Direct Sales. Direct sales includes the realm of the Internet, junk mail, catalogs, shopping networks, and long-format TV infomercials. Direct sales are big business. Internet sales exceeded $165 billion in 2010 and are growing rapidly. In 2009 catalog sales were $110 billion. Over eight thousand firms mailed out 20 billion catalogs that year. In 2010 the leading home shopping network, QVC Network Inc., had over $8 billion in revenues.
The nature of the direct mail game is to segment, segment, segment. Mailers target their market with a focused mailing list to directly reach those households with a compelling mail piece. Lists can be developed internally or purchased from vendors listed in SRDS’s Direct Mail List Rates and Data directory. The more defined, affluent, and focused the list is on a desired demographic composition, the higher cost per thousand (CPM) names. The results are tracked by rate of return (ROR) and dollar amount per order. Because TV audiences lack a list’s selectivity, TV sales pitches cannot be as directly targeted as direct mail.
Internet marketing is the largest and a growing method of directly contacting the customer and receiving a direct response. In 2011 marketers spent over $50 billion on Internet advertising. Search engine marketing (SEM) or key word advertising on Google’s or Yahoo!’s Internet Web search engines is purchased on a cost-per-click (CPC) basis. You select your customers by their interest when they are interested. In a competitive bidding process, the most sought-after word is priced at a market price. Because the cost-per-click is well defined, the conversion of leads to sales and the resulting profit needs to be carefully calculated. If the customer has a continuing value, the lifetime value should be considered. Other Internet marketing techniques include search engine optimization (SEO), banner ads, pop-ups, social media ads, text messages, and e-mail solicitations to target your audience.
The other component of both direct mail, Internet, and TV selling is fulfillment. Fulfillment is the process of order entry, order processing, inventory management, mailing, and customer service. The dreams of those viewers of HSN and QVC who want to buy collectible dolls must be fulfilled. The operation may be executed internally or subcontracted out to a fulfillment house that performs the duty for a per-order fee over certain volume minimums. It saves smaller companies the initial investment required to establish in-house fulfillment capabilities. Because direct selling is becoming such a large part of the economy, it should not be ignored as a possible channel to the consumer. A thorny issue connected with this selling method is the backlash against the Big Brother effect of having very personal information captured in mailing lists that churn out personalized pitches. This topic, like slotting fees, is a “hot” one for MBA chatter.
Each method of promotion—advertising, personal selling, sales promotions, public relations, and direct selling—can accomplish a separate mission depending on the product, the place of sale, and the price. The gifted marketer goes to his or her palette of promotional options and combines them in a coordinated promotional strategy to sell the product efficiently.
Product Place Promotion Price
PRICING DECISIONS: WHAT SHOULD MY PRICE BE?
The pricing decision, like the product decisions, can dramatically affect the marketing mix by suggesting a channel of distribution or an advertising strategy. The pricing itself can differentiate your product from the competition. Both the Kia and the Rolls-Royce are differentiated at opposite ends of the automobile spectrum. There are many rationales behind pricing each product and service. Haven’t you seen a pair of Nike cross-trainers for sale at $59.95 instead of $60 for some psychological advantage? Besides psychological pricing, there are eight major pricing methods and strategies suggested by research and case analyses.
Cost Plus. This is a simple method of taking your cost and adding a desired profit margin. Highway contractors often use this simple method; however, it is not the proper way to price.
Perceived Value to the Consumer. You can charge the customer the value provided, regardless of its cost. Replacement parts are a prime example—exorbitant prices are charged for a cheap but crucial custom nut or bolt. The owner of a fixture manufacturer confided to a group of my classmates during a school-sponsored plant visit that the majority of his company’s profits were derived from the twenty-by-twenty-foot replacement-parts cage, not from the long assembly lines producing the fixtures. If the price charged for an item is commensurate with the benefits provided, then it will be considered a good value in the mind of the buyer. But remember, there are limits even in a monopolistic situation.
Skimming. Early in the introduction phase of the PLC, a company can opt to charge a high price and skin high margins from a new and novel product or service. The margins could be used to further R&D, as is done in high-tech industries, or to immediately reward the owners for fad product introductions. RCA used this strategy to charge high prices for color TVs when they were introduced in the 1960s, and Sony used it in 2011 to introduce 3D TVs.
Penetration. This pricing can be used in the introductory phase or later in the PLC. A penetration strategy would use a low price to gain market share; the goal is primarily to lower costs per unit by producing many units in hopes of eventually controlling a market as the low-cost producer.
The Price/Quality Relationship. Because consumer perceptions are not necessarily based on just the physical attributes of a product, the “perceived” quality is often influenced by its price. Apparel, perfume, and jewelry are examples where the price itself affects the perception of product attributes. Consumers often attribute the characteristics of style and workmanship to a product just because of the high price charged.
