to certain customers. Dynamic Pricing –Charging more than the standard price when the customer’s profile suggests that the higher price will be accepted. Price Lining –Setting a range of several distinct merchandise levels.

31. Copyright © by South-Western College Publishing. All rights reserved. 16–31 Selecting a Pricing Strategy (cont’d) What the Market Will Bear –A strategy of charging the highest prices that customers will pay can be used only when the seller has little or no competition. Pricing Situations and Controls –The effect of the introduction of new products into an established product line. –Offering discounts to match the needs of customers. –Sherman Antitrust Act prohibits competitors from conspiring to fix prices.

32. Copyright © by South-Western College Publishing. All rights reserved. 17–32 The Communication Process in Promotion Communication Process Components –Source—the message sender –Channel—the path the message travels –Receiver—the recipient of the message Forms of Promotional Communication –Nonpersonal—advertising –Personal—personal selling –Special forms—sales promotion

33. Copyright © by South-Western College Publishing. All rights reserved. 17–33 Fig 17-1 Similarity of Personal and Small Business Communication Processes

34. Copyright © by South-Western College Publishing. All rights reserved. 17–34 Promotional Communications Promotional Mix –A blend of nonpersonal, personal, and special forms for communication techniques aimed at a target market. –Makeup of the mix is determined by:  Geographical nature of target market  Size of promotional budget  Product’s characteristics

35. Copyright © by South-Western College Publishing. All rights reserved. 17–35 Determining the Promotional Budget “How much should a small business spend on promotion?” –Allocating a percentage of sales –Deciding how much can be spared –Spending as much as the competition –Determining what it takes to do the job

36. Copyright © by South-Western College Publishing. All rights reserved. 17–36 Fig. 17.2 Four-Step Method of Determining a Promotional Budget

37. Copyright © by South-Western College Publishing. All rights reserved. 17–37 Proceed to develop promotion at WTDJ level Comparing Alternative Promotion Expense Estimates Compute WTDJ Is WTDJ equal to or less than others? Compute average of WTDJ, APS, WCS, and ACS Compare WCS with computed average Compare WCS with computed average Is WCS equal to or greater than average? Proceed to develop promotion at average level Seek additional funds to supplement promotion YES NO NOYES Key Terms: WTDJ: What it will take to do the job APS: A percentage of sales WCS: What can be spared ACS: As much as the competition spends START

38. Copyright © by South-Western College Publishing. All rights reserved. 17–38 Personal Selling Techniques Personal Selling –A sales presentation (promotion) delivered in a one-on-one manner. –Requires:  Product knowledge  Well-prepared sales presentation  Ability to build good will

39. Copyright © by South-Western College Publishing. All rights reserved. 17–39 Importance of Product Knowledge Salespersons use product knowledge to: –Successfully educate customers about the product’s advantages, uses, and limitations. –Answer customer questions and counter customer objections. Personal selling becomes order-taking when a salesperson lacks product knowledge.

40. Copyright © by South-Western College Publishing. All rights reserved. 17–40 The Sales Presentation: Prospecting Prospecting –A systematic process of continually looking for new customers Prospecting Techniques –Personal referrals  Salesperson initiates customer contact through referral by another party known to the customer. –Impersonal referrals  Information on potential new customers developed from public records and published sources.

41. Copyright © by South-Western College Publishing. All rights reserved. 17–41 The Sales Presentation: Prospecting Prospecting Techniques (cont’d) –Marketer-initiated contacts  Market surveys are used to identify prospects –Customer-initiated contacts  Potential customers are identified through their contacts with the firm.

42. Copyright © by South-Western College Publishing. All rights reserved. 17–42 Practicing the Sales Presentation Improves the salesperson’s success rate. Prepares salesperson for customer objections related to price, product, timing, service, or need. –Techniques for dealing with objections:  Convert the objection into the form of a question.  Use third party testimonials or experiences.  Use the boomerang or positive conversion technique.  Use comparisons.

