RetailersRetailing: efforts aimed at selling products to final consumers for personal, non-business use

-consumers buy ~ $3.7 trillion a year from U.S retailers-retailers bear risk; must understand derived demand-shopping motivators: economic & emotional

Economic Motivators-convenience (location, hours, checkout)-product selection (assortment, quality)-special services (delivery, gift wrap)-fairness in dealings (return privileges)-helpful information (clerks, displays)-price (value, credit)-social image (status, “fitting in”)-atmospherics (comfort, relaxation)

Classification of RetailersOwnership:

-independent retailers-chain stores-franchise outlets

Level of service:-full service-self-service

Product assortment:-breadth-depth

Price:-gross margin (% of sales)

Conventional retailer: -low value/high margin, -“buy low sell high” philosophy

General stores => carry anything they could sell in reasonable volumeLimited-Line stores => specialize in certain lines of related products rather than a wide assortmentSpecialty stores => small; distinct “personality”; excellent service (Sierra Designs)Department stores => combination of limited-line stores and specialty stores (Nordstrom’s)Mass Merchandising: revolutionary change from conventional retailing

-operate on high volume/low margin basis-goal: offer low prices to get faster turnover & greater sales volume by appealing to larger markets

1. Started with supermarkets in the 1930s2. Has really caught on; birth of self-service retailers (KMART, Wal-Mart)3. Increasing competition among mass-merchandisers

Evolution of Mass Merchandising-Supermarkets => large grocery stores; self-service orientation; wide assortments

-40,000 products-45,000 sq. feet-$2,000,000 annual sales (more like $17,000,000)-saturation now though-32,000 supermarkets

-Catalog showroom retailers => offer several lines in display showroom; hold backup inventories (Service Merchandise)-Discount houses => offer hard goods at substantial price cuts-Hypermarkets => carry goods, drugs & services that consumers purchase routinely (Super Target)-Warehouse clubs => offer appliances, household items & groceries, usually sold in bulk; cash-carry basis; may be a membership fee (Costco)- Category Killer => offer single-line merchandise; use self-service. Discount prices, high turnover (Best Buy)

Dot-Com meltdown revisitedInsight 1: the net is not “disruptive”, certain industries it was revolutionaryInsight 2: if it don’t make $’s then it don’t make senseInsight 3: “time favors incumbents”Insight 4: “branding” is not a strategyInsight 5: “real wealth creation is yet to come”

Why retailers must change-scrambled merchandising: offer any product line that can be sold profitable

-gas + coffee + cigarettes-wheel of retailing theory: new entrant (low-margin) => conventional operator

Retailing Mix1. Product (assortment)*2. Promotion (advertising)3. Place (location and hours)4. Price (gross margin)*5. Personnel (customer service)*6. Presentation (atmospherics)

Atmospherics: image conveyed by a stores physical layout and décor-employee type & density-merchandise type & density-fixture type & display-sounds-odors-visual factors

-> Warm colors for warmth and closeness-> Cool colors open up closed space, elegance, clean lines

Personnel Issues: clerks help boost customer retentionCritical sales techniques

-trading up-suggestion selling

David V. GoliathU.S landscape = ~ 1,113,000 retailers

-David Retailers = 62% of the pool; annual sales less than $1 million-Goliath Retailers = 9% of the pool; annual sales more than $5 million

-David retailers are being squeezed out of business-Goliath retailers enjoy economies of scale (corporate chain)-David (independent) retailers often create chains:

-Corporate chains = retailer sponsored (True Value Hardware)-Voluntary chains = wholesaler sponsored (IGA)

Franchising-Franchiser => originates the trade name, product, methods of operation-Franchisee => pays the franchiser for the right of use-A franchise agreement usually lasts for 10-20 years; it is legally binding

Typically, the franchisee pays:1. initial, one-time franchise fee2. pays weekly, biweekly, or monthly royalty fee (3-7% of gross revenues)3. advertising fees (4% of gross revenues)

Why franchise?-risk relatively little capital-product has already been established-technical training & assistance-quality control standards-substantial lower failure rate-growing in popularity

Pricing FundamentalsPricing Strategies:

-Markup-Average Cost-Experience Curve-Target Return-Break-even analysis-Marginal Analysis

