5 1. MARKETING The Traditional View of Marketing Traditionally, the marketing function is defined as “a process through which people create, offer and exchange products of value with others”. This implies that the primary role of the marketing function is to maximize sales. So Marketing strategy is… “the set of plans and actions that an organization undertakes to maximize the profitability of the sales of its products.” Marketing involves determining the product attributes which the customers desire, and branding and positioning existing and new products. Tactical decisions and actions then follow: prices must be set, customers communicated with through advertising and other means, distribution channels selected. These are the so-called “4 P’s” of product, price, promotion and place. The figure shown below represents the fundamental framework that is used for marketing in Mike’s Bikes. Marketing and the Business Shareholder Value ECONOMIC CONDITIONS Current Profit COMPETITORS’ ACTIONS Demand Future Profit Supply Accounting operating decisions investment decisions BUSINESS STRATEGY Marketing Strategy Operations Strategy Finance Strategy Product Development Strategy Copyright © 2001 - 2004 SymComm Limited. All rights reserved. 4 It illustrates the role of marketing relative to the other business functions and its contribution to shareholder value. Specifically, marketing complements decisions in operations, finance and product development, and generates profits and shareholder value by achieving a match between demand and supply. Page 5-1 Copyright © 2001 - 2012 SymComm Limited. All rights reserved. The MiniMBA l Marketing 2. The Emerging view of Marketing In response to a changing market place and the growth of information and service-oriented businesses, a more sophisticated view of marketing is now evolving. The trend towards a more team-orientated and process-driven firm requires a broader role for marketing. Marketers are no longer seen as purely functional specialists. Rather, in the marketing- (or customer-) oriented firm, every employee is seen as a marketer, whether on a full-time or a part-time basis. Part-time marketers are found throughout the firm (for example, at senior management and board level, and in customer service personnel and technical departments at lower levels) while full-time marketers are located in the marketing function – should this exist (and increasingly it may not). All employees work together in some way to maximize the long-term profits associated with sales. The distinction between the traditional and emerging role for marketing is subtle. In the first case marketers research the market, determine customer needs and wants, and work with the production department to arrive at a product offer that matches the market’s requirements with the firm’s capabilities. Price and distribution strategy are set, and the market is informed and persuaded of the product’s competitive superiority. The end result is a transaction – the customer makes a purchase. Under the emerging view, the emphasis is on building long-term customer relationships, or paying attention to streams of transactions. The focus is directed at identifying and keeping the ‘right’ customers, rather than ‘getting’ customers indiscriminately on a oneoff transactional basis. To achieve this, consistently superior customer value must be delivered over time, and this requires the firm to pay close attention to all aspects of its performance, including achieving lowest delivered cost. This in turn requires a cross-functional processoriented approach, and a great deal of interaction with both internal and external parties. Excellent relationships must be built and maintained inside and outside the firm with, for example: The accounting and finance department (to ensure that the firm monitors and controls delivery costs, among other things) The production department (to ensure performance in a number of areas, including delivery and fitness for function) External suppliers (eg, advertising agencies and packaging suppliers). While the trend towards service and relationship marketing is very important, it is specifically excluded from this model. In Mike’s Bikes the environment has been set up so that marketing tries to maximize shareholder wealth by persuading people to purchase goods of value. It is assumed that consumers buy according to a demand curve. Total demand is determined by a range of factors – and marketing decisions are just one of these. There are two other factors which affect the demand for a product - its quality and its delivery time and availability. For our purposes they are covered in the Operations Function. Page 5-2 The MiniMBA l Marketing 3. Learning Objectives In this chapter we explore some theory related to these issues, and work through some simple numerical and more complex spreadsheet examples. The main learning objectives for this chapter are to understand the following: A framework for marketing Market analysis and segmentation The selection of target markets The effect of branding Product positioning using attributes and the perceptual map The perceptual map The marketing mix (the 5 P’s) Pricing strategy Promotion/advertising product PR Distribution strategy and channel selection. (Product quality and availability are covered in the Operations Function.) Determination of margin for channels Determination of demand for products Substitution of products The marketing/operations interface The marketing/finance interface The marketing/product development interface Strategic marketing marketing plan. strategy control and and media selection, development of a While these issues may be considered in isolation, Mike’s Bikes encourages users to view them as a part of the overall strategy and so to think of the firm and industry as an interactive system. 4. A Framework for the Marketing Process The figure shown below represents the fundamental framework that is used for marketing in Mike’s Bikes to generate profits and shareholder value. The strategic marketing process may be viewed as a number of steps: Analyze and segment markets Select target market(s) Determine branding and positioning strategy Determine the best marketing mix to generate optimum demand. Marketing management implements the outcomes of the strategic marketing process. Page 5-3 The MiniMBA l Marketing Marketing Strategy is… “the “theset setof ofplans plansand andactions actionsthat thatan an organization organizationundertakes undertakesto tomaximize maximizethe the profitability profitabilityof ofthe thesales salesof ofits itsproducts.” products.” And includes… Marketing Strategy • Analysis of Markets • Selection of Target Markets • Marketing Mix • Control Copyright © 2001 - 2004 SymComm Limited. All rights reserved. 