Retailers

Retailing: 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 Retailers Ownership: -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 volume Limited-Line stores => specialize in certain lines of related products rather than a wide assortment Specialty stores => small; distinct personality; excellent service (Sierra Designs) Department stores => combination of limited-line stores and specialty stores (Nordstroms) 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 1930s 2. 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 revisited Insight 1: the net is not disruptive, certain industries it was revolutionary Insight 2: if it dont make $s then it dont make sense Insight 3: time favors incumbents Insight 4: branding is not a strategy Insight 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 Mix 1. 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 dcor -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 retention Critical sales techniques -trading up -suggestion selling

David V. Goliath U.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 fee 2. 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 Fundamentals
Pricing 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 #1 Markup % = Markup / (Cost + Markup) Equation #2 Selling Price = Cost / (100% - Markup %) High markups cannot insure big profits Low markups -> speed turnover, raise stock turn rate

Stockturn rate: the number of times the average inventory is sold in a year Store A Store B Annual Sales: $100,000 $100,000 Stockturn Rate 1 5 Stock Inventory $100,000 $20,000 Carrying Costs: 20% $20,000 $4,000 Big Eureka= $16,000 of savings Average Cost Total Fixed Cost (TFC) -> expenses that stay the same even if production stops Total Variable Cost (TVC) -> changing expenses that are closely tied to output Total Cost (TC) => TFC + TVC Focus: 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 for Step 1: research -look at last years figures for a comparable pen Step 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 price Loses can result if actual sales are much lower than expected Major drawback => ignores the shape of the true demand curve Experience 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 years 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 firms 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: -P/Q = TR/Q TC/Q Calculus insight: -dP/dQ = dTR/dQ dTC/dQ Maximum: set marginal profit at zero -0 = Marginal Revenue Marginal Cost -MR = MC

Demand Pricing Strategies 1. Value 2. Reference 3. Leader 4. Bait 5. Odd-Even 6. Prestige 7. 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 Policies
What Factors? Demand: price/quality perception Cost: land, manufacturing, marketing, economies of scale Profit: trade, quality, cash discounts, promotional allowances Competition: rivals prices and offering, reviews Fixed Costs: 1,000,000 Retail Price: 28.00 Variable Unit Cost: 20.00 Break Even Point: If there are 12 bottles per case, how does the BEP compare to Stuart Cellars annual capacity of 16,000 cases Profit-Focus Objectives Target Return: percentage of sales or capital investment; yardstick idea (GE) Satisfactory Profits: returns that insure a firms survival (Madison Symphony) Profit Maximization: charge all that traffic will bear

Sales-Focus Objectives Sales 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 Objective Status Quo: hold a dont rock the boat mindset Goal: non-price competition (McDonalds, Wendys, Burger King) New-Product pricing strategies Skimming: 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 Policies Administered: -firm sets price One-Price: -offer the same price to all -easy to use -avoid rigid policy (Merck) Flexible-Price: -offer different prices to different consumers (Ford) Allowances Advertising: reseller reductions for promoting a manufacturers items locally Slotting: retailer payments to acquire shelf space Spiffs: retailer cash incentives for aggressively selling certain items Segmented Pricing: adjusting prices for difference in consumers, products, or locations 1. 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 businesses CM enables consumers to make informed purchase decision CM = firms promotional tools Effective 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 approach Step 1: coordinate promotional efforts Step 2: couple CM with the other marketing elements to create a viable marketing strategy Old School => separate departments for marketing and communications New School => IMC speaks to the big picture; joint effort; project a consistent and unified image to the marketplace (University of Maryland) CM Tool Box 1. Advertising 2. Direct Marketing 3. Internet 4. Sales Promotion 5. Publicity 6. Personal Selling CM = the life blood of many U.S. firms Past: advertising = most vital CM tool Present: sales promotion rules Future: internet or advertising comeback? Advertising: any paid, non-personal communication about a good or service by an identified sponsor [Hammer] Advantages 1. able to control the message 2. cost-effective (large audience) 3. able to create images 4. power to differentiate similar products 5. able to maintain brand equity 6. able to strike response chord with audience Disadvantages 1. can be costly 2. difficult to determine effectiveness 3. credibility and image problems 4. clutter 5. lack of consumer attention Direct Marketing: communication directed at customers to generate a response and/or transaction [Wrench] Advantages 1. consumers more receptive to convenience 2. allows for very selective target marketing 3. messages can be tailored 4. effectiveness relatively easy to assess