Markup Pricing: resellers set prices using a markup-Markup: a dollar amount added to the cost of a product to reach the selling price-Markup (percent) is based on selling price

Equation #1Markup % = Markup / (Cost + Markup)

Equation #2Selling Price = Cost / (100% - Markup %)

High markups cannot insure big profitsLow markups -> speed turnover, raise stock turn rate

Stockturn rate: the number of times the average inventory is sold in a yearStore A Store BAnnual Sales:$100,000 $100,000Stockturn Rate1 5Stock Inventory$100,000 $20,000Carrying Costs: 20%$20,000 $4,000Big Eureka= $16,000 of savingsAverage CostTotal Fixed Cost (TFC) -> expenses that stay the same even if production stopsTotal Variable Cost (TVC) -> changing expenses that are closely tied to outputTotal Cost (TC) => TFC + TVCFocus: cost per unit rather than total cost

-Average Cost (AC) => TC/Q-Average Fixed Cost (AFC) => TFC/Q-Average Variable Cost (AVC) => TVC/Q

Scenario: pen dealer wants to know what to sell its latest pen forStep 1: research

-look at last year’s figures for a comparable penStep 2: isolate costs & quantity sold

-TFC = $30,000-TVC = $32,000-Q = 40,000 unites-TC = $62,000-AC = TC/Q = $62,000/40,000 = $1.55 per unit

Step 3: use markup magic-$1.55 + $.45 = $2.00 (selling price)

Step 4: check out actual results-Q = 20,000 units sold

Step 5: analysis-Total Revenue = ($2.00) * (20,000) = $40,000-Total Cost - $30,000 + $16,000 = $46,000-Upshot => $6,000 dollar loss

Average cost works well if the firm actually sells the quantity it used to set the AC priceLoses can result if actual sales are much lower than expectedMajor drawback => ignores the shape of the true demand curveExperience Curve

-uses an estimate of future average costs-assumes managers learn new ways to reduce costs-if costs drop as expected, this approach is OK; runs the same risk as AC pricing

Target Return: same idea as ROI

Price setter seeks to earn:-a percentage return on investment-a specific total dollar return

Scenario: pen dealer with an investor, what should we sell for-$180,000 invested-wants a 10% return on investment

Step 1: research-look at last year’s figures for a comparable pen

Step 2: incorporate target => $18,000-TFC = $30,000-TVC = $32,000-Q = 40,000 unites-TC = $30,000 + $32,000 + $18,000 = $80,000-Selling Price = $80,000/40,000 = $2.00 per unit

Step 3: Been there, done that (oops)-Q = 20,000 units sold-TR = ($2.00) * (20,000) = $40,000-TC = $30,000 + $16,000 = $46,000-Upshot => $6,000 loss

Break-Even Analysis-Break-Even point (BEP) => quantity sold where a firm’s TC = TR-TR and TC straight lines, which assumes any quantity can be sold at the same price-BEP can be stated in units or dollars-BEP can be used as a “what-if analysis”; each possible price has its own BEP-A target profit can be calculated using break-even analysis-BEP (units) = TFC/ (fixed cost contribution per unit (price-AVC per unit))-BEP (dollars) = BEP (units) * selling price

Marginal Analysis Looks at cost and demand

-MR => change in total revenues that results from the sale of one more unit-Under a downward demand curve, MR can be negative (diminishing returns)-MC => change in total cost that results from producing one more unit-Profit maximization rule => the highest profit is earned where MR = MC

Given relationship:-Profit = (Total Revenue – Total Cost)

At the margin:-ΔP/ΔQ = ΔTR/ΔQ – ΔTC/ΔQ

Calculus insight:-dP/dQ = dTR/dQ – dTC/dQ

Maximum: set marginal profit at zero-0 = Marginal Revenue – Marginal Cost-MR = MC

Demand Pricing Strategies1. Value2. Reference3. Leader4. Bait5. Odd-Even6. Prestige7. Demand-Backward

Value Pricing: offer the highest value relative to competitors (e.g., P&G)-consumers calculation: Value = Benefit/Price

Reference Pricing: taps the price consumers expect to pay-across consumers reference prices vary for the same product (e.g., Wines)

Leader Pricing: offer attractive prices to get consumers into retail stores-leaders are priced low, but above cost-leaders are used to get consumers into the store to buy other items