5. 6 Determining Strategic Objectives From a strategic perspective, marketing has 3 main goals: To determine which segments of the market to target To achieve a certain number of sales in each market segment To achieve a given contribution margin (profit) from each segment. Sales performance then determines the required market share and competitive position of the company in each of these market segments. To develop its strategic marketing objectives, the firm must do some market analysis. 6. Analyzing the Market Market analysis considers the business environment in which an organization operates, including the customer segments that could be matched with the products that an organization produces or intends to produce. Typically a lot of data is required to inform a sound market analysis – and this data does not become a good basis for decisionmaking until it has been processed, structured and summarized. Quality of information is vital. The most valuable information is current information. However, this is generally also the most ill defined and informal. It is better to be roughly right than precisely wrong, and the art of analysis is to sort the nuggets of gold from the deserts of data. In the case of Mike’s Bikes, this information is provided to you in the form of some summary reports. In a real context, there is a lot of work entailed in arriving at good summary information for effective decision-making. The information provided in Mike’s Bikes can be considered as the outcome of prodigious marketing research efforts. A good way to cover key aspects of market analysis is to follow the three C’s - Customer, Competitor and Company. These are discussed briefly below. Page 5-4 The MiniMBA l Marketing Analysis of Markets Marketing Strategy Customer Analysis • Analysis of Markets • Selection of Target Markets • Marketing Mix • Control Competitor Analysis (see strategy) Copyright © 2001 - 2004 SymComm Limited. All rights reserved. Company Competence (see strategy) 9 CUSTOMERS - IDENTIFYING SEGMENTS A good analysis should provide a map of the market. Management can then use this map to decide how to segment the market and to target a particular segment or segments with its product. The aim is to achieve the best match with the organization’s capabilities and resources. Segmenting a market appropriately is as much an art as it is a science. There are many ways to go about it. The ‘right’ way is the one that results in the best insight into product sales! Many factors or criteria may guide segmentation. These can be loosely categorized as geographic, demographic, psychographic, and behavioral factors. For example, the toothpaste market could be segmented in the following ways: Geographically: country or state user; rural or city user Demographically: by family life cycle stage (eg, empty nest user, young single user) Psychographically: by attitude or lifestyle of users (eg. educated green user or urban sophisticate user) Behaviorally: by how many times per week the product is used. By looking at the requirements of the different segments, at competitor activity and at the organization’s potential resources, the firm can decide which segments of the market it wants to serve, and the position it should adopt in each of these segments. There is a strong need for consistency in these choices. THE PERCEPTUAL MAP The perceptual map is a useful tool for building understanding of differing consumer needs in various segments or markets. This tool identifies the product or service attributes which consumers value most highly and positions a number of segments in relation to these attributes. Several attributes may be important to a market (eg, in the case of toothpaste these may include taste, sex appeal or whiteness, appeal to children, ease of use). A perceptual map can only show 2 (or 3 if using a 3-D approach) of these attributes at any one time. Several Page 5-5 The MiniMBA l Marketing different maps may be constructed to get the overall picture. However using more than 3 attributes makes it difficult to identify segments. THE PERCEPTUAL MAP IN MIKE’S BIKES Following extensive international research into the types of people who purchase bikes, we have concluded that the potential bike market can be broken into two key segments. The segments have been given the names ‘Adventurer’ and ‘Leisure’. Note that only the ‘Adventurer’ segment is currently being served by RockHopper Bikes. ‘Adventurer’ customers desire trendy, highspecification, high quality mountain bikes and put them to reasonably demanding use. They are prepared to pay retail prices ranging from $500 to $4,000. On the other hand, ‘Leisure’ customers purchase bikes for relaxed Sunday afternoon bike rides. They want a lower spec, stylish bike with a realistic retail price range from $100 to $600. As of 1998, no bikes suitable for the Leisure segment are being sold. THE ADVENTURERS SEGMENT The Adventurer segment is broadly typified by the young suburban bicycle purchaser who wishes to buy a mountain bike. An Adventurer is typically a young person, focused on fitness and the outdoors. He or she wants a bike that will go anywhere and everywhere, and then come back. Often the Adventurer will forego luxury features in favor of a sturdy, high performance bike. The evidence is that the use of bikes for fun adventures and blood-pumping action is very popular and in fact this segment is experiencing strong growth. The people who buy these bikes tend to be prepared to pay more for the right bike because they have a specific purpose for it and do not want to be held back with slow equipment or to have to stop for repairs. Given the many and varied exciting opportunities for off-road biking in Erehwon, we are confident this segment has good potential if appropriate bikes are released into the market. THE LEISURE SEGMENT The Leisure segment is made up of people who own a bike, but use it only once or twice a month. These customers see their bike primarily as a means of relaxation or leisure, and they go for a Sunday ride every now and then, usually with others (often in family groups). The Leisure segment therefore requires less in terms of high tech components and accessories, with “leisurites” preferring comfort and style. Purchasers who buy bikes for leisure purposes are not very fussy, but they like to be able to buy a bike when they go out shopping, so long as they’ve seen the bike on TV before. Consumers in the leisure segment abhor having to wait to buy, even if it is the best value for money. Because this segment is quite broad, it is also typically very large. It accounts for 50% of new bike sales units overseas. Page 5-6 The MiniMBA l Marketing THE RESULTS OF THE MARKET RESEARCH To produce some data that would be useful in differentiating the market segments, a market research house was commissioned to undertake a survey. 