(BUS 13) Notes to Accompany Lecture, May 28, 1998
This material is used courtesy of Fred Gibbons, Instructor for EE353/CS394
Forecasting Total Market Demand
Recent history is filled with stories of companies and entire industries that have made grave strategic errors because of inaccurate industry wide demand forecasts. These inaccurate forecasts did not stem from a lack of forecasting techniques: regression analysis, historical trend smoothing, etc. The issue is not seeing the forest for the trees.
There are four steps in any total market forecast.
1) Define the market (Personal computers)
2) Divide the total market into segments (Desktop computers, notebooks, and PDAs)
3) Identify and forecast the drivers of demand in each segment and project how they are likely to change (Cost of components, competitors pricing, buyer upgrade cycle, customer acceptance, capability, performance)
4) Build a model and conduct sensitivity analyses to understand the most critical assumptions and to gauge risks to the baseline forecast
Building the model is the essential step. It allows the forecaster to
select the fundamental drivers and understand their interaction before
the actual numbers obscure the picture.
[You'll find that the term marketing is used to mean many different things. You have to examine the context to be sure of the author's intent whenever you see this ambiguous word. Note that we have used the tools learned in the previous lectures to study steps 1 and 2 below, market selection and product planning. -- Ken Hess]
At the heart of any business strategy is a marketing strategy. Businesses exist to deliver products to markets. Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives. A marketing strategy is composed of several interrelated components called the marketing mix:
The Marketing Mix
1) Market selection (choosing the customer)
2) Product planning (what products are the company going to sell to the selected customers)
3) Pricing (a quantitative expression of the value of the product to the customer). See also the discussion of the Price/Features matrix
4) Distribution (the wholesale and retail channels through which the product moves to the people who ultimately buy it and use it)
5) Marketing communications
Decision-Making Unit and the Decision-Making Process
The actual selling process breaks down into two components called the decision making unit (DMU) and the decision making process (DMP). The decision making unit consists of all the people who play a role in the decision to purchase a product. The marketing mix program must understand the needs of each and find a way to communicate the marketing message to them. These people are typically identified as:
the person who actually issues the check i.e. the purchasing agent)
Decider (the person or group that actually says this is the product we want i.e. the MIS manager)
Influencer ( who helps the decider decide i.e. the press, analysts, peers, evaluation groups)
User ( the individual or group who actually uses the product and derives benefit from it)
The people included in the decision making unit interact to make the purchasing decision. The decision making process (DMP) is a description of this interaction. By understanding it a salesperson can best understand who, how, and when to work on getting the customer order.
For example, a company has decided to pick a workstation standard. The
engineering VP made this decision. Since the standard affects all software
engineers an evaluation team is formed to make the recommendation. They
hire a consultant to research alternatives. He has great influence due
to his strong technical background and years of experience. Recent magazine
articles are also reviewed. After a few months the team makes a recommendation, the VP R&D decides to accept it and go ahead. The purchasing manager is asked to negotiate the best deal. The salesperson for the winning workstation company was on top of and influenced every person at every stage of the decision making process.
Basic Quantitative Analysis for Marketing
Simple calculations often help in making quality marketing decisions. One of the most useful quantities is calculating break-even volumes, i.e., the quantity of units which must be sold to recover an initial investment. With this number we can then ask how long will it take to sell this many units and is it reasonable to assume that the market overall is big enough to support this volume. When sales exceed the break-even volume, the firm starts making a profit.
To apply this calculation we must understand the following definitions:
Variable cost (K)=$cost uniquely associated with each unit produced (ex. Microprocessor on a PC mother board)
Fixed cost (FC)=$cost which are fixed and do not vary with the volume of output(ex. a new IC fab plant)
Contribution (C)=The difference between the price($P)
of one unit and the variable cost per unit($K) C=P-K
Break-even volume (BEV)= $Fixed Cost FC/C ($contribution per unit )
Designing a distribution channel to deliver both a product (or service) and its benefits to a customer begins with a question:
"What needs to be done to get my product sold?"
Suppose a watch manufacturer decides to compete in the mass market for watches in the $15 price range. Successfully selling this kind of product requires the firm to have:
1. Established brand name
2. Distribution in a large number of convenient outlets
3. Good display in those outlets
4. An efficient means of restocking retail outlets
The next question is "who is to do each task?"
Here we are asking should the company perform the function or delegate it to an intermediary? This is the question of channel length. Consider the good display of watches in a large number of outlets. Theoretically the manufacturer can perform this function by opening a large number of retail outlets. However, existing retail and department stores accomplish this task more efficiently.
There is also the question of Channel Breadth
How many firms of each type does the manufacturer want to have. The basic alternatives are:
1. Exclusive distribution (only one place to get it, typically for high
priced specialty goods "Rolls Royce"")
2. Selective distribution (a few well trained and qualified "Mercedes")
3. Intensive distribution (find it everywhere thus convenience is the driver "Honda")
The intention here is to present a collection of sales strategies to provide a common reference base and vocabulary. The marketing manager operates at a level selecting the target segments and executing the marketing mix. The sales manager must deal at a lower level with the specific customers (names, addresses) .
Team selling (multiple disciplines and people working together on a high price, complex sale)
Key accounts ( a culling of potential customers into those who display a desirable attribute: size, profitability, or opinion leadership, etc.)
National accounts (companies with nation wide disbursement that are sold to at a central headquarters location)
Multi-level selling ( Contacting people at all levels in the organization from engineer to VP marketing and convincing them to buy the product)
Systems selling ( involves elements of team selling and includes multiple products which tied together often deliver a "solution")
Third party sales (using other organizations like retailers or OEMs to sell your product)
Telemarketing ( Telephone selling often involving automatic dialing from targeted lists. )
Putting the Service-Profit Chain to Work
The service-profit chain establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity. The links in the chain are as follows:
Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided the customer. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.
It is estimated that a 5% increase in customer loyalty can produce profit increases from 25% to 85%
For many firms an important means of achieving marketing communications goals is the development of an advertising strategy. Communications goals are usually expressed as desired increases in sales or market share. Sometimes intermediate goals such as product awareness and knowledge are employed. Integral to good advertising strategy is an efficient media plan that maximizes the achievement of communications goals within the constraint of a fixed budget.
Some of the more important criteria for evaluating a media plan are:
1) Cost of space/time- the price for a one page ad or
a 30 second TV spot
2) Reach- The size of the audience reached (ex. LA times circulation of 1,000,000)
3) Audience composition- description of the audience in terms of various demographic characteristics such as age, income, or education.
4) Impact- is one media type more forceful at commanding attention than another
5) Exposure value- evaluation of a given media vehicle may be undertaken on the basis of cost per thousand (CPM) exposures.
Take for example Life cereal: both children and mothers are desired targets. Beyond this, mothers of families with children 10-18 might be considered better prospects than those with younger children. Also, families with higher education might be considered generally more receptive to nutritional claims in the advertising strategy.