Bait Pricing: offer a bargain, but sell under protest-draws in price sensitive shoppers then directs them to more expensive items-most marketers see this practice as unethical

Odd-Even pricing: offer prices that end in certain numbers-< $50,00 => ending numbers 5 or 0 (e.g., $.49 or $24.95)-> $50.00 => $1.00 below next even dollar figure ($99.00)

Prestige pricing: offer a rather high price to suggest high quality or status-Jordache jeans

Demand-Backward pricing: offer an acceptable final consumer price and work backward to what a producer can charge

-subtract typical margins resellers expect-reverse cost-plus pricing, market-minus pricing

Pricing PoliciesWhat Factors?

Demand: price/quality perceptionCost: land, manufacturing, marketing, economies of scaleProfit: trade, quality, cash discounts, promotional allowancesCompetition: rivals’ prices and offering, reviews

Fixed Costs: 1,000,000Retail Price: 28.00Variable Unit Cost: 20.00Break Even Point:If there are 12 bottles per case, how does the BEP compare to Stuart Cellars’ annual capacity of 16,000 casesProfit-Focus Objectives

Target Return: percentage of sales or capital investment; yardstick idea (GE)Satisfactory Profits: returns that insure a firm’s survival (Madison Symphony)Profit Maximization: charge all that traffic will bear

Sales-Focus ObjectivesSales Growth: seek some level of unit sales, without referring to profit (Amazon)Market Share: seek to gain a specific share (percent) of a market, benchmark idea (Coke)

Status Quo Pricing ObjectiveStatus Quo: hold a “don’t rock the boat” mindsetGoal: non-price competition (McDonalds, Wendy’s, Burger King)

New-Product pricing strategiesSkimming: feel out demand at a high price before aiming at more price sensitive consumers (McCaw)Penetration: capture the whole market with one low price (3Com)

Pricing PoliciesAdministered:

-firm sets priceOne-Price:

-offer the same price to all-easy to use-avoid rigid policy (Merck)

Flexible-Price:-offer different prices to different consumers (Ford)

AllowancesAdvertising: reseller reductions for promoting a manufacturer’s items locallySlotting: retailer payments to acquire shelf spaceSpiffs: retailer cash incentives for aggressively selling certain items

Segmented Pricing: adjusting prices for difference in consumers, products, or locations1. Consumer-Segment (MOMA)2. Product-Form (Black & Decker)3. Location (XYZ Theater)4. Time (Hilton Resorts)

Communication Mix-> A firms coordinated effort to inform, persuade, and remind target audience

CM is used to reach consumers and businessesCM enables consumers to make informed purchase decisionCM = firm’s promotional toolsEffective CM = integrated marketing communications (IMC)Informative Communication

-increase the awareness of a new brand, product class, or product attribute-explain how a product works-suggest new uses for a product

Persuasive Communication-encourage brand switching-change consumers perceptions of product attributes-influence consumers to buy now

Reminder Communication-remind consumers that the product may be needed in the near future-remind consumers where to buy the product-maintain consumer awareness

IMC: 2-prong approachStep 1: coordinate promotional effortsStep 2: couple CM with the other marketing elements to create a viable marketing strategy

Old School => separate departments for marketing and communicationsNew School => IMC speaks to the big picture; joint effort; project a consistent and unified image to the marketplace (University of Maryland)

CM Tool Box1. Advertising2. Direct Marketing3. Internet4. Sales Promotion5. Publicity6. Personal Selling

CM = the life blood of many U.S. firmsPast: advertising = most vital CM toolPresent: sales promotion rulesFuture: internet or advertising comeback?

Advertising: any paid, non-personal communication about a good or service by an identified sponsor [Hammer]

Advantages1. able to control the message2. cost-effective (large audience)3. able to create images4. power to differentiate similar products5. able to maintain brand equity6. able to strike response chord with audience

Disadvantages1. can be costly2. difficult to determine effectiveness3. credibility and image problems4. clutter5. lack of consumer attention

Direct Marketing: communication directed at customers to generate a response and/or transaction [Wrench]

Advantages1. consumers more receptive to convenience2. allows for very selective target marketing3. messages can be tailored4. effectiveness relatively easy to assess

Disadvantages1. junk mail phenomenon2. has serious image problems3. problems with clutter