1,000 potential bicycle purchasers were asked the following questions: Thinking about bicycles, what two factors would be most important to you if you were to purchase a bike tomorrow? How important would each factor be to you? The two factors identified were: The aesthetic style and design of a bike The technical features and components construction materials and strength). (including This research is ongoing. From year to year there may be slight variations in the positioning of the segment points as customer needs change. In general, it is safe to assume that people’s expectations will increase with time. INTERPRETING THE INFORMATION The Perceptual Map Report shows the levels of Style/Design and Technical Specs which each of the market segments (ie, Adventurers and Leisure) desire. The circles indicate the acceptable ranges of Style/Design and Technical Specs. The Perceptual Map Report shows also how well your products (and unused product designs) match these requirements. By selecting a different firm you can see this information for its products too. The segment centers are the best points on the map to aim for. These are ‘ideal’ positions which satisfy all of the segment. You could of course move away from these center points, and produce a product which exceeds the style and technical specifications of the segment. You could sell it at the same price as one that met exactly the needs of that segment. However, the “better” product would not sell as well as one exactly meeting the segment needs, because it is not what the customer wants. Unnecessary features can be annoying for someone who wants a simple bike. Extra style and design attributes can reduce Page 5-7 The MiniMBA l Marketing a bike’s performance and functionality for someone who uses the bike for a specific purpose. It is important to note that demand for a product is determined by many factors in addition to the product’s attributes. These include pricing, quality, advertising, and distribution. In most cases these other factors are more significant than the closeness of a product to the center of the circle on its perceptual map. SEGMENT SUMMARY Key information regarding each of the segments in Mike’s Bikes is given in the tables below. The section below explains the process used to collect this data. Segment Adventurers Leisure Segment Sensitivity Adventurer Leisure Est. Potential Market Size (Units) 70,000 50,000 Retail Price Range Average Score for Style/Design Average Score for Technical Specs $500-$4,000 $100-$600 50 50 50 10 Price Advertising PR Quality Distribution Delivery Time Low Med Med High Med Low High Low Med Med Low High COMPETITORS This section is covered in the Strategy Chapter. The content includes the following analytical tools: environmental analysis, PESTE, competitor profiles, and SWOT analysis and the concepts of vision, mission, strategic intent, and core competencies. COMPANY This section is also covered in the Strategy Chapter. The content includes issues such as the company’s mission, strategic intent and core competencies. CONJOINT ANALYSIS OVERVIEW OF CONJOINT ANALYSIS1 Conjoint Analysis is a technique used specifically to understand how respondents develop preferences for products or services. It is based on the simple premise that consumers evaluate the value of a product/service/idea by combining the separate amounts of value provided by each attribute. It is unique in that the researcher first constructs a set of hypothetical products or services by combining the possible attributes at different levels. These hypothetical products are then presented to respondents who provide only their overall evaluations of the hypothetical products/services. Thus the researcher is asking the respondent to perform a very realistic task - choosing among a set of products. Because the researcher constructed the hypothetical products/services in a specific manner, the importance of 1 Hair, J., Anderson, R., Tatham, R., Black, W., “Multivariate Data Analysis with Readings (3 rd Ed)”, Macmillan, 1992 Page 5-8 The MiniMBA l Marketing each attribute and each value of each attribute can be determined even while having only the respondents’ overall ratings. THE PROCESS OF DATA COLLECTION Data collection in a conjoint study involves showing respondents a series of cards that contain a written description of the product or service. If a consumer product is being tested then a picture of the product can be included along with a written description. Analysts are able to use statistical manipulations to avoid having to make consumers rate every possible combination. In a typical conjoint study, respondents need rate only 10-20 cards. This data becomes the input for the conjoint analysis. Analysts can then calculate consumer preferences and perform simulations to identify which products will be successful and which should be changed. Price simulations can also be conducted to determine how sensitive the consumer is to changes in prices. AN EXAMPLE The following card is an example of one of the cards which might make up the set used in a conjoint study into the airline business traveler. "On your next business flight overseas how likely would you be to choose a flight that has all the following characteristics? Please circle the appropriate number from 1 to 10 to indicate your feelings." One stop en route Extra-wide seats Departure time: before 8:00 am "Double" mileage points $200 fee to change ticket Would never choose this flight 1 2 3 4 5 6 7 8 9 10 Would definitely choose this flight QUESTIONS CONJOINT ANALYSIS CAN ANSWER Which new products will be