43. Copyright © by South-Western College Publishing. All rights reserved. 17–43 Overcoming Customer Objections I had problems with a similar product before and don’t want to go through that again! I’m too busy. I like what you have said, but I need to wait. Yes, I understand your attitude, but have you considered... ? That’s why I want to explain how I can save you time by... Let’s figure how much you can save by acting now. Your product sounds just like your competitor’s. There are similarities, but we have... at a better price. I’m not sure I can risk a changeover to your product. Let me tell you how one of your competitors decided to buy from me.

44. Copyright © by South-Western College Publishing. All rights reserved. 17–44 Making the Sales Presentation Adapting the sales approach to the customers’ needs: –Avoid a “canned” sales talk. –Speak the customer’s “language”. –Answer every objection explicitly and adequately. –Be enthusiastic, friendly, and persistent. –Be personally supportive of the customer.

45. Copyright © by South-Western College Publishing. All rights reserved. 17–45 Customer Goodwill and Relationship Selling Relationship selling –Building customer goodwill for future sales to satisfied customers through:  Maintaining a good personal appearance.  Having a pleasant personality.  Using professional etiquette in all customer contacts.  Understanding the customer’s point of view.  Maintaining high ethical standards in the customer relationship.

46. Copyright © by South-Western College Publishing. All rights reserved. 17–46 Compensating Salepeople Nonfinancial Rewards –Personal recognition of employees by the firm  Plaques and “Employee of the Month” awards  Providing “perks” to superior performers. –Personal satisfaction drawn by salespersons from doing their work well.

47. Copyright © by South-Western College Publishing. All rights reserved. 17–47 Compensating Salepeople Financial Rewards –Commissions  Compensation paid as percentage of sales productivity.  Strong sales motivator –Straight Salary  Compensation paid regardless of sales made. –Combination of Commissions and Salary  Balance of two compensation forms is adjusted to provide an increasing proportion of commission as salesperson gains experience.

48. Copyright © by South-Western College Publishing. All rights reserved. 17–48 Advertising Practices for Small Firms Advertising –The impersonal presentation of a business idea through mass media. Advertising Objectives –To sell by informing, persuading, and reminding. –To serve as a complement to product quality and efficient service. –To properly reflect changes in customer needs and preferences.

49. Copyright © by South-Western College Publishing. All rights reserved. 17–49 Types of Advertising Product Advertising –The presentation of a business idea designed to make potential customers aware of a specific product or service and create a desire for it. Institutional Advertising –The presentation of information about a particular firm, designed to enhance the firm’s image.

50. Copyright © by South-Western College Publishing. All rights reserved. 17–50 Advertising Decision Factors Frequency of Advertising –With regularity for effectiveness and continuity  Introduction of new uses for established products  Introduction of new products and services Where to Advertise –Appropriate media mix is determined by:  Geographical area for target market coverage  Customer type targeted by advertising campaign  Advertising media customarily used by industry  By type of business

51. Copyright © by South-Western College Publishing. All rights reserved. 17–51 Advantages and Disadvantages of Traditional Advertising Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing (Cincinnati: South-Western, 1998), p. 509.

52. Copyright © by South-Western College Publishing. All rights reserved. 17–52 Creating the Promotional Message Advertising Agencies –Furnish design, artwork, and copy for ads –Evaluate and recommend media with greatest “pulling power” –Evaluate the effectiveness of advertising appeals –Advise on promotion and merchandise displays –Conduct market sampling studies –Furnish mailing lists Other Sources –Suppliers –Trade Associations

53. Copyright © by South-Western College Publishing. All rights reserved. 17–53 Web Advertising Basic Web Promotions –A corporate Web site  A firm’s location on the World Wide Web –Banner ads  Advertisements that appear across a Web page, often as moving rectangular strips –Pop-ups  Advertisements that burst open on computer screens –E-mail promotion  Advertising delivered by means of electronic mail

54. Copyright © by South-Western College Publishing. All rights reserved. 17–54 Web Advertising (cont’d) Basic Web Promotions (cont’d) –Web Sponsorships  A type of advertising in which the firm pays another organization for the right to be part of that organization’s Web page. –Linkages  A type of advertising in which one firm pays another to include a click-on (click-through) link on its Web site.