McFarlane Toys: shows the power of interactive marketingProduct => action figures (extreme detailing, dead on likeness)Place => toy chain stores, mass merchandisers, entertainment stores, comic book stores, McFarlane store, websitePrice => $10.00 -> $15.00 (using low cost production in china)Promotion => mostly web (moved from print & broadcast)

Internet: communication that uses fully integrated text, graphics, images and sound [Duct Tape]

Advantages1. buying is convenient, easy, private2. greater product access & selection3. comparative information4. customer relationship building5. cost reduction & increased efficiency6. website flexibility7. effectiveness easy to assess

Disadvantages1. limited consumer buying2. skewed user demographics3. clutter issues4. security issues5. privacy issues

Sales Promotion: efforts that provide extra value to consumers or middlemen for purchasing a good or service [Saw]

Advantages1. extra inventive for consumers, middlemen2. appeals to price sensitive consumers3. generates extra interest in products, ads4. effectiveness can be measured

Disadvantages1. many firms suffer “short-run sales fix”2. sales promotion can erode brand image3. clutter

Publicity: any nonpersonal communication about a good or service that is not directly paid for nor run under identified sponsorship

Advantages1. credibility2. low cost3. often has news value4. generates word-of-mouth

Disadvantages1. lack of control over what is said2. double-edge: negative or positive buzz

Personal Selling: personal communication that assist, informs, and persuades prospective buyers to purchase a firm’s good or service [Screwdriver]

Advantages1. face-to-face contact2. communication flexibility3. immediate & direct feedback4. target good prospects

Disadvantages1. high cost per contact2. expensive for large audiences3. difficult to maintain a consistent message

Advertising“Today, more than ever, if advertising is not relevant, it has no purpose. If it is not original, it will attract no attention. If it does not strike with impact, it will make no lasting impression.”

-Keith ReinhardDDB Needham

Great AdsBasic Properties:

1. strategically sound2. creativity concept3. execution

Persuasion process-stopping power-pulling power-locking power

Appeal: efforts that make a product attractive or interesting to target audiences-often appeals elicit consumer response-appeal => general creative emphasis (Secondary idea)

Types of AppealsConsumer’s perspective:

1. rational: utilitarian needs2. emotional: psychological needs*3. stats: quality needs4. fear: social approval needs5. appetite: physiological needs

Execution: speaks to how an appeal is presentedFactual message

-focus on product attributes & benefits (Dodge)Technical evidence

-scientific evidence is highlighted to support a claim (Combat)

Demonstration -illustrate key product benefits by showing usage (UPS)

Comparison -direct or indirect comparison to a competitive brand

Testimonial-a person speaks on behalf of the product (Toyota)

Slice of Life-portray real-life situations featuring problems to be solved (Tide)

Animation-focus children audiences (Teenage Mutant Ninja Turtles)

Personality Symbol-central character who becomes strongly associated with the product (Jolly Green Giant)

Fantasy-relies on imagery or illusion (Gatorade)

Dramatization-creates suspense in the form of a short story (Taster’s Choice)

Humor-easy to remember, difficult to create (Snickers)

Combinations-hybrids are common

Creative Issues1. Is the creative approach consistent with the brands marketing objectives?2. Is the creative approach appropriate for the target audience?3. Is the approach clear, understandable, and convincing for target audiences?4. Is the message sacrificed for creative execution? (Vampire Creativity)5. Is the ad truthful/tasteful? (Calvin Klein)

Celebrity Endorsers-rationale: celebrities are thought to have “stopping power”

-garner attention-influence emotion & behavior

Source attractiveness= f (similarity) + f (familiarity) + f (liking)Meaning transfer (McCracken)

1. celebrity derives meaning from past roles2. meaning transfers to the endorsed product3. consumers gain meaning via purchase

Caveats regarding celebrity use:-overshadow the product-overexposure-target audiences-risk to markets-synergy: product ~> target ~> celebrity

GenerationsBaby Boomers

-born between 1946-1964-72 million in size-World War II Babies

Generation X-born between 1965-1979-17 million in size-Baby Busters

Generation Y-born between 1980-1994-60 million in size-Echo Boomers-millennium generation