successful? Which features or attributes of a product or service drive the purchase decision? Do specific market segments exist for a product? What advertising appeals will be most successful with these segments? Will changes in product preference and sales? What is the optimal price to charge consumers for a product or service? Can price be increased without a significant loss in sales? design increase consumer CONJOINT ANALYSIS IN MIKE’S BIKES The results of a conjoint analysis survey conducted on members of each of the segments identified in the Erewhon bike market are available to firms in the industry. The attributes tested were price, quality, delivery time, availability/distribution, style, and technical specifications. A summary of the results is shown in the table below. Page 5-9 The MiniMBA l Marketing Segment Sensitivity Adventurer Leisure 7. Price Advertising PR Quality Distribution Delivery Time Low Med Med High Med Low High Low Med Med Low High Selecting Target Segments The selection of target segments follows once the groundwork (the marketing analysis) is complete. Selecting a target segment is an important decision. The basis for this is long-term segment profitability. In real life, strategic criteria (such as fit with parent company aspirations, or a desire to build competency in a particular market) may also need to be considered. Target Segment Required Attributes Segment Potential Racers Style not important (20 units on the Perceptual Map) Excellent technical spec (80 units on the Perceptual Map) 25,000 units per year Expected Competitor Activity Medium 2 competitors willing to maintain profit Company Competence Medium compared with others. Need to invest in machinery and hire skilled staff Profitability $2,000,000 based on 10% market share SELECTING TARGET SEGMENTS IN MIKE’S BIKES The table shows the process that one could go through to determine the profitability of a segment in Mike’s Bikes. The first step is to assess what the segment requires and its total sales potential. Total sales potential must be assessed in view of likely competitor activity and the ability of the firm to compete. This assessment will lead to an estimate of the most profitable segment for the firm in that competitive environment. It may be wise to start with a table using textual descriptions and include the numerical measures later, as this data is often difficult and/or expensive to obtain. 8. Developing the Marketing Mix The next step is to determine the details or tactics for achieving the desired position in each of the segments. This involves considering the appropriate marketing mix - loosely called the “four Ps” (product, price, place, and promotion). More recently the importance of relationships (often called People and the “fifth P”) has been introduced. Mike’s Bikes focuses on the first four of these. Product is the bundle of physical product and intangible service benefits provided to the consumer (expressed in terms of the attribute scores, ie, ‘stylishness’ and ‘technical specifications’). Price is the retail price charged to the consumer. Place refers to the type of distribution channel or store used to distribute the product. Promotion entails communicating the total product bundle to the target segments, resulting in brand and product awareness, and (ideally) sales. People refers to the importance of building the trust relationship with the customer that will lead to brand loyalty and repeat sales. These tactics will all influence segment demand. They are examined in turn in the sections which follow. Demand will also be influenced by Page 5-10 The MiniMBA l Marketing delivery and quality. Operations decisions. In Mike’s Bikes these are assumed to be PRODUCT2 Consumers base their purchase decisions on the attributes of the products that are available to them. The closer these attributes to what they require, the more likely they are to buy. To manage these attributes, the firm needs to measure actual product attributes and relate these to the ideal attributes desired by each market segment and modeled using the Perceptual Map. The product may then be modified (if necessary) to suit the market. This is shown in the diagram below. Positioning Strategy is... “the development of the attributes of the product so that it matches the requirements of the target market.” Product Attributes Position of Segment Price Promotion Distribution (Place) People Attributes of Product Copyright © 2001 - 2004 SymComm Limited. All rights reserved. In Mike’s Bikes, we have assumed that the most important physical attributes of a bike are Style/Design and level of Technical Specification (including components, construction materials and strength). The product’s performance on these attributes (ie, its actual attributes) can be assessed through market research and compared to the segment’s ideal requirements (ie, its ideal attributes) to compare the distance between the two. The closer the distance, the more suited the product is to the segment’s requirements. 2 Price, quality, distribution, delivery, and product awareness are excluded from the perceptual map. In general the more appropriate each of these is, the more likely all segments are to buy the bike. In contrast, there are often other attributes where “better” is different for different market segments. Consider seat height for example. Kids’ bike requirements are quite different from other market segments. A higher (or lower) bike seat is not better for everyone! Page 5-11 The MiniMBA l Marketing THE PRODUCT DECISION IN MIKE’S BIKES In Mike’s Bikes, you are restricted to selling bikes only. You need to make decisions about when and how new bike products will be launched and existing products modified and deleted. This is done on the Products Screen shown above. NEW PRODUCTS New products can be launched at any time. These products are based on the physical characteristics of a completed Product Development Project (sometimes called a New Product Development Project). New products can be used to enter new segments of the market or to attempt to dominate a current segment. In general, firms should be wary of product proliferation (ie, of producing many different products). This increases complexity and costs. It may also increase factory lead times, resulting in poor delivery performance. A direct effect of product proliferation is that more head office marketing staff are