Meet Competition. Strategies frequently decide to match or beat competitors’ prices to gain or retain market share in a competitive market. This is especially the case in commodity products and services such as gasoline, steel, and airline tickets. The economics of pushing a product through the distribution chain, as explained in the discussion of distribution channels, has a great effect on what price a manufacturer can charge to sell his product to the distribution chain and still end up with a competitive retail price.
Meet Profit Goals Based on the Size of the Market. If a market is limited in size, then a price must be charged that will allow enough profit to justify the marketing and manufacturing effort. If the product cannot command a profitable price, then to lower costs investigate either other user markets or manufacturing improvements.
Price Based on the Price Elasticity of the Buyer. Price elasticity describes how a buyer’s behavior changes due to a change in price. Buyers with elastic demand do not readily accept price hikes. Their demand is greater or smaller depending on the price. Buyers with inelastic demand behaviors don’t care about price increases. They don’t decrease their quantity or frequency of purchase depending on the price. Tobacco and crack cocaine smokers, for example, have absorbed many price increases and continue to buy because their addiction makes their demand inelastic. If elastic, buyers will not pay more than a given price point and will stop buying or buy much less based on the intensity of their desires, their personal disposable income, or their psychological price thresholds. When airline ticket prices are low, they encourage tourist travel. When they are high, tourists take more car trips or stay at home.
Many avenues may be taken with any given product. In the case of my gourmet packaged coffee, a distinctive coffee “product” may require a distinctive package, a higher “price,” a targeted promotion, and a selective “place” for distribution. But what really tells the story is the economics. Can I do it and make money?
6. WHAT ARE THE ECONOMICS OF MY PLAN?
Consumer → Market → Competition → Distribution → Marketing Mix → Determine the Economics → Revise
This may be the last step of marketing analysis. This step may also send the marketing manager directly back to Go without collecting two hundred dollars. By that I mean that the consumer analysis may be exemplary, the marketing mix masterful, but it just doesn’t make money.
The costs may be too high, the market price too low. Perhaps unrealistically high sales volume may be needed to break even. In those sad cases the entire circular process of marketing strategy must be restarted in an effort to find a profitable solution. To determine whether you have created a plan that is both profitable and reasonable, you must address several issues.
What are the costs?
What is the break even?
How long is the payback of my investment?
What are my costs? Fixed or variable?
The first cost question for a marketing manager should be, “Which of my costs are variable and which are fixed?” If this sounds like accounting, it is.
Variable costs are those that vary with the volume of products sold or manufactured. The costs of materials and labor are variable costs. As more units are sold or manufactured, the total costs of material and labor are higher. Fixed costs do not vary with volume even if no sales are made. As volume fluctuates neither rent nor supervisor salaries change—within a relevant range. By that I mean that if sales triple, a new factory may have to be leased, and thus fixed costs will go up. Promotional expenses such as advertising are also seen as a fixed cost of a marketing plan, because if the product is a flop, the advertising dollars are already spent. They are considered sunk costs—after a TV ad airs, the dollars are “sunk” in the ocean of TV land. Total costs are a combination of both variable and fixed costs.
Total Costs = Variable Costs Per Unit (VC) × Units Sold + Fixed Costs (FC)
They can also be shown graphically as below.
What can be seen in the graphs is that regardless of unit volume, the fixed costs remain constant. When units are actually produced, variable costs are added on top of the fixed costs to equal total costs.
What is my break even and is it reasonable?
Break even is the point at which the fixed costs are recovered from the sale of goods but no profit is made. Promotion and manufacturing are expensive. A way must be found to recoup those investments. That’s the whole point of marketing: to recover costs and make profits.
Using my data from the coffee industry, I have provided an example from the real world. I determined that the prices and costs of a proposed marketing plan for the Mexican gourmet coffee were:
WOODEN END TABLE PRODUCTION
Retail Sales Price
COST: $6.00 lb.
Selling Price to Distributors
COST: $4.20 lb.
Coffee Beans Cost
COST: $1.00 lb.
COST TYPE: Variable
Roasting and Processing Cost
COST: $.44 lb.
COST TYPE: Variable
Packaging Cost
COST: $.55 lb.
COST TYPE: Variable
Shipping Cost
COST: $.25 lb.
COST TYPE: Variable
Spiffs and Slotting Fees
COST: $50,000
COST TYPE: Fixed
Production Equipment Rental
COST: $12,000
COST TYPE: Fixed
Promotional Efforts
COST: $150,000
COST TYPE: Fixed
FIXED COSTS + VARIABLE COSTS = TOTAL COSTS
The corresponding break-even volume was calculated:
And the break-even dollar sales were:
108,163 lbs. × $6.00 lb. = $648,978 break-even retail sales
The same equation can be used to calculate a target volume to yield a desired profit.
