GENE452 – Technical Entrepreneurship
Lecture Notes #5 – Feb 2, 2006
Review of Key Points from Last Week










The Fallacy of the Better Mousetrap
The Four "Ps"
o Product
o Price
o Promotion
o Place
Marketing
o Product focus vs customer focus
Markets
o “A group of individuals, that have needs for a product or service, and have
the ability, willingness and Authority to buy them.”
Target markets
o The specific group for whom the firm develops and maintains a marketing
mix suitable for the specific needs and preferences of that group
Market Segmentation
o By type – consumer vs industrial
o By demographics
o By geography
o By psychography (technology life cycle model)
o Behavioural
o Vertical and horizontal industries
Market Research: Primary versus Secondary
Primary market Research: Observation vs. Communication
Primary market Research: Quantitative vs. Qualitative
Market Research Methodologies
o Mail survey
o Internet/Website survey
o Telephone survey
o Man in the street survey
o In-depth interview
o Focus group
Tonight’s Lecture - Developing Your Marketing Strategy
- Product: packaging, manuals, guarantees, service, support,
"quality"
- Price: cost based pricing, mark-up, "skimming" vs. "penetration"
o Break-even analysis
- Promotion: advertising, personal selling, promotion
- Place: wholesalers, retailers
Marketing Strategy
“The long-term decisions made by a firm regarding their product, price,
promotion and place, relative to external factors and competition.”
Looking at each “P” in detail:
Product
Q.
Who has been to the Bombshelter?
Q.
What’s the product?
A.
If you only want beer you can go the Beer Store, buy a 6 pack of
Labatt's Blue then go home to watch Survivor in a comfy chair…
A.
Destination
Patio
Music – Live / DJ
Volume
Food
Décor
Ambiance
Pool table
Attractive friendly staff
Expectation of meeting people
Product
“All of the tangible and intangible features and benefits of
purchasing a good or a service, including both actual and
anticipated features and benefits”
Q.
So what’s my point
A product is more than merely the hardware in a box or the
minimalist appreciation of the service you are proposing to offer.
What defines VALUE to your customers? How do competitive
companies and products satisfy customer needs? What is your
UNIQUE VALUE PROPOSITION?
Service
i.e. Hair cut - Offering more than merely hair cut
Convenience of location
Convenience of hours
Ambiance of location
Friendliness of service personnel
Adaptability of service
Speed of delivery
Warranties or guarantees
- Looking Good!
Good
i.e. Photocopier
Financing
Delivery
Removal
Installation
Training
Maintenance
Insurance
Upgrades
- Total Office Productivity
For the next assignment:
Improve your description of the product concept, in response to what your
market research tells you about:
1.
2.
What the target market wants
What the competition offers
Price
There is no precise formula for determining appropriate price for a new
product.
Price setting is combination of:
- Competition (and market/industry dynamics)
- Costs
- Strategic
Price: Function of level of competition (Market driven pricing)
This is the most powerful determinant of price. Largely dependent on
industry – competition type and “5-forces”
Perfect competition
-
Many small sellers, no differentiation
Product or service is commodity
New entrants are price “takers” – price set by market
No latitude to set price, must match market price
e.g.: commodities, small retailers, 2nd hand book shops, barber shops
Monopolistic Competition
-
Many small sellers, no differentiation
A few larger firms, can differentiate
Branding allows larger, better known firms to charge more
e.g.: unbranded clothing vs. Nike
small burger restaurants vs. McDonalds
Oligopoly
-
Small number of firms
Barriers to entry
Some latitude to determine price
e.g.: Canadian banking industry, N.A. auto industry
Monopoly
-
One supplier only
Product unique to the supplier
Supplier sets price
Generally avoided in modern capitalist societies
e.g.: Hydro utilities, LCBO
Porter’s 5-Forces Model1
- Describes “Industry Attractiveness”
Threat of New Entrants
- Low entry barriers
- Undifferentiated product
- Perception of
attractiveness
Supplier Power
- few suppliers
- scarce resource
- price/quantity
control
- high switching
costs
Industry Rivalry, Degree of
Competitiveness
- number/strength/size
- stable or declining mkt
- high fixed costs
- high exit barriers
- compete on price
Buyer Power
- few buyers
- undifferentiated
product
- low switching
cost
- low profits
Threat of Substitutes
- Rapid technology
advances
- major shifts in consumer
behaviour
1
Porter, M.E. – Competitive Advantage: Creating and Sustaining Superior Performance, 1985
Price: function of your costs (“Cost-plus”)
- Start up firm must determine cost-base
- (Both fixed and variable costs)
- Add mark-up or margin.
Markups:
- costs + absolute $$
- costs + %
Price: Strategic Pricing
Skimming = High margin
- Charge as much as you can.