55. Copyright © by South-Western College Publishing. All rights reserved. 17–55 Sales Promotion Tools Sales Promotion –An inclusive term for any promotional techniques that are neither personal selling or advertising  Used in combination with personal selling and advertising. Specialties –Tangible and enduring functional items of worth distributed personally to recipients that serve as reminders of the firm.  Pens, key chains, magnets, and clothing imprinted with the name, logo, or slogan of the firm.

56. Copyright © by South-Western College Publishing. All rights reserved. 17–56 Sales Promotion Tools (cont’d) Trade Show Exhibits –Provide hands-on experience with products. –Are less costly than personal selling. Creating Effective Trade Show Exhibits –Create moving billboards –Make the booth interactive –Qualify sales leads immediately –Create a presence on the sales floor –Plan ahead how to use the trade show time –Recruit customers actively

57. Copyright © by South-Western College Publishing. All rights reserved. 17–57 Sales Promotion Tools (cont’d) Publicity –Information about a firm and its products or services that appears as a news item, usually free of charge.  Provides visibility for the firm  Requires regular contacts with the news media

58. Copyright © by South-Western College Publishing. All rights reserved. 17–58 Sales Promotion Tools (cont’d) When to Use Sales Promotion –For manufacturers  To stimulate channel members—retailers and wholesalers—to market a firm’s products. –For wholesalers  To induce retailers to buy inventories earlier than they normally would. –For retailers  To persuade customers to make a purchase.

59. Copyright © by South-Western College Publishing. All rights reserved. 15–59 The Role of Distribution Activities in Marketing Distribution –Physically moving products and establishing intermediary relationships to support such movement. Physical Distribution (Logistics) –The activities of distribution involved in the physical relocation of products. Channel of Distribution –The system of relationships established to guide the movement of a product.

60. Copyright © by South-Western College Publishing. All rights reserved. 15–60 The Role of Distribution Activities in Marketing (cont’d) Functions of Intermediaries –Perform the marketing function better. –Provide efficient distribution of the product. –Merchant middlemen  Intermediaries that take title to the goods they distribute. –Agents/brokers  Do not take title to the goods they distribute.

61. Copyright © by South-Western College Publishing. All rights reserved. 15–61 The Role of Distribution Activities in Marketing (cont’d) Types of Distribution Channels –Direct channel  A distribution system without intermediaries –Indirect channel  A distribution system with one or more intermediaries. –Dual distribution  A distribution system with more than one channel.

62. Copyright © by South-Western College Publishing. All rights reserved. 15–62 Fig. 15.6 Retailer Channel Wholesaler Channel Agent/Broker Channel Direct Channel Indirect Channels Producer Consumers or Industrial User Consumers or Industrial User Consumers or Industrial User Consumers or Industrial User Retailers or Industrial Distributor Retailers or Industrial Distributor Retailers or Industrial Distributor Wholesalers Agents or Brokers Alternative Channels of Distribution

63. Copyright © by South-Western College Publishing. All rights reserved. 15–63 Structuring a Distribution Channel Important Factors in Building a Distribution Channel –Costs associated with establishing a direct channel distribution –Coverage is increased through the use of indirect channels of distribution. –Control is enhanced using a direct distribution channel.

64. Copyright © by South-Western College Publishing. All rights reserved. 15–64 Determining the Scope of Physical Distribution Transportation—which mode to use? –Common carriers  Transportation intermediaries available for hire to the general public. –Contract carriers  Transportation intermediaries that contract with individual shippers. –Private carriers  Lines of transport owned by shippers.

65. Copyright © by South-Western College Publishing. All rights reserved. 15–65 Determining the Scope of Physical Distribution (cont’d) Storage – Lack of storage space is a common problem. Materials Handling –Protecting the firm’s output during warehousing. Specifying Responsibility for Delivery Terms –Paying freight costs. –Selecting the carriers. –Bearing the risk of damage. –Selecting the modes of transport.

66. Copyright © by South-Western College Publishing. All rights reserved. 15–66 Determining the Scope of Physical Distribution (cont’d) Logistics Companies –Firms which specialize in providing cost-effective transportation, storage, and distribution services to small companies.  Trucking  Packaging  Warehousing