required. Depending on your workforce effectiveness, you may need one head office marketing staff member for each product you launch. PRODUCT MODIFICATION Current products can be modified using a completed Product Development Project. Modifications can be made for a number of reasons: To adapt the product to the changing needs of a segment To improve an existing well known product so that it appeals to new market segments To re-engineer processes - retaining the product’s same physical characteristics but simplifying production requirements and lowering costs. Bear in mind that consumers may not always react positively to such modifications! Where the firm holds obsolete stocks of finished goods for a product that has since been modified, the obsolete stocks are automatically dumped at prime cost (material plus labor costs). Page 5-12 The MiniMBA l Marketing See the Product Development Chapter for information on how to develop new products. PRODUCT DELETION Products can be abandoned at any time if they prove no longer consistent with a firm’s strategy. Where the firm holds inventories of finished goods for deleted products these are dumped at prime cost. PRICE Price is usually a key determinant of demand. Several pricing strategies are listed below. Price to suit your strategy. Mark-up Pricing: and above costs. The firm applies a fixed margin over Target Return return/margin. Perceived-Value Pricing: consumer is willing to pay”. Going Rate Pricing: The firm prices at the price which is being charged in the market. Pricing: The firm sets a specific The firm prices at “what the THE PRICE DECISION IN MIKE’S BIKES Pricing can be determined in any way that is considered appropriate. This decision can be made on the Products Screen for each individual product, as shown above. A price decision must be made for each product. These prices should take account of the price sensitivity of consumers in your target segments and the prices of competing products. PROMOTION Marketing communications (or promotion) is important in generating product demand. Marketing communications can include advertising, Page 5-13 The MiniMBA l Marketing public relations, personal selling, direct marketing, Internet activities, outdoor signage and many other tactics and techniques. The aim of marketing communications is to create consumer awareness, product and brand recognition, and intention to purchase. Promotion Strategy is... “The ways in which an organization generates a positive perception of its products. It usually consists of product advertising, branding and public relations.” Product Attributes Price Promotion Advertising Distribution (Place) People Public Relations Copyright © 2001 - 2004 SymComm Limited. All rights reserved. Brand advertising and product advertising work together. For example, Toyota’s brand advertising creates an image and communicates brand values for the Toyota brand as a whole. This brand covers all of Toyota’s product variants or models. By comparison, specific model or product advertising (eg, for the Corolla and Corona models) informs the consumer about the features and benefits of a particular model. Brand advertising, in effect, leverages the effectiveness of product advertising. In Mike’s Bikes, brand awareness, product awareness and the influence of product public relations (PR) depend on current budget and the carryover effect from previous periods. The effectiveness of product advertising and PR depends on choosing media that match the target market’s media consumption habits. Brand advertising increases the effectiveness of product advertising and results in increased product awareness. AN EXAMPLE Given the S-curve shown below what increase in TV viewers’ awareness will an expenditure of $2m on TV advertising achieve? How much product awareness will there be if we assume that product awareness last period was 10% but half of this is lost each period, all our target consumers watch TV, and brand advertising is ignored? SOLUTION $2m will achieve an increase of 35% among TV viewers. Last period awareness = 10%; loss for this period = 5%; total product awareness for this period = 10% - 5% +35% = 40%. Page 5-14 The MiniMBA l Marketing Advertising Awareness Curve for TV 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 00 0 $1 ,0 00 ,0 00 $1 ,2 50 ,0 00 $1 ,5 00 ,0 00 $1 ,7 50 ,0 00 $2 ,0 00 ,0 00 $2 ,2 50 ,0 00 $2 ,5 00 ,0 00 00 0 $7 50 , 00 0 TV Advertising Expenditure $5 00 , $0 0% $2 50 , Awareness Increase in TV Watchers Work a Simple Example Copyright © 2001 - 2004 SymComm Limited. All rights reserved. 31 PROMOTION IN MIKE’S BIKES There are three forms of promotion (or marketing communications) in Mike’s Bikes: Brand advertising Product advertising Product PR BRAND ADVERTISING Only one brand is permitted (the name of the manufacturer, ie, Real Cool Cycles) and this contributes to the effect of any other product advertising that is carried out. A budget can be allocated to brand advertising (as shown). This determines the effectiveness of the advertising. In the next period, consumers “forget” the advertising to some extent, but any new brand advertising adds cumulatively to what is left. PRODUCT ADVERTISING Analyzing the Erehwon bike market has revealed that there are three media choices for advertising bikes– TV, newspapers and magazines. In general, consumers in the Adventurer segment are relatively heavy readers of magazines, while the Leisure segment tend to be relatively heavy readers of newspapers. Both segments watch television. Newspaper advertising is about half as expensive as TV and magazine advertising per person reached. Page 5-15 The MiniMBA l Marketing As of 1998, Real Cool Cycles and MountainTop Cycles have concentrated advertising for RockHopper bikes on television. Newspapers will be utilized more if and when Leisure bikes are released onto the market. A brief description of each medium is given below. Segment TV Reach Newspaper Reach Magazine Reach Adventurer 50% 10% 60% Leisure 60% 60% 20% Television: Erehwon has only one national TV network. Television is a good way of reaching most market segments. Newspaper: There is one main newspaper in Erehwon - a monthly called the Erehwon Herald. An awareness curve like the one shown earlier for TV is available for newspaper and magazine advertising in the Mike’s Bikes Help. Magazines: There is a variety of monthly magazines in Erewhon. Magazines related to the