Boomer HistoryJFK assassinated (1963)Malcolm X assassinated (1965)Vietnam (1965)Dr. King & Robert Kennedy assassinated (1968)Democratic National Convention (1968)Hippies/Free Love/Berkeley (1964-1969)Kent State (1970)

-defining history = strong rallying moments-resulted in a unified cohesive group

Boomer outlook-stability, hope-power to change-idealism

Boomer mind-set -> We Shall Overcome!Music

-classic rock-passionate protest music-Beatles, Rolling Stones-Jimi Hendrix, Bob Dylan

Magazines-Time-Look-Life

Television-I Love Lucky (1951)-Gunsmoke (1955)-Leave it to Beaver (1957)-The Flintstones (1960)-Star Trek (1966)

Marketing insight: security blanket marketing1. memory is the message (Nissan)2. the real thing (Wild Thing)3. make a clear connection (Drano)4. mom, I’m home (Maxwell house)5. coolness matters (Tonka)6. child at heart (Disney)

Generation X HistoryWatergate (1972-1974)Stagflation & Gas lines (1976)Chrysler bailout (1981)AIDS (1981)Bell breakup (1984)Challenger disaster (1986)Restructuring/Downsizing (1990)

-defining history =bad economic times-resulted in a loosely defined, scattered group

Generation X outlook-cynical, apathetic-unable to change-realism

Generation X mind-set -> Can We Survive?Music

-grunge, metal, rap-nonsensical => gritty reality-Nirvana, Pumpkins, Rage-Dr. Dre, Ice Cube, Notorious BIG

Magazines-Spin-Sassy-Details

Television-The Cosby Show (1984)-The Simpsons (1990)-Seinfeld (1990)-MTV (1981)

Marketing Insights1. difficult to segment2. cynical towards advertising3. shift toward specialty stores, discount outlets4. shift from prestige to value pricing5. products should be durable, reliable, high quality

Generation X Advertising-should be fresh, original, not contrived-should be funny, sassy, not serious-should speak to diversity-ads should stress individualism

Generation Y HistoryGulf War (1991)LA Riots (1992)Oklahoma City Bombing (1995)Columbine Shootings (1999)Internet & Cyberspace gold rush (1996-1999)Dotcom crash (2000)WTC & Pentagon Attacks (9/11/01)Enron (2002)

-defining history = good & bad economic times, digital wave, strong rallying moments-resulted in a connected group

Music-alternative rock, hip hop-fun loving => angst driven-‘N Sync, Britney, Beyonce, Jay-z-Creed, Eminem, Linkin Park

Magazines-Source

Television-Friends (1994)-The Sopranos (1999)-Survivor (2000)-Pimp My Ride (2004)

Marketing Insights1. bring ads to where Generation Y congregates2. old Boomer rules do not apply3. Generation Y responds to humor, irony, truth4. points of contact = Internet & Email5. must stay ahead of style curve6. Ad campaigns should be subtle and local

Boomer Generation YLexus LS400 Jeep WranglerGap Delia’sL.L. Bean The North FaceCoke Mountain DewNikes Vans

Personal SellingSales reality

-sleazy-unrespectable

Prevailing stereotype-loner-cover broad territories-“push products” on unwilling buyers

Personal Selling -> Ubiquitous1. Advertising -> “salesmanship in print”2. Litigation -> “sales pitch won by the lawyers”3. Patent Prosecution -> “selling the USPTO on scope”4. Scientific Grants -> “winning over NIH”5. Politics -> “pushing one’s vision”6. Job Interview -> “selling yourself”7. Scholarship -> “salesmanship of ideas”

Personal Selling: person-to-person communication process-message flow from sender to receiver is uninterrupted-dyadic communication; allows the message to be tailored

Types of SalespeopleOrder Getter

-seek out potential customers-persuade them to buy- (Avon)

Order Taker-assist customers who have already decided to buy- (GAP)

Order getters & takers are at all levels of the channelMissionary

-work for producers-do not take orders-build goodwill or educate buyers- (Merck)

Technical Specialists-assist salespeople-provide technical insight- (Merck, HSA)

Sales Force Functions1. locate new customers2. underscore product benefits3. provide strategic insight4. act as visible agents of the company

What qualities lead to sales?-enthusiasm-persistence-initiative-self-confidence-self-motivation-ability to listen-ability to close the sale-ability to build customer relationships