To return a $30,000 profit target, you just add the profit to the numerator with the fixed costs.
One very important aspect of this analysis is that it does not include the costs that were “sunk” in the development of the product or the ad campaign if they have already been spent. The evaluation of the economics is always performed from the perspective of the present. There should not be any crying over spilled milk. You need to decide if you can make money on the proposed marketing spending in the future. For example, if the coffee blend was the product of millions of dollars of research, that would be irrelevant to the decision of whether I should spend additional money to market it. If I include the millions of research, it would be a definite “no go.” However, with that money down the drain, it might be profitable to invest additional cash in a marketing effort.
The graphical representation of the marketing plan economics for the Mexican coffee looked like this:
GOURMET COFFEE MARKETING PLAN ECONOMICS
Is my break even reasonable in relation to my relevant market? Answering this question must be your next step. In the coffee example, $648,978 of break-even retail sales was a .26 percent share of the $248 million market for gourmet, nonflavored coffee sold through the supermarket channel as explained earlier in the chapter. The targeted retail sales of $740,814 equaled only a .3 percent share of the relevant market. On that level, the plan appeared reasonable if I believed $150,000 of promotion and $50,000 of dealer incentives could have produced $740,814 in sales. Imagine that—I could have reached my goal with only a .3 percent share of the market!
Unfortunately, a small target share can easily lead you to believe that it is easy to obtain. How fierce was the fight for the grocer’s shelf? If my coffee got on the shelf, somebody else’s had to be kicked off. How would they react? Once in the supermarket, would my company have been willing to continue to support the coffee when a competitor went after my shelf space? In my case, the company was not willing yet to make that kind of long-term commitment to coffee.
What is the payback period on my investment?
This is another hurdle frequently used by companies to evaluate marketing projects when they have many to choose from. Companies want to know how long it will take just to get their investment back. Forget about profit. The payback formula is:
In the coffee example, the calculation would be:
If the yearly profit is not the same each year, there is no formula. The break-even point is where the plan returns the initial investment.
Seven years is a bit long for a risky venture. This may indicate that the whole marketing development process should start again. And unfortunately for me it did.
7. GO BACK AND REVISE THE PLAN
Consumer → Market → Competition → Distribution → Marketing Mix → Economics → Revise the Plan
At this stage of disappointment, I revisited the marketing strategy development process outlined at the beginning of this chapter. In circumstances such as those I faced, you must either tweak or discard your plans entirely. You may have something that can be salvaged . . . if you’re lucky. You have to start by asking yourself tough questions. In the case of the coffee project I tormented myself with:
Should I target another segment?
Is the mail order distribution channel an option?
Should I not advertise and rely on a cheap price to move my product?
As these questions indicate, the marketing process is not easily defined or executed. It can be frustrating because there are no “right” answers. Consumer reactions cannot easily be predicted. It takes creativity, experience, skill, and intuition to develop a plan that makes sense and works together (internally consistent and mutually supportive). Marketing also requires close attention to the numbers to be successful. With this chapter you are armed with the MBA problem-solving structure and the MBA vocabulary to attack the marketing challenges that you may encounter. You haven’t even paid a dollar in tuition, sat through a class, or anted up for an expensive executive seminar. Figure the break even on that investment!
I include the following notes that we all passed among ourselves at school to guide our case discussions and tests (open notes). These are the key questions that must be addressed by a comprehensive marketing strategy.
MARKETING STRATEGY OUTLINE
1. Consumer Analysis
Makable or marketable product?
Who’s buying, who’s using?
What is the buying process?
Who are the “influe
ncers”?
How important is it to the consumer?
Who needs it and why?
What is the value to the end user?
Is it a planned or impulse buy?
What are the perceptions of our product?
Does it meet their needs?
2. Market Analysis
What is the market’s nature? Size, growth, segments, geography, PLC
Competitive factors? Quality, price, advertising, R&D, service
What are the trends?
3. Competitive Analysis
What is your company good at? Poor at?
What is your position in the market? Size, share, reputation, historical performance
What are your resources? Trade relations, sales force, cash, technology, patents, R&D
Who is gaining or losing share?
What do they do well?
Compare your resources to theirs.
What are the barriers to entry?
What are your objectives and strategy?
Any contingency plans?
Short- and long-term plans and goals?
4. Marketing Mix
Who is the target?
Product—Fit with other products? Differentiation, PLC, perception, packaging, features
The Ten-Day MBA 4th Ed. Page 6