bike market range from a specialist racing bike magazine through general outdoor adventure magazines to very general leisure magazines. PRODUCT PUBLIC RELATIONS Product public relations related to the bike market include product reviews and press releases. The idea is that consumers will give more weight to news and independent reviews than advertisements. The Adventurers are more sensitive to this kind of product promotion (see the Media Reach table above). MAKING THE PROMOTION DECISION The brand advertising expenditure decision can be found on the Marketing Decisions tab of the Main Decision Screen. The resulting brand awareness applies to all the firm’s products. Specific product-related media advertising and public relations are budgeted for each product on the Product Decision Screen. Advertising activity affects the awareness levels of the product. It should be remembered that awareness takes time to build and will decline over time as consumers “forget”. Advertising experts estimate that an investment of around $2m is required to achieve initial awareness levels of 25%-50%. Less is required to maintain these levels. In deciding the level of investment in advertising, it is important to remember that certain segments are more responsive to advertising than others. The investment includes money spent on advertising research to develop advertising messages. Product PR works in a similar way to product media advertising. However each market segment’s sensitivity to advertising may be different from its sensitivity to PR. PLACE (DISTRIBUTION) Distribution (place) relates to the ability of the firm to make products accessible to its target segments. This is achieved through distribution channels – in this case through retail outlets. The effectiveness of distribution (and hence its impact on demand) is determined by the shopping habits of the target market and the number of stores in the required channels that carry the product. Page 5-16 The MiniMBA l Marketing For example, if Adventurers are being targeted, then it is more effective to have a greater number of sports stores and bike shops in the distribution channel. Distribution Logic Marketing Marketing Strategy Strategy Product Attributes • Analysis of Markets • Analysis of Markets • Selection of Target Markets • Selection of Target Markets • Marketing MixMix • Marketing • Control • Ongoing Management Price Promotion Distribution Number of Stores Expected Sales Shopping Habits Retailer Margin Copyright © 2001 - 2004 SymComm Limited. All rights reserved. Extra Support 37 The number of stores persuaded to stock a firm’s products is determined by margin offered, expected product sales, and extra support provided. DISTRIBUTION CHANNELS IN MIKE’S BIKES Distributors carry a complete line of products. You will need to decide on broad or narrow coverage (ie, many or few different channels), and the intensity of distribution (ie, number of stores in each channel). This will be influenced by the shopping habits of the market segments you are targeting. Another small influence on your decision is the fact that the greater the number of distributors, the higher the number of head office marketing staff that you will need. (A head office marketing staff person will be required for approximately every hundred stores stocking your products.) The number of stores in the channel which decide to stock your products will depend on the retail price, margin, unit sales history, and extra support offered. You must specify what margin and what extra support (eg, in terms of special promotions and discounts) you are going to offer the retailers in each channel. Note that the retailer margin decision refers to the percentage of the retail price that the retailer keeps. So a percentage of 60% means that they keep 60% of the sales revenue and give you the remaining 40%. Maintaining existing distributors and acquiring new ones requires considerable resources. Costs associated with distribution include: hiring and training retailers, field sales representatives and head office sales staff; providing promotional literature; organizing delivery and ordering of products; following up complaints; collecting accounts. Distribution costs vary with the number and types of distributors/retailers used. Analyzing the Erehwon bike market has revealed that the vendors of bikes may be broken into two categories: Bike Shops and Department Stores. In general, the Adventurer segment favors the specialty bike Page 5-17 The MiniMBA l Marketing shops while the Leisure segment simply shops in the familiar department stores. An analysis of the costs of supporting retail stores in the two channels has revealed that the Bike Shops are more expensive to support per store, but this is balanced by the fact that there are many more Department Stores. In 1998, the majority of bikes sold are sold through Bike Stores. Department Stores would be expected to be deliver more sales when/if Leisure bikes are released onto the market. A brief description of each channel is given below. BIKE SHOPS The bike shop (often called ‘the bike boutique’) is a specialty store dedicated to bikes and bike-related products. Store assistants are trained bike specialists, able to tailor specific bikes to specific customers. People unsure of which bike to buy will usually go to a bike shop, especially if the bike is required for a specific purpose. Bike shops stock an extensive range of different models, catering to all types of purchasers. Bike shops generally stock bikes in the mid to high price range and bikes they stock in common with the department stores are often priced slightly higher than in the department stores. They are thus perceived as the quality bike vendor (at the cost of being perceived as the most expensive bike vendor). Bike shops rely on their higher margin to gain a profit, so are less likely to discount their stock. Their customers tend to be less price sensitive than those of department stores. DEPARTMENT STORES Department stores (eg, chain retailers such as Wal-Mart) stock a wide range of goods - from consumer durables (such as refrigerators and televisions) to apparel and kitchenware. They often specialize in budget or exclusive items. Department stores appeal to people wanting to complete their weekly shopping in one store. They are increasingly being built in mall sites surrounded by smaller satellite stores catering to other