Disadvantages 1. junk mail phenomenon 2. has serious image problems 3. problems with clutter McFarlane Toys: shows the power of interactive marketing Product => action figures (extreme detailing, dead on likeness) Place => toy chain stores, mass merchandisers, entertainment stores, comic book stores, McFarlane store, website Price => $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] Advantages 1. buying is convenient, easy, private 2. greater product access & selection 3. comparative information 4. customer relationship building 5. cost reduction & increased efficiency 6. website flexibility 7. effectiveness easy to assess Disadvantages 1. limited consumer buying 2. skewed user demographics 3. clutter issues 4. security issues 5. privacy issues Sales Promotion: efforts that provide extra value to consumers or middlemen for purchasing a good or service [Saw] Advantages 1. extra inventive for consumers, middlemen 2. appeals to price sensitive consumers 3. generates extra interest in products, ads 4. effectiveness can be measured Disadvantages 1. many firms suffer short-run sales fix 2. sales promotion can erode brand image 3. clutter Publicity: any nonpersonal communication about a good or service that is not directly paid for nor run under identified sponsorship Advantages 1. credibility 2. low cost 3. often has news value 4. generates word-of-mouth

Disadvantages 1. lack of control over what is said 2. double-edge: negative or positive buzz Personal Selling: personal communication that assist, informs, and persuades prospective buyers to purchase a firms good or service [Screwdriver] Advantages 1. face-to-face contact 2. communication flexibility 3. immediate & direct feedback 4. target good prospects Disadvantages 1. high cost per contact 2. expensive for large audiences 3. 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 Reinhard DDB Needham Great Ads Basic Properties: 1. strategically sound 2. creativity concept 3. 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 Appeals Consumers perspective: 1. rational: utilitarian needs 2. emotional: psychological needs* 3. stats: quality needs 4. fear: social approval needs 5. appetite: physiological needs Execution: speaks to how an appeal is presented Factual 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 (Tasters Choice) Humor -easy to remember, difficult to create (Snickers) Combinations -hybrids are common Creative Issues 1. 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 roles 2. meaning transfers to the endorsed product 3. consumers gain meaning via purchase Caveats regarding celebrity use: -overshadow the product -overexposure -target audiences -risk to markets -synergy: product ~> target ~> celebrity

Generations
Baby 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 History JFK 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 marketing 1. memory is the message (Nissan) 2. the real thing (Wild Thing) 3. make a clear connection (Drano) 4. mom, Im home (Maxwell house) 5. coolness matters (Tonka) 6. child at heart (Disney) Generation X History Watergate (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 Insights 1. difficult to segment 2. cynical towards advertising 3. shift toward specialty stores, discount outlets 4. shift from prestige to value pricing 5. 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 History Gulf 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 Insights 1. bring ads to where Generation Y congregates 2. old Boomer rules do not apply 3. Generation Y responds to humor, irony, truth 4. points of contact = Internet & Email 5. must stay ahead of style curve 6. Ad campaigns should be subtle and local Boomer Lexus LS400 Gap L.L. Bean Coke Nikes Generation Y Jeep Wrangler Delias The North Face Mountain Dew Vans

Personal Selling
Sales reality -sleazy -unrespectable Prevailing stereotype -loner -cover broad territories -push products on unwilling buyers Personal Selling -> Ubiquitous 1. 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 ones 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 Salespeople Order 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 channel Missionary -work for producers -do not take orders -build goodwill or educate buyers - (Merck) Technical Specialists -assist salespeople -provide technical insight - (Merck, HSA) Sales Force Functions 1. locate new customers 2. underscore product benefits 3. provide strategic insight 4. 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