- Take all the cream
- Advantage:
o Shortens break-even point
- Disadvantage:
o Lowers size of target market
o Opens you to price competition
- Example:
o Mercedes Benz (changing?)
o Rolex watches
o Mont Blanc Pens
Penetration = Low margin
- Take a little from each
- Build volume
- Advantage:
o Builds market share
o Builds customer loyalty
- Disadvantage:
o Lengthens break-even point
o Forgo short-term profits
- Example:
o Honda Civic
o Casio watches
o Bic pens
A Warning: Skimmers have to watch out for “penetration-pricers.” They
can erode your market from below. They come in and steal the least
profitable segments of your market. Eventually, they move upstream.
- Toyota  Lexus
- Steel mini-mills  rebar  sheet  structural
Break-Even
For final business plan: you must do break even calculation.
-
Is breakeven volume very large or very small?
Is it realistic relative to productive capacity?
Relative to productive capacity, will it be 6 months or 3 years?
Can price (markup) be increased, how does that affect B/E
Can fixed costs be lowered?
Break-Even Example
Pizza Parlour
-
Building
Furniture
Signage
Kitchen
Fixed Costs (FC)
=
$200,000
=
$1.00
=
$6.00
Pizza
-
Dough
Tomato Paste
Cheese
Mushroom
Green pepper
- Selling price
.20
.20
.20
.20
.20
Variable Costs (VC)
R(evenue)
Q: How many pizzas to break even?
Q: How profitable after this point?
Place
How do you get your product or service in front of the customer.
Place describes the sales channel for your product or service. A typical sales
channel for a “widget” may include:
-
Make new widget (you)
Contract with sales agent to carry widget
Sales agent convinces distributor to carry widget
Distributor sells widget to retailer
Retailer sells widget to consumer
Why so many steps?
- Trust
- Inertia
Sales channels are often like a system of rivers. It can be a lot easier to get a
product to market by following the flow of existing rivers, as opposed to
going counter-current or forging new portages across them.
However, by fitting into existing sales channels, you have to follow their
rules. These rules are often un-written, and sometimes seem unfair.
Promotion
People have to know about your better mouse trap.
Promotion is catch all phrase, includes following activities:
- Make customers aware of your product.
- Make them knowledgeable about your product.
- Persuade them to like your product
- Persuade them to purchase your product.
Most people confuse advertising with promotion. But there are several types
of promotion:
Advertising
-
Purchase of media space to inform broad audience.
Broadcast the message, but how wide?
Objective: Not to maximize audience
Objective: Maximize relevant audience
Same considerations with website traffic
Example: Skis
The Star read by 500,000 - 98% aren't interested in your product. (10,000)
Ski Magazine read by 15,000 - 80% are interested in your product (12,000)
Don't forget, ads are priced by the readership.
Personal Selling
One to one, face to face.
- Sales force
Expensive but Effective
Salary vs commission?
- Wholesalers
Less cost
Some dilution of effectiveness
- Agents - They don't have to buy from you. What else is on their line
card?
- Do it yourself
Time and labor intensive
You are motivated
You know the product.
Sales promotion
Free samples (i.e. RIM’s initial market penetration – be strategic)
Discount coupons
Contests
Exhibits and trade shows
Public relations
Press releases
Reviews / Articles
Sponsorships
Word of Mouth
Most powerful form of promotion – but how do you harness it?
It’s a competitive world out there, so how do you compete?
Through Differentiation and Positioning
Differentiation applies to all of the 4 P’s. Where can you differentiate
and ADD MORE VALUE?
Positioning is about occupying a distinct place or position in the target
customers’ MINDS. This builds a BRAND. Positioning must be done
relative to other alternatives. Focus on one or two KEY
DISTINCTIONS.
Well known axes of value in an industry are generally not the strongest
differentiators. Being competitive here is the price of market entry.
i.e. for enterprise software, are you intuitive, fast, secure and scalable?
So is everyone else… To differentiate on one of these axes requires a
monumental improvement (10 x better)
Q: What set google apart as a search engine?
- speed?
- accuracy?
No, it was a different axis of value – getting the results you were
expecting!
A Piece of Advice: “There is no such thing as a useful product or service
with no competition. Saying this makes you sound foolish, so don’t say
it. If there is evidence of need, how are people meeting this need
currently?”
Current/Modern Marketing Considerations:
- Cluetrain Manifesto – people are becoming more “marketing savvy” and
less susceptible to “messages.” Be honest with your market. Marketing is
a conversation.
- Design Principle applied to marketing – Align Form and Function
i.e. don’t look like you’re trying to dupe someone, unless you’re
trying to dupe them – postcard advertising
-
Blogs and chat rooms as marketing tools?
Network Externalities – what value is the first telephone?
Migration Paths – customers may be waiting to leapfrog
Web advertising – banner ads, pay per click, spyware and adware
Privacy laws and privacy policy (PIPEDA)
The First Assignment – Presentations (next week!)
2 minute max - Tell us why your business is worth investing in!
Second Assignment – Due Feb 24. 25% of your grade. Only 3
weeks away! You should have a good start on this already!
Next Week’s Lecture: Determining Your Capital Needs
Reading: Stage Seven - Cost and Profitability Assessment