shopping requirements. The typical shopper at a department store is out with his or her family on Saturday or Sunday afternoon. Often they do not have a definite purchase in mind, but in walking around may see something that appeals. The busiest time of year for department stores is prior to Christmas, when gifts are in everyone’s thoughts. In terms of support, department stores seem to offer little support to bike manufacturers. They do not have salespeople who are bike experts to give the customers information, nor do they take part in many of the promotions that the manufacturers propose. They typically stock a wide range of mid-priced bikes, stocking competing brands side-by-side. SUMMARY Number of Dealers Annual cost to support each dealer Bike Shops Department Stores 120 $450 300 $200 The costs of distributing through each distribution channel are shown in the table above. Other distribution costs not shown here are the salaries of head office marketing staff, and any extra support that you allocate to either of the distribution channels. Page 5-18 The MiniMBA l Marketing Estimates of the shopping habits of the different segments in the different distribution channels are also given for use in deciding on a distribution strategy. Adventurers Leisure Bike Shops Department Stores 70% 25% 30% 75% AN EXAMPLE Assume you are targeting the Adventurer segment. Assume that 20% of consumers prefer to purchase in department stores and 40% prefer bike shops. Your margin means that 50% of department stores and 80% of bike shop stock your product. Roughly what coverage of the Adventurer segment do you have? SOLUTION Approximate coverage of the Adventurer segment = (0.2 x 0.5) + (0.4 x 0.8) = 0.42% MAKING THE DISTRIBUTION DECISION The Distribution Channels Screen is shown below. This is where you enter your decisions about distributing your products for the coming year. Here you decide the importance of the different channels. To allocate the number of stores for a particular channel, click on either the Bike Shops or Department Stores Icon. A summary of decisions for the selected distribution channel appears towards the bottom of the screen. Then click the Allocate Button and enter your decision in the dialogue box that appears. You must specify what margin and what extra support (eg, in terms of special promotions and discounts) you are going to offer the retailers in each channel. This is the margin the retailers keep - so don’t increase it too much! The number of stores in each channel which decide to stock your products will depend on the retail price, margin, unit sales history, and extra support offered. Page 5-19 The MiniMBA l Marketing 9. Generating demand Traditional economics Demand = Alpha – (Beta x Price) Demand vs Avg Price for Adventurer Segment 1996-1999 200,000 y = -82.144x + 195182 150,000 100,000 50,000 0 $0 $500 $1,000 $1,500 $2,000 Can extend to include product specs, awareness, PR, distribution, quality, delivery Copyright © 2001 - 2004 SymComm Limited. All rights reserved. 42 Arguably, the objective of marketing activity is to generate demand. This idea overlaps heavily with economic theory. The ‘Traditional economics’ diagram above shows market demand, based on average price. The higher the average price, the lower the demand (ie, this is an elastic demand curve, or one where the level of demand is relatively sensitive to changes in price). It is assumed that the relationship is linear for a realistic range of prices. The formula for demand is given. Obviously this is simplistic: in reality price is not the only determinant of demand. To enrich our model to include other factors (eg, relative product quality, consumer awareness), we have defined a variable labeled ‘Value For Money’ (VFM) and have adjusted the market demand model to include these factors. The logic we follow in modeling demand for the bike scenario is shown in the diagram below entitled ‘Generating Demand for the Adventurer Segment’. Page 5-20 The MiniMBA l Marketing Generating Demand for the Adventurer Segment Awareness Product Specs PR Influence Distribution Price Delivery Quality Value for Money Product’s Segment Share Segment Demand Total Product Demand Copyright © 2001 - 2004 SymComm Limited. All rights reserved. 41 The steps involved in the calculation are as follows: Step One: calculate a VFM or segment attractiveness score for each product, based on attributes of price, advertising, PR influence, quality, distribution and product delivery; Step Two: calculate segment share for each product, achieved by comparing VFM scores for different products. (Note that products from the same firm selling to the same segment cannibalize each other.) Step Three: calculate segment share-weighted indices for average price, quality, distribution, etc; Step Four: calculate segment demand (based on the weighted average indices). The higher the index, the greater the segment demand generated; Step Five: calculate product demand – share of segment demand, determined by the ratios of the VFM indices; Step Six: calculate total product demand - the sum of all segment demands for the product. 10. Ongoing Management and Control None of this is a ‘set and forget’ one-off exercise. The market changes over time. There is a constant requirement for feedback, updating of market data, and modifications to plans in response. Planning and strategy need to take into account the actions of competitors, and the improved understanding of the environment that comes from feedback. Internal consistency between marketing, operations and finance is also critical to success. Some key reports that could be used to assess market changes are Sales Market share Margins Customer satisfaction surveys. Important organizational decisions relate to the desired position or strategic posture which the company wishes to take – whether as market innovators, followers, best-price firm or differentiators. These Page 5-21 The MiniMBA l Marketing decisions cannot be made by the marketing department in isolation but must be consistent with other organizational functions, and recognize both organizational and competitor capabilities. 11. An Example of a Good Strategy for Mike’s Bikes Using the Marketing Function Only There is no one “correct” way to maximize shareholder value in Mike’s Bikes. Please bear this in mind when you read through this model answer! NOTES We arrived at this model answer by making decisions in the Decision Screen of only one of the functional areas of the Mike’s Bikes environment: the Marketing Function. We did not alter the decision screens of the Operations, Finance or Product Development Functions. At the end of each subsequent chapter, we give a model answer that we have achieved by altering not only the Marketing Function but also the function discussed in that particular chapter and in previous chapters. That is: At the end of the Operations Chapter (Chapter 6), the model answer reflects decisions in the Marketing and Operations Functions. At the end of the Finance Chapter (Chapter 7), the model answer reflects decisions in the Marketing, Operations and Finance Functions. At the end of the Product Development Chapter (Chapter 8), the model answer reflects decisions in the Marketing, Operations, Finance and Product Development Functions. We have provided these model answers for several reasons: The answers demonstrate very clearly that you achieve the best results when you take an integrated approach (ie, when you use all the functional tools available to you, and ensure that all your functional strategies are internally consistent, consistent with one another and consistent with your overall strategy). The answer that we give at the end of Chapter 8 (ie, using this integrated approach) is a “good” answer in the sense that it achieves shareholder value in excess of $50. It shows that it is possible to achieve shareholder value of over $50 (for all you doubters!) The commentary that we provide after each chapter may give you some ideas about how you should proceed with the work you’ve already done in the Mike’s Bikes environment. You may be able to get a better result than we have here! STRATEGY Marketing Strategy Since we can’t change capacity (no Operations Function), the strategy that we choose to take is to be a low volume high margin manufacturer. We will produce the Adventurer bike only. Page 5-22 The MiniMBA l Marketing We will invest heavily in promotion to convince our target consumers that our bikes are worth paying extra for. TACTICAL DECISIONS Marketing Decisions Pricing Increase unit price from $1,700 to $2,100 Promotion Increase branding from $100K to $500K Increase media advertising from $800K to $1.5m for first period, then scale back to $1m Increase PR from $500K to $1.5m for first period, then scale back to $1m Distribution We can't afford to offer large margins to attract lots of stores. Leave the 50% margin unchanged at present. RESULTS AFTER 5 YEARS Sales 15K units, profit $3.4m, shareholder value approximately $15. 12. Questions to Assist Learning 1. Write a draft marketing plan for the Mike’s Bikes environment for the next 2 years (2-3 pages). You should include the following issues and use bullet form. a) What are your target segments? Why? b) For each of your market segments, what are your objectives for products, price, advertising, and distribution? Where appropriate, indicate how you will achieve these objectives. c) Look at your competition. What is their sales potential? d) Make sure that you think about consistency – of marketing objectives, with the overall strategy, and with the operations and finance strategies. 2. Construct an advertising and promotion strategy for the Mike’s Bikes environment for the next 2 years. This should consider the following. a) What segments are you aiming at? b) What do the consumers in these segments watch/read and what types of promotion are appropriate? c) How much do these promotions cost? d) How much awareness do they generate per dollar of cost? e) What is your plan, how much will it cost and how much extra demand will it generate? f) Is this consistent with the distribution, operations and finance strategies? 3. Write a draft distribution strategy for the Mike’s Bikes environment for the next 2 years. This should consider the following. a) What segments are you aiming at? Page 5-23 The MiniMBA l Marketing b) Where do your consumers go to make their purchases? c) How much do these distribution channels cost? d) How much coverage do they provide per dollar of cost? e) What is your plan, how much will it cost and how much extra demand will it generate? f) Is this consistent with the advertising, operations/production and finance strategies? 4. Write a draft pricing strategy for the Mike’s Bikes environment for the next 2 years. This should consider the following. a) What segments are you aiming at? b) With what products? c) How sensitive are the segments to price? d) What type of pricing strategy are you going to adopt? e) How will you react to competition? f) Is this consistent with the advertising, operations/production and finance strategies? promotion, 5. When positioning products, what are three key issues? 6. What is the difference between branding and product advertising and how would you decide the correct mix between the two? 7. What is the purpose of distribution channels and how do you decide on the appropriate mix? 8. Why is it vital to coordinate marketing and production and how is this achieved? 13. Appendix – Generating Demand in Mike’s Bikes EXAMPLE ONE Assume that segment demand for Leisure is given by: Segment Demand = alpha average awareness index. + beta * average price index + beta * The numbers for this are: Segment Demand = 20,000 + 10,000 x average price index + 5,000 x average awareness index. If average price index = 0.6 and average awareness index = 0.2, what is the demand from the segment? Which factor (price or awareness) has more effect on demand and by how much? SOLUTION Segment Demand = 20,000 + (10,000 x 0.6) + (5,000 x 0.2) = 27,000. Because the beta for price is twice that for awareness, price has twice as much effect on demand as awareness per unit change in index. Page 5-24 The MiniMBA l Marketing EXAMPLE TWO Assume that the total potential demand from the Leisure segment is 24,000 units. Assume that there are two products that sell to the segment - Cruiser 1 and Cruiser 2. If the Value for Money of Cruiser 1 is 10 and for Cruiser 2 is 20, how much potential demand will each get? SOLUTION Potential demand for Cruiser 1 = 10/(10+20) x 24,000 = 8,000 units. Potential demand for Cruiser 2 = 20/(10+20) x 24,000 = 16,000 units. 14. References 1. Hair, J., Anderson, R., Tatham, R., Black, W., Multivariate Data Analysis with Readings (3rd Ed), Macmillan, 1992 Page 5-25 The MiniMBA l